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Why Cash Flow is Overrated

A recent report says that nearly half of all condos in Toronto are cash flow negative. Is this cause for concern? Should investors be worried? How important is cash flow when investing and how should investors interpret this data?

EPISODE HIGHLIGHTS

1:00 44% of investors with a mortgage possession in 2017 are in a negative cash flow.
4:53 Breaking down numbers, what’s the methodology? How did they collect this data?
6:40 Large number of condos are in a negative cash flow.
11:06 Toronto has taken the next leap and we are in the next stratosphere of cities.
12:42 100% of my units, personally in my own portfolio are cash flow positive.
13:15 How can all of my units be cash flow positive?
13:40 Why are so many condos apparently cash flow negative?
18:26 Let’s compare the cash flow value to the appreciation value.
21:25 Money is made from equity accumulation over time.
23:35 Should you care about cash flow? Is cash flow matter at all?
27:10 What’s gonna happen to cash flow in Toronto?

Click Here for Episode Transcript

Andrew la Fleur: Cash flow is overrated. Let me tell you why on today’s episode.

Intro/close: Welcome to the True Condos podcast with Andrew La Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Welcome back to the show once again, Andrew La Fleur here, thanks for listening in, thanks for tuning into the show as always. On today’s episode I want to talk about cash flow and specifically I want to address this report that has been sent to me by so many people over the past few weeks, asking me, “Hey Andrew, what do you think about this,” and I apologize. It’s been very busy in the spring market with a lot of things going on, so I haven’t had a chance to actually sit down and record this podcast to talk about this specific report.

Report is from Urban Nation and CIBC. They did this together. I’ll include a link to it in the show notes. But the big headline the media picked up on from this report is this idea that a huge chunk of investors … according to this report 44% of investors with a mortgage took possession in 2017 are in a negative cash flow position where the rental income is less than the expenses essentially.

So, 44% … So, the media is jumping on that, and of course the real estate bears are jumping on that, and oh here we go, this just proves that condos are horrible investment. See, I told you, told you shoulda never bought that condo, cash flow negative, bad idea, whole things gonna come crushing down.

All these investors are losing money every month, they’re going to flood the market, everybody’s going to sell, and the whole condo market and the real estate market is going to crash and presumably this will make the real estate bears and those people who make a living off of commenting on Twitter very excited and very happy. But, what do I think about this? Is this true, is this a reality? I wanted to touch on this in today’s episode.

Well, first of all the headline of course doesn’t say that. 55% of people are cash flow positive. The majority of investors are cash flow positive according to their methodology and calculations. That wouldn’t be a very exciting headline, would it? The Majority of Condo Investors Taking Possession Are Cash Flow Positive.

Not very exciting, wouldn’t get people clicking on something like that. Majority of investors are making money … Majority of investors are bing rewarded for their decisions by making good money every single month. Not very exciting.

Reality is, the majority of people are making money even if you look at it just from the way that Urban Nation did which is, they didn’t go and survey every single condominium purchased and closed in 2017, all 20,000 of them, or whatever the thousands and thousands of condos. They didn’t go and analyze every single condo, break it down and say, “Who’s making money and who isn’t, what mortgage rate is he paying. What maintenance fee is he paying? What property tax rate is … ”

They didn’t plug every single thing into a spreadsheet and come up with this answer. No, of course not. That would be impossible to do. They did their best by making a number of assumptions and essentially boiling the statistics down to averages. Average price paid. Average price that’s worth now. Average rental amount received. Everything is averageized, if you want to put it that way.

Obviously when you average things out, it’s not an exact science at all. It doesn’t … It’s one way of sort of looking at it and getting an approximation of what may be happening out there. But it’s certainly not indicative of exactly the true reality of what is happening on an individual basis with individual condo units out there, because everybody is paying different mortgage rates, and everybody’s paying different property taxes, and everybody’s collecting different rents and so on and so forth.

There’s many things that go into it and it’s not to be … This ad, while it’s very interesting and it’s generally overall it’s fairly accurate, it’s not to be taken as gospel. It’s not to be taken as the be all and end all of this is 100% reality for every situation and every condo investor. Of course not.

And I’m not saying urbanation would claim that it is. But I’m just pointing that out to everyone that we need to understand when we’re looking at stats and you’re looking at headlines like this that are breaking down numbers, what’s the methodology? How did they collect this data?

What techniques did they use and how accurate is it? Always gotta question that when you’re looking at the media that’s out there. What do I have to say about this? If there’s a huge amount of investors, call it 44%, call it whatever number you want, it’s bigger than a small number.

Ideally, in a perfect world, we’d love for the headlines to say 100% of real estate investors are cash flow positive or everybody’s making money. Well, let’s face it. If everybody’s making money, if it was that easy to make this kind of money, then everyone would do it. But we know that everyone doesn’t do it. If you listen to this podcast for any amount of time, you know that as real estate investors, we are sort of aliens in a foreign land.

We are the different ones. We are zigging when everyone else is zagging. We are very small percentage of the overall population. We are freaks to some people. As I said, many people on Twitter and other places, the real estate bears, those who are just salivating and hoping and waiting and religiously pursuing the end of the real estate market in some kind of a major collapse, those people look at real estate investors with disdain and it’s just a reality of being a real estate investor.

You are different. You are going into the flow and it’s not easy to make money doing this. You have to know what you’re doing. First of all, let’s talk about the premise. Condos are negative cash flow. Large number of condos are negative cash flow.

First of all, I just say to that, yes. It’s possible. So what? So what? I would say nothing has changed. Reality is, most condominium, if you wanna go by this, then you could probably make an argument that most condos in Toronto have been cash flow negative forever. This is nothing new.

You could extend it out and you could say most residential properties be it houses or condos are cash flow negative and have been cash flow negative forever. Or certainly for a very long time. You could even let me just look at, go out and try to buy any property in the GTA in Toronto in particular, in the city of Toronto in particular and show me something that’s positive cash flow.

It’s extremely hard to find anything with positive cash flow, and of course, just to clarify, when we’re talking about positive cash flow, we’re using the basic assumption of 20% down, so looking at cash flow based on a 20% down payment.

Look at Triplexes. Even quadplexes. You go in Toronto, you buy a quadplex, four units, maybe it’s 60, 70 year old building, it’s very old, so the price is relatively low compared to something that would be new. Even places like that are not cash flow positive. You can’t get a yield. You can’t get cap rate anywhere in this city.

This has always been true. This is normal, this has been normal. This has been the story of Toronto real estate for a very long time. Toronto is a very expensive city to buy real estate in right now and it has been that way for a number of years. It’s gotten relatively more expensive, but it’s always been expensive.

Cap rates just suck. In Toronto it’s always been that way for the longest time. If you’re looking for cap rates, you’re looking in the wrong city. If you’re looking for positive cash flow, if that’s the main thing you’re looking for, it doesn’t take a rocket scientist. Anybody knows anything about real estate investing, Toronto is not where you wanna buy.

If cash flow is your holy grail, guess what? Get in the car, drive four hours down to Detroit, and you can get insane cash flow all day long. You can buy properties for 75,000 and rent them out for 1200 bucks a month. Go for it. It’s all yours. Cash flow is there. If you’re looking for cash flow, there are so many markets out there.

Basically, drive … Basically from what I can tell, rule of thumb is two hours away from Toronto, if you wanna stick in Ontario, in Windsors, your Sudburys, your Kingstons, your London Ontarios. These kind of places, if you’re two hours or more, maybe even like a Peterborough, if you’re two hours or more from Toronto, then you’re gonna get into cash flowing sort of properties.

If that’s the kind of real estate investing you wanna do, if those are the tenants that you want to have as your customers, then by all means. Those opportunities are there and they will always be there and the further you go away from Toronto, or from any major city that has a booming economy, the further you go away from those places, the better your cash flows going to be.

The closer you get into the core of these financial centers, Toronto, New York, Hong Kong, London, the more desirable these places are, the more wealth that is generated from these places, the worse the cash flow is going to be. That is a real estate fact. It’s a truism, you can test me out. Look across the globe, look at any city. Good luck finding cash flow anywhere.

In fact, that’s, until recently with the recent run up of prices making cash flow situation even worse in Toronto, Toronto has been sort of an anomaly because relative to other major cities around the world, the cash flow has been better, has been pretty good. It’s like a major city, so you get a lot of appreciation on price, but you also have a good opportunity to get some cash flow as well.

That’s actually made Toronto extremely unique and that’s a place that Toronto was, but reality is, Toronto has taken the next leap and we are in the next stratosphere of cities. A lot of people have said this, not just me. Brad Lamm, Richard Flord, and many others have talked about how Toronto is now the next level of a city, it’s in that sort of super star city status.

If you’re looking for those days of cash flow all day long on anything you can just go out and buy cash flowing properties anywhere in Toronto, especially in the core of Toronto. Reality check, those days are gone. Those days are not coming back. You’re looking in the wrong place if that’s what you’re looking for.

If you’re just going out there and assuming ’cause you went to some real estate seminar or you read some real estate book that you’re gonna go out there and buy a property with 20% down and it’s gonna give you 200, 500,000 dollars a month cash flow, guess what? That does not apply to a city like Toronto.

It never has, it never will. If that’s what you’re looking for, again, get out of the major city like Toronto, drive two hours away from it, and buy the properties in those areas. Yeah, there’s nothing wrong with doing that if that’s the type of investing you wanna do, then go out there and do it.

For a number of reasons, that’s not what … I’m not interested investing in those kind of properties myself, and most of my clients obviously are not either. That’s a non starter. We’re not gonna go there.

What do I know for sure when it comes to this stuff, in terms of cash flow? I know for sure that 100% of my units, personally in my own portfolio are cash flow positive. They’re extremely cash flow positive. It’s not even close. I also know that probably, I would estimate 90 to 95% of my clients properties that people have purchased with me over the last 10 years, their properties are cash flow positive as well, with almost down to a T with very few exceptions.

All of my client’s properties are cash flow positive as well and my clients condos.

How can this be? How can all of my units be cash flow positive and how can 95% of my client’s units be cash flow positive when reports like this are coming out saying huge chunks, almost 50% of the market is cash flow negative?

Well, we talked about the methodology and that, but beyond that, why are so many condos apparently cash flow negative and why has this really always been the case?

Well, there’s a few reasons for that. Number one is, people for the most part people don’t know what they’re doing. People are buying condos … Most people are not listening to this podcast. Most people out there, as much as I hate to admit it, most people out there are not my clients and are not listening to my advice. If you’re listening to me and if you’re following what I’m doing, most likely you’re gonna be extremely successful and you’re gonna be way ahead of the curve.

It’s the same as anything. A very small percentage of the people make the majority of the profits. Most of the people out there are not making anything, or in this case, if you wanna look at it this way, they’re losing money every month.

Majority of people don’t know what they’re doing. They’re getting bad advice. They’re buying the wrong condos. They’re paying the wrong price. They’re buying at the wrong time. They’re buying in the wrong buildings. They’re buying the wrong units. It goes on, and on, and on. They’re doing the wrong thing.

Most people are buying retail. We talk about and I’ve done podcasts on the unfair advantage and one of the reasons it’s so great to be a condominium investor is if you are connected to somebody like me, you have an unfair advantage. You can get units below retail. You can pay sort of a whole sale price for a condo. You can pay less for your condo than everyone else is paying. If you’re getting into new developments at the right time, if you’re connected to the right builders through somebody like me, then you are ahead of the curb.

You’re buying at a lower price than everyone else and your cash flow position, therefore, is gonna be better. If you’re paying 20, 50, 70,000 dollars less than the other guy and you’re both getting the same rent, three four years down the road when the building is built, guess what, you’re gonna be positive cash flow and the other guy right next to you who paid 70,000 more is not. Right?

Majority of people are not doing that. Majority of people do not understand how the game is played and do not have that unfair advantage that you have if you’re working with me, if you’re listening to this podcast right now.

People are just paying too much. People are buying the wrong units and like I said, this is just always been the case and it always will be the case. A very small percentage of people will take the majority of the pie so to speak. But, at the end of the day, as I titled this podcast, Why Cash Flow is Overrated, who really cares if you’re cash flow negative, ultimately, at the end of the day. If you’re in that position, that’s you, who cares?

The reason why it’s really not that big of a deal and why cash flow is overrated, look at this report itself. The numbers again, that doesn’t talk about in the headlines and the media and how they’re reported on this. All they focus on is big percentage of the units are cash flow negative, is what everybody latched onto and what everybody wants to talk about.

Nobody really seems to want to talk about the fact that using the same methodology and looking at the report, these condos that are quote on quote cash flow negative, they have appreciated 50%, 51% in price since they were purchased a few years before. If you put down 20% and it’s appreciated 50% in value, then you’re up 250% on your investment.

Your investment is up 250% by the time you take possession of it because the market is appreciated so much. That’s in most cases, 100 to 200 thousand dollars of appreciation. Your net worth’s gone up 100 to 200 thousand dollars in appreciation.

People who bought units for 200,000, they’re not worth 350. People who bought for 500,000, they’re now worth 800,000. Let’s just think about the numbers here. People get all worked up and a lot of people talk to me, they decide not to buy condos based on the cash flow of these condos.

Let’s say, if they’re looking for these condos that are reaching whatever, a certain number of certain cash flow per month. Let’s say you find an amazing condo that’s absolutely killing it from a cash flow perspective, and you could find one that’s paying you $200 a month positive cash flow. Most people would say that’s a fantastic position to be in for a single condo to be clearing $200 a month after expenses with 20% down.

$200 a month sounds like a good number, great. But let’s compare the cash flow value to the appreciation value. This condo that you bought, let’s say it went up $100,000 from the time you bought it to the time you took possession, $100,000. Well, $200 in cash flow, how long would it take you to get to $100,000 in your pocket?

Do the math. $200 a month, it’d take you about 41, 42 years to reach $100,000. 40 years of renting out a unit to get $100,000 that you made in just three or four years of doing nothing. Hopefully you start to get a sense of what I’m talking about here. Even if, let’s say you found the unicorn of all unicorn condos and you found one that was cash flow positive, $500 a month, that’s about $6000 a year of positive cash flow.

Sounds great, I know most people would love to get a raise in their job or whatever of $6000 a year, definitely take that, that’s some nice income for you. Hey, money is money, that’s great. But, the average condo … Let’s say the average condo of $400,000 say, what is $6000 represent in appreciation? That’s one point five percent appreciation.

What are the chances of your condo appreciating one point five percent or more in the next year? I would say they’re pretty high. Again, you look at what’s the average appreciation rate in Toronto real estate over the last 50 years in any given year, the average is about five or six percent.

The chances are, all things being equal, whatever property you own, whatever condo you own, whatever house you own, anywhere in the GTA, if you just throw a dart at the wall and buy something and you wait 10 years, chances are over those 10 years the average appreciation’s gonna be about five to six percent a year, which absolutely dwarfs any kind of cash flow that you’re making.

Even if, like I said, you find the unicorn of unicorns of a property and it’s paying $500 a month positive cash flow, which would be insane, that’s only like one point … that’s equal to like one point five percent appreciation, which is not even a third, not even a quarter of the average appreciation you’re probably gonna get.

You make your money in real estate from equity. You make your money in real estate from appreciation. Nobody really likes to talk about this, people like to look down on this sort of thinking as too aggressive, un Canadian, whatever you wanna call it. You’re not looking at the … you’re not being conservative enough with this cash flow, you’re just counting on appreciation, but the reality is, that is where the money is made.

Money is made from equity accumulation over time. Most of that equity accumulation … Some of it comes from your mortgage pay down and you’re tenant is paying your mortgage down every single month, but the reality is, historically speaking, most of that appreciation and most of that growth is from appreciation. Price appreciation.

And that happens over time. The longer that you’re in the market, the luckier that you’re gonna get is something I also like to say all the time. You’re gonna get an average of five, six percent per year if you’re in the market for a long period of time. The market’s gonna reward you. If you’re a long term investor, if you’re a long term thinker, if you’re not thinking short term, you’re always going to win.

If you’re worried about this year, next year, two years from now, if that’s your mindset, you’ve already lost. You need to have a long term approach when it comes to real estate. Set it and forget it. Don’t worry about the month to month. Don’t worry about a 100 bucks here, 200 bucks there. Worry about the 100,000, 200,000, 300,000 dollars of equity that you’re gonna get when you buy a good property, rent it out, close your eyes, and look at it three, five, seven, 10 years later and you see how much your mortgage has been paid down and how much that property has appreciated.

That is where the money is made. That is where the fortunes are made. It’s being in the market for long periods of time. Buy and hold is how you make money. Flipping properties, buying, selling, assigning units, grabbing stuff here and then getting rid of it the next week to make a couple bucks. You’re not gonna do …

You can do that and people do that, but if you wanna grow your wealth and truly build something huge, it’s about buying and holding. Very simple. Very boring. And it’s the tried and true philosophy. It’s my philosophy and that’s what I encourage all my clients to do and to approach it as that.

Should you care about cash flow? Is cash flow matter at all? Is that what I’m saying? No. I’m not saying cash flow doesn’t matter at all. Yes, of course you wanna find properties that are cash flow positive if you can. Of course, you don’t want to be buying properties that are bleeding 100s and 100s of dollars a month or thousands of dollars a month. That’s a drag on your personal balance sheet every single month.

You want to avoid that if you can. But, who should … You gotta look at the bigger pictures, is the main thing. You gotta understand where your wealth is coming from. It’s not coming from 100 bucks here or there or 200 bucks here or there. Your wealth is coming from being in the market for long periods of time, equity pay down and appreciation. But, you should care about cash flow if you are … if you’re the type of investor type of person, financially speaking.

If you’re living paycheck to paycheck, and if you’re spending every dollar that you have, whether you’re making $50,000 a year or $500,000 a year, if you’re spending all of your money every single month and for you to have a negative of 100 or 200 bucks a month, if that’s gonna break your back, then yeah, you better be very careful about cash flow and you better be very careful about buying properties that aren’t going to do that, because they break your back.

If your back is broken by that minus $100 a month or $200 a month, then you might be forced to sell that property. Again, you don’t wanna ever be forced to sell a property. If your property is cash flow negative and if you’re living paycheck to paycheck, and dollar to dollar, then a slight negative on your monthly could force you to have to dump one of your assets.

If you start dumping assets and if you have to sell and the market is down or something, that’s when you feel the most pain. That’s when you’re gonna hurt the most.

If you’re stretched really thin, if you have just tons of properties and not a lot of equity in all of them, if it’s very difficult for you to get another mortgage, then yeah, you gotta start looking more carefully at cash flow. If you’re not living paycheck to paycheck, if 100 bucks here or there, negative on your monthly is not gonna impact your lifestyle or your financial outlook or your ability to get another mortgage, then you’re fine. You’ll be fine.

You don’t need to focus and worry about cash flow on your properties.

Of course, if you can get cash flow, go out there and get it. Of course, the reality is rental rates are increasing significantly and you’re buying something today that on paper is negative cash flow, in four or five years from now there’s a very good chance it’s gonna be break even or positive cash flow because of the way and the direction that rental rates are going. But, don’t …

If you’re … Again, one of the key messages here I wanna give to you is, if you’re sitting there waiting for that positive cash flow property to appear and fall into your lap, that condo that you’re gonna buy, got news for ya. You’re never gonna buy in Toronto again.

If cash flow with 20% down is your goal, those days are … They’re not 100% totally gone in Toronto, but they’re like 98% gone. There’s virtually no properties out there anymore that you’re gonna be able to buy with 20% down and getting positive cash flow. It’s just a reality.

Where do I see this going? Where do I see the future of real estate investing in Toronto? What’s gonna happen to cash flow in Toronto you might be asking. Well, I see cash flow, as I said, it’s almost gone. It’s gonna be less and less over time. We are becoming more like other superstar cities around the world. New York City, London, Hong Kong, all these cities.

We are trending in that direction and if you go to any of those cities and you meet with a real estate agent, and you tell them, “I wanna buy a cash flow positive property in the core of your city with 20% down. What have you got?” They will laugh you out of the office and they’ll tell you that you need to hop in a time machine to go back to the 1970s, ’cause that was the last time that a lot of these places saw a positive cash flow in the core of their cities.

It’s just not happening. You don’t need to go that far. Just look at Vancouver. Vancouver is a little bit ahead of the curve of Toronto in terms of pricing, in term of rents, in terms of superstar city sort of status. Just talk to any real estate agent in Vancouver and I talk to them all the time. They look at Toronto numbers and they’re amazed at actually how good the cash flow situation is in Toronto. It’s way better than it is in Vancouver.

You’re gonna have way better cash flow in Toronto for the most part than you are going to in Vancouver. We are moving … Toronto is on a path, we are not going to get off this path. We are on a train. The train is heading to superstar status, so the days of cash flow are for the most part, unfortunately, gone.

That doesn’t mean that any property you buy is gonna be … You have to say, “Oh, anything I’m gonna buy it’s gonna be bleeding 500 bucks a month. No. I mean, if it’s 100 bucks a month, if it’s 200 bucks a month negative, again, my point is, in the big picture of investing in real estate in this city, it is a drop in the bucket. If you’re losing 2000 bucks a year, but your property is on average appreciating by 30, 40, 50, 100,000 dollars a year, who cares about the 2000, the 3000, right?

You need to focus on the big picture and you need to also understand that rental rates are gonna increase over time. It might be negative for … Let’s say it’s negative for two or three years at 100, 200 bucks a month, 300 bucks a month or whatever it is. By year three, rental rates have increased another 15%.

Your amortization curve on your mortgage is different, you start paying more principle than interest and so on and so forth. Your cash flow situation will improve. You might be negative for a couple years and a couple thousand bucks here and there, but by year three, year four, year five, you’re cash flow positive.

In the meantime, you’ve enjoyed plenty of mortgage pay down and plenty of appreciation as well. Once again, the message is that long term investors, long term thinkers, will be rewarded. Long term investors are the ones who will always win in the end.

Those people who have been in the market the longest will reap the most rewards. Those people who are the most patient, who are able to see past the trees to see the whole forest are going to benefit the most.

In summary, yes, a lot of properties … a lot of condos in Toronto are cash flow negative. Almost every single one of my client’s properties are cash flow positive. Moving forward, finding cash flow positive properties will become harder, and harder, and harder in Toronto. But, it doesn’t really matter. Cash flow is overrated and the majority of your wealth as an investor in real estate is not gonna come from cash flow.

It never has, it never will. It will come from appreciation and equity pay down on your property.

There you have it. I hope you enjoyed this episode. It was a long one. It was fairly in depth. And I hope you got some value from it. Thank you for listening to it. And as always, until next time, have a great week and happy investing.

Intro/close: Thanks for listening to the True Condos Podcast. Remember, your positive reviews make a big difference to the show. To learn more about condo investing, become a True Condos subscriber by visiting truecondos.com.

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