Real estate cash flow is a ticket to adventure (Updated 2022)

Fixing up a rental property.

***This article from 2016 has been updated at the end with a view about our evolved real estate investing strategy as of 2022.***

My interest in real estate is driven by my passion for adventure.

Through real estate investing, I have found one of the best investment vehicles for generating monthly cash flows that can help fund my adventure travels. And, of course, I’ve found a great vehicle for wealth building.

In this article, I share details about my real estate investing strategy and why cash flows from real estate are our ticket to our adventure lifestyle.

Our Real Estate Portfolio (in 2016)

We invest in single family homes, and we invest for cash flow, aiming to develop a substantial income stream.

To be clear, we don’t buy and flip houses. We buy houses, fix them, and hold them. We’re in it for the long haul, and we’re in it for the monthly cash flow.

Every month, we want real estate investments to put money into our pocket, money that we can spend on adventure travel or reinvest for continue growth of cash flows.

We currently own four, single family homes, three of which are dedicated rentals and one of which is our primary home, which we converted into rental while we travel.

I’m focusing the analysis that follows on the three rental properties because they are true rental real estate investments.

Our primary home wasn’t meant to be a rental, and it certainly doesn’t meet our standards for an investment property, as we barely break even when renting it. I address the financials of a primary home in a separate article, “Should you sell or rent your home while traveling long-term?”

The Cash Return from our Rental Properties (in 2016)

The three rental properties we own are all leveraged, meaning they carry mortgages. The mortgages range from 3.5 to 4.375 percent, and they are all 30 year fixed, conventional mortgages.

I prefer long term, fixed rate mortgages because that keeps the monthly mortgage payment low and consistent. I have the option to throw more money at principal if I want, but month to month I get to maximize the cash flow generated through rent.

We charge monthly rent to tenants through one year leases, and all of the properties provide provide positive cash flow. Each one covers the mortgage, taxes, and all related property management expenses, and on top of that still provide cash flow.

The properties combined provide a 12.6 percent Cash on Cash Return.

What is a Cash on Cash Return?

This number demonstrates the net cash returns (i.e. money pocketed) from the cash invested in a rental home.

Cash on Cash Return is calculated with the following formula:

Cash on Cash Return = Net Cash Flow / Cash Invested * 100%

Cash Invested typically includes downpayment, closing costs, and property improvement costs to make the home rentable.

Net Cash Flow is the cash pocketed each month, after paying the mortgage principal and interest, taxes, insurance, HOAs, vacancy costs, and any maintenance or property management costs. It includes every dollar invested in the property.

Since maintenance costs and vacancy costs fluctuate, we use conservative placeholders for each of these items when calculating the cash return.

We estimate 5% of monthly rent to cover monthly maintenance costs, and we estimate 5% of monthly rent for vacancy. By doing so, we’re setting aside 10% of monthly rent each month to cover maintenance costs and the vacancy that may occur when changing tenants. Though this 10% goes into my pocket each month, it is earmarked for property expenses and therefore deducted when calculating my Net Cash Flow.

Here’s an example to show how we calculate the Cash on Cash Return on a $125,000 townhouse carrying a 4.25%, 30 year fixed rate mortgage, renting at $925 per month.

First, a look at the overall numbers related to purchase price and cash invested.

And then, a look at the income and expenses generated by the property.

Basically, through the Cash on Cash return, we want to understand if we are getting a good return on the money that we have invested into real estate.

In the example above, we would be happy with the 11.6 percent return. In practice, we aim to buy more expensive homes that rent for higher rates so that we can generate a greater amount of cash flow. However, we certainly wouldn’t mind the scenario that provides a solid cash on cash return that puts $272 in our pocket every month.

If the cash return were lower, like less than 8 percent, we would most likely not buy the property. If the return on an existing property drifted downward past 8 percent as a result of depressed rental prices, we would probably consider selling it. We would invest our money in a different real estate investment or perhaps move our money to a different investment where we could get equal or better returns, without the landlord headaches, such as stocks.

The Importance of Cash Flow to Adventurers

As an adventurer, Cash on Cash Return is one of the top factors we consider when purchasing an investment property, though there are other numbers and factors to evaluate as well.

For us, we don’t make complex real estate investing decisions. We try to keep my investing strategy and decisions simple.

We invest in real estate to generate cash flow because this stream of cash funds my adventure travel needs and wealth building goals.

The Cash on Cash Return metric helps ensure we are getting the best return possible on my cash, which means we are putting as much cash as possible in our pocket each month to spend on travel or reinvest for growth.

Cash on Cash Return Doesn’t Show the Whole Investment Picture

Cash on Cash Return does not take into account a number of benefits of real estate investing, which is why most investors include a number of different factors when evaluating investments.

For one, Cash on Cash Return does not take into account the equity paid by the tenants each month.

When your tenants pay you rent, they are in turn paying your mortgage. Each mortgage payment includes both principal and interest. The money paid towards the principal balance increases your equity in the home.

This is great upside for rental real estate investing, as that equity belongs to you.

In addition to the monthly payment towards principal, hopefully your property values are increasing, also contributing to an increase in equity.

Through both of these factors, your overall net worth increases because you increase your equity. As you can see in the example above, the home owner has built up $44,972 in equity through both an appreciating property and the principal paid by tenants over the years.

While this wealth building is awesome, it doesn’t mean much to our adventures in the short term. We can’t spend equity. Equity doesn’t put gas in the RV, pay for backcountry permits, or buy a new surfboard. So we don’t pay much attention to it.

We could get access to equity through refinancing or through a Home Equity Line of Credit (HELOC), but we’re not going to do that because it conflicts with our longer term strategy for the growing equity.

The other primary advantage of real estate investing are the tax advantages, which Cash on Cash return doesn’t take into account. Through depreciation, rental real estate reduces your overall annual tax burden, and you can also deduct expenses related to property management.

I don’t fully understand the tax implications of rental real estate. I’m learning about them, but because I don’t fully understand them yet, I don’t assess the tax benefits when purchasing an investment property. The tax deductions are all upside for us, and we pay a CPA to tell us what we need to know.

Again, cash flow is king, and what we need, as adventurers who strive to take a year away from work every five to seven years, is cash flow. Cash flow gives us options to spend money to cover adventure costs or to reinvest to build greater cash flows and wealth.

When evaluating investments, we care most about Cash on Cash return. We need money flowing into the bank account each month from investments. If a rental property cannot generate healthy cash flows, then we’re typically not interested.

Update 2022: Shifting our Real Estate Investment Strategy

We moved out of single family rentals to invest in apartment buildings via syndication, like the one pictured here in North Carolina.

Since 2016, we’ve evolved our strategy to invest in real estate. Real estate remains a prominent asset class in our investment portfolio, and we still primarily invest for cash flow. However, we have sold our single family home rentals, in part because the Cash on Cash Return metric dropped as real estate prices skyrocketed. We did not want to increase our leverage on the properties, so we sold to get the equity out and to reinvest that capital elsewhere for an appropriate cash on cash return. We now invest in apartment and retirement communities by way of real estate syndications.

Syndications are a partnership among investors to purchase a property. There are general partners (GPs) in the syndication who are active in the acquisition, management, and disposition of the asset, taking responsibility for overseeing day to day operations and the execution of the business plan. There are also limited partners (LPs) who bring the capital. In exchange for capital, LPs earn a return on money invested, receive cash flow distributions from income generated by the property, and share in the profit generated by the eventual sale of the property. We now invest in apartment and retirement communities across the United States as LPs, putting money into the deals.

We primarily invest in cash flowing properties, though we’ve also invested in some speculative opportunities to build retirement communities like this one in Idaho.

Free time and less responsibility are the primary drivers behind our decision to move into investing in real estate by syndication. In syndications, our involvement as LPs is limited. We bring the capital and the GPs bring the expertise, effort, and business plan. Our only involvement is to decide whether or not to invest in a particular deal or fund, and after that we put little time into the deal. In fact, the GP requires that we sign documents explicitly stating that we will have noting to do with daily operations or decision making.

For the time being, we’ve determined syndications to be the ideal route for investing in real estate to enable the life of adventure we’ve designed. The principles I outlined around cashflow in 2016 in this article still apply, and the added benefit is the passive nature of the investment. Single family homes, even with property management, still required some involvement. An occasional call here and there, considerations about capital expenses like a new roof, and further considerations about whether or not to sell and when to sell. Syndications provide cash flow and free time, almost entirely removing even the mental burden of directly owning real estate.

Cash Flows for Adventurers

We hope you can see the advantages that the cash flows from real estate investments when it comes to funding your adventure travels. We earn a good amount of money each month from our real estate investments, and that cash goes a long way towards helping us realize our adventures, either by covering expenses or enabling further investments.

Have questions about real estate or adventure?

We know that real estate investing isn’t easy and it also takes some time and cash to get going.

This article clearly doesn’t give you everything you need to know, but if it sparks a fire inside you such that you think real estate is your ticket to adventure, then we encourage you wholeheartedly to read and research real estate investing.

Start to build your portfolio. We started with a single, dinky townhouse, and we grew to three homes. Those three homes plus the rental of our primary home helped enabled a year of adventure in 2016, mainly by allowing us to keep building wealth by reinvesting the cash flow from real estate while funding adventure expenses with other income. In 2016, we fully intended to acquire dozens more properties over the years, though we have since evolved our real estate investment strategy to focus on commercial investments, mainly apartment buildings.

The shift in real estate investing strategy was due to our changing view of time and finances. Today we value time as much as we value money. In 2016, we were more willing to be hands-on landlords, willing to take the tenant calls and make repairs. Today, we’re not willing or interested in being a landlord or managing real estate assets. We leave those responsibilities to professionals, deploying capital on the deals we choose. We suspect by 2030, the strategy will further evolve or shift.

If you’ve got any questions about real estate investing, feel free to ask in the comments below.

We may not be able to help, but at least we can point you in the right direction.