Why Cashflow Investing Beats Appreciation for Long-Term Wealth

Eric Hughes (00:00)

⁓ So investors that are successful in the end are the ones that are able to hold on ⁓ and actually achieve those long-term returns. And of course,

Having multiple properties, scaling your portfolio is another way to protect yourself against that because if one property is having a tough time, you might have four others that are OK and are kind of picking up the slack. And the more properties you’re able to build into the portfolio, the more protection you have against the swings that might occur at any one.

Michelle Kesil (02:03)

Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. Today I’m joined by someone I’m looking forward to chatting with, Eric Hughes, who is a real estate investor and coach working on single family properties in Memphis. So, excited to have you here today, Eric.

Eric Hughes (02:22)

Yeah, thanks, Michelle. Happy to be here.

Michelle Kesil (02:24)

Awesome, so let’s dive in. For those not familiar with you and your work yet, can you share what your main focus is?

Eric Hughes (02:31)

Yeah, so as an investor, ⁓ have a portfolio of 25 properties, almost all single family in the Memphis metro area. And the focus of that portfolio really from the beginning was cashflow. You I was leaving my corporate career in the retail industry at that time. And my goal was to deploy this money and have it produce as high a yield as I could. ⁓ So cashflow investing in lower cost of living markets is really the focus.

do and then it’s also the focus of what I do as a private coach for other investors who are looking to build similar types of ⁓ passive income portfolios.

Michelle Kesil (03:11)

Awesome. And are all of your properties in the Memphis area?

Eric Hughes (03:14)

All of mine are, yeah, but I work with clients in different types of cash flow markets, but yeah, I’m all in Memphis.

Michelle Kesil (03:20)

Great. And so how did you get started in the real estate world?

Eric Hughes (03:23)

So I, ⁓ many, many years ago, I was working at the corporate office of Macy’s in New York and overheard a coworker of mine mention that he had a ⁓ condo that he rented out. ⁓ And I think it maybe was a previous primary residence or something like that. And I remember that stuck with me because it was like, that seems like something smart.

successful people do, that seems savvy. Maybe I should look into doing that. And that actually is where I started, is with Kondo investing in New York, where I lived at the time. ⁓ So I started off with properties that actually did not cash flow. And I didn’t expect them to cash flow, but the goal was really to pick the right spot where home prices were gonna appreciate, which was a total failure. ⁓

That’s not the strategy that I recommend these days. And then later on transitioned into the idea of cashflow investing with lower price properties. And of course, outside of New York where I lived at the time. But that’s sort of how it all started was that one conversation, I don’t know, 15 years ago. And yeah, as far as the Memphis properties, know, I at the time was…

doing some research and looking at roof stock. And that was sort of my main entry point at the time into understanding, which markets do I buy in? What do those properties look like? How much do they cost? How do you manage them? And all those types of questions that come up with remote investing.

Michelle Kesil (05:44)

And so what would you say have been some of the main keys that have allowed your business to be able to grow and to run smoothly?

Eric Hughes (05:52)

⁓ So I think picking the right ⁓ market and the right types of properties that have cashflow potential was really key, right? If you’re buying wrong at the outset, it’s going to be tough to achieve those goals. So I had that alignment between what my investing objectives are and the types of properties that I ultimately bought. ⁓ And they’re different from a what a lot of investors buy and a lot of what you hear and read about, right? These are not glamorous properties. ⁓

⁓ properties that are ⁓ very sort of run-of-the-mill, ⁓ smaller brick homes from the 50s, 60s, 70s. This is not HGTV, as you look at my portfolio right there. Just places where tenants are looking for homes. ⁓ So buying right at the outset was important. And then I think the second big key is how you manage them.

I’m not there, I don’t manage the process of the portfolio, that’s all left up to my property manager. So having the right PM who can do these things professionally and manage the property in a profitable way over time is really important. So I work at those relationships and make sure that the PM is doing what they need to do.

Michelle Kesil (07:11)

Awesome. What would you say have been some of the obstacles or hurdles that you experienced on this journey of getting into investing and like how did you overcome them?

Eric Hughes (07:23)

⁓ I mean, think the, for anyone who’s, who’s thinking about remote investing, there, there is sort of a mental leap that you have to take. that that’s a hurdle to get over, right? So say, okay, I’m going to go buy a property that I’ve never seen. ⁓ and you know, make that investment, right? There’s a little bit of a leap of faith that’s required the first time anybody does that. so that’s an obstacle and it’s an obstacle that is actually. ⁓

too high for many investors who convince themselves, well, I don’t want to do that. I want to be able to travel to the property and deal with it. And if there’s an issue and touch and feel the property, the problem is a lot of people live in places where there are no cashflow opportunities. So if you decide, well, I can only invest close to home and I’ve lived in a place where homes are expensive, then you’re significantly limiting the options that you have. So that was definitely a hurdle, but I was sick enough of my corporate career that I was

more than willing to take the risk and just see if it worked. ⁓ And then I would say, again, the management of the properties is always a challenge. ⁓ just dealing both with the mechanics of that, know, ⁓ PM sends me a notice about something, I have to digest that, I have to understand if it makes sense, I might have to ask questions and so on. But also just, you know, there are a lot of…

ups and downs when it comes to direct ownership of rentals. So year one can be very smooth, year two can be smooth, year three can be very awful, you know, from the financial standpoint where you’re losing money. So you have to kind of be ready to ride the roller coaster a bit and deal with those ups and downs.

Michelle Kesil (09:06)

Yeah, definitely. What advice do you usually give to the people that you coach when they’re going through maybe one of those obstacles?

Eric Hughes (09:51)

Yeah, I try to prepare. It’s one of the things I do spend quite a bit of time on. I’ve worked with over 100 investors and I’ve learned what sort of the risks and pitfalls are for them. And one of them is just having a challenge or a bad experience out of the gates, right? Sort of a client only has one or two properties and one of them has gone south or is costing them a bunch of money. It’s easy for a new investor in that spot to say, well, this isn’t working.

or there’s no way I’m to be able to make money here, or I’ve done something wrong, right? Even if none of those things are really true. So I do try to prepare them and say, hey, look, this is the reality of the business. There are spikes. ⁓ And we just kind of have to be ready for that. When it does occur, ⁓ I just try to keep them focused on solving the problem in front of them ⁓ and also just keeping their eyes and their mind on the long-term investing horizon. ⁓

If you hold one of these properties long enough, there’s a very good chance that you’re going to achieve the ROI and the results that you were looking to get. ⁓ But it doesn’t mean that every year is going match your performance. There’s going to be up years and down years.

⁓ So investors that are successful in the end are the ones that are able to hold on ⁓ and actually achieve those long-term returns. And of course,

Having multiple properties, scaling your portfolio is another way to protect yourself against that because if one property is having a tough time, you might have four others that are OK and are kind of picking up the slack. And the more properties you’re able to build into the portfolio, the more protection you have against the swings that might occur at any one.

Michelle Kesil (11:32)

Yeah, absolutely that makes sense. And so what would you say you’re most focused on now when it comes to solving or scaling to the next thing?

Eric Hughes (11:40)

So for me, ⁓ I’m not really ⁓ building my portfolio at this stage. I sort of consider the project complete. ⁓ And again, this maybe is a little bit ⁓ counter messaging against a lot of what people hear out there in the real estate world. So for me, the portfolio exists to achieve a purpose, which was to create cash flow that would give me work.

and life flexibility, allow me to leave my career in the retail industry, move on to other things. And it did that, you know? So it kind of worked as advertised. And so I don’t want to scale and buy more properties just to like have more properties. I want to keep that end goal in mind, which is really about, you know, having my time back, right? It’s really about the freedom.

that comes with that. And, you know, to some extent, if I just keep scaling and scaling, there is some amount of work, even though I have professional property management, there’s some additional work that comes with that. you know, I don’t want 50 properties just to be able to say I have 50 properties. And in fact, probably what I will do next when I start to make changes to the portfolio is to pay off loans, sell certain properties, pay off loans with the proceeds and just have

a smaller, simpler portfolio with less leverage. And the reason for that is that it kind of depends at what stage you’re at and what you’re optimizing for. ⁓ Chad Carson, who’s a friend of mine, talks about this a lot, so I’m kind of stealing from him. But you can be at the beginnings phase, you can be at the phase where you’re scaling, and then you can be at the harvesting phase where you’re trying to now just kind of reap the rewards of your investments. So at the beginning,

Having a lot of leverage makes sense because it allows you to scale quickly with less money and also gives you this wealth building multiplier effect over time. But at the end, you get to a point where you say, OK, well, that worked pretty well. I have a lot of wealth. But what would really change my day to day is just more simplicity, more cash flow, so that I just have plenty of cash to work with on a month to month and year to year basis.

And that’s kind of, I’m in that sort of final stage. So the way I think about it is probably different than the way a new investor could and should think about it. So, you know, for me, I’m happy where I am and not really looking actively to acquire more properties, but thinking about a future portfolio that’s a little smaller ⁓ with a few, somewhat less leverage that’s going to give me more cashflow per month.

Michelle Kesil (14:20)

Yeah, what an awesome position to get to. That’s exciting.

Eric Hughes (14:23)

Yeah, no, it’s not bad.

Michelle Kesil (14:24)

Awesome. And so what advice would you give to someone that’s looking to just get started in their investing journey?

Eric Hughes (15:12)

⁓ yeah. ⁓

There’s a number of things that come to mind. So one of the things I spend a lot of time talking about is ⁓ just being well-capitalized, having enough money to invest. ⁓

Real estate is a world that some people get the impression, well, okay, I can build wealth here with starting from zero, right? I can have no money and using various strategies, acquire properties and achieve the wealth building that that is gonna bring to me over time. And there are edge cases where you can see people succeed at that, but this requires taking a lot more risks than I’m comfortable taking and that I’m comfortable advising people to take. So I try to view real estate as

investing there the same way you would invest anywhere else. Right? So, you know, if you want to invest in stocks, you got to have money. You want to invest in crypto, you got to have money. You want to invest in gold, in fine art, in whatever. Nobody wants to invest in those things when they have zero dollars. Right? They know it’s not possible. And really, it’s the same in real estate. So first thing, if you want to invest in real estate is, you know, save, right? Have a high savings rate and start to accumulate money to invest. ⁓

So that’s sort of square one. And for new investors, that’s the engine of growth in real estate is your savings rate from some other source of money, right? ⁓ If you have $100,000 to invest, that’s good. You can probably buy two or three cashflow properties in a place like Memphis with that money. How do you get the next two or three? Well, you need cashflow coming from somewhere else. Until the portfolio gets to a certain size,

then you can start to use the portfolio to snowball into growth. ⁓ And then I think separately, you another piece of advice that I would give is just ⁓ understand the numbers and how a simple approach to this gives you a lot of benefits without a lot of the complication. ⁓ When I go to educate myself or when I did at the beginning and I see clients do this as well, there’s so much that’s written about

⁓ Creative financing, creative deal sourcing models, ⁓ and other sorts of ⁓ specific ⁓ approaches ⁓ that aren’t really needed to succeed long-term. I’ve never done any of those things. Most of my clients never try any of those things. And the reality is the vast majority of people who own rental properties do it the boring, unsexy way. They go out, they buy a publicly listed property for sale, they rent it out, they manage it over time, and

That’s the story. It’s not like a really clickable story. So it’s not necessarily what you see talked and written about the most. ⁓ But the numbers really convince me and should convince everyone, I think, that ⁓ that’s where the magic is. The magic is in achieving a high yield, using leverage, which we can get for a home and not for any other asset, taking advantage of tax advantages in this model, and then riding for the long term. That’s ⁓ where

the magic really is. It’s not in getting a slightly better deal at the closing table or any of that. So understand the numbers there and keep it simple because it’s really perfectly fine. You can succeed ⁓ quite strongly without any special maneuvers or techniques.

Michelle Kesil (18:36)

Yeah, absolutely. I think sometimes people want to over complicate things so it’s nice that you’re sharing to just keep things as simple as they can be.

Awesome. What is maybe the most common mistake that you see new investors make?

Eric Hughes (18:53)

⁓

think unrealistic expectations is a big challenge at the outset. I kind of chatted about that already. ⁓ People coming in and thinking like, OK, I have 80,000 to invest and I want to scale to 15 or 20 properties. You just really can’t do that. ⁓ So I think that’s just sort of a mistake of mindset and expectations. ⁓ And then, you know,

every mistake that’s possible to make new investors make, buy in the wrong market, you hire the wrong property manager, you buy a house that doesn’t meet your buy box, or maybe you haven’t even thought about what your buy box should be. ⁓ So thinking through in logical way, a strategy is really important. And this is one of things I do with new clients before we even get into looking at individual properties ⁓ and making offers.

is to say, let’s think about what your goals are first, right? What does good look like at the end of this? ⁓ Then based on that, what markets should we be looking at? So if you want to create yield, if you want to create cashflow, you have to go where homes are cheap, right? The math is sort of irrefutable on this. So if you’re a cashflow investor, you have to invest in cashflow markets where homes are cheap. ⁓ And then let’s define a buy box within that.

So what types of homes, what price points, what neighborhoods? And all of this has a why. It has a purpose behind it so that ultimately the buying strategy and the portfolio that you ultimately acquire should match back to your goals so that you have the best chance of getting to where you’re trying to get to. So I think kind of jumping in haphazard without all of those pieces connected ⁓ is a really common mistake that new investors make.

Michelle Kesil (20:41)

Yeah, absolutely. It’s important to look at it from all of those points. So thank you for sharing that. Well, before we begin to wrap up here, if someone wants to reach out, connect and learn more about what you’re up to, where can people find you and connect with you?

Eric Hughes (20:55)

So the best way is on my website. I am not super active on social media on purpose. ⁓ the website is rentalincomeadvisors.com. And on the site, there’s a lot of deep form blog content that I’ve published over the years about the cashflow investing model. I also publish really detailed accounts of my own properties, ⁓ specifically individual posts about each property. ⁓

and also the numbers for my full portfolio. So there’s total transparency when it comes to the properties and how they’re performing. So that would be something that might be really interesting to people who are wondering, okay, what are the numbers really look like in this model and what kinds of homes are these? So that’s all on the site. And then, yeah, if anybody is interested in coaching, there’s a free consultation that you can schedule right there on the site.

⁓ and all the information about the coaching program and fees, et cetera, is also right there in public, no secrets. So yeah, that’s the best way to reach me.

Michelle Kesil (21:56)

Perfect. Well, I appreciate your time and your story. Thank you so much for being here.

And for those listeners tuning in, if you got value, make sure that you have subscribed. We’ve got more conversations with operators like Eric who are building real businesses. We’ll see you on our next episode.