In this podcast episode, Steve and Kevin discuss the often misunderstood concept of cash flow in real estate investing. While cash flow is widely seen as the ultimate goal for many investors, the hosts argue that its importance is overstated—especially in the early stages of investing. They emphasize that focusing solely on cash flow can distract from long-term wealth-building strategies. Steve shares examples of how appreciation, tenant contributions, and tax advantages can create significant financial gains over time, even without immediate cash flow or favorable interest rates.
The episode also touches on the importance of understanding when and how cash flow becomes relevant, framing it as a long-term outcome rather than an immediate necessity. They explain how interest rates, while often viewed as a barrier, can actually unlock opportunities for growth, such as tax-free income through cash-out refinancing. Kevin uses examples of real estate appreciation over time to show how properties can double in value, even in the absence of significant cash flow or optimal interest rates.
The episode aims to shift the mindset of real estate investors, encouraging them to look beyond short-term cash flow and focus on the larger financial picture, including property appreciation, tenant-paid equity, and tax-free income.
0:00 Life Lately
5:08 Cash Flow
11:46 Why it is irrelevant
20:50 Focusing In
00;00;01;19 - 00;00;06;00
Kevin
All right. Well hello everybody, and welcome to replace your income with Kevin and Steve.
00;00;06;01 - 00;00;06;18
Steve
How's it going, Kev.
00;00;06;24 - 00;00;08;23
Kevin
Oh it's good man.
00;00;08;26 - 00;00;25;12
Steve
It's been kind of fun the last couple of weeks. We've gone on some road trips, spent some time, you know, learning about some different marketing techniques. We spent a lot of time talking about, you know, real estate, different things. Anyways, it's been it's been a busy, really productive really, I don't know, informative last couple weeks.
00;00;25;14 - 00;00;43;13
Kevin
Yeah. We, we, we went we went down to Las Vegas. That was fun. We had a great time there and met some incredible people. Went to a great conference. And on the way down to Las Vegas, I had a really cool experience. I had another opportunity to see the windshield on my Tesla get cracked by a rock.
00;00;43;18 - 00;01;06;08
Kevin
It was great, but really excited about it. That is the second cracked windshield. I got to tell you this. Look, I was talking to somebody who owns a Tesla. Her brother drive, he, like, works at the Tesla dealership. And Elon listed, I think Elon. I think I know Elon's moneymaking scheme. He makes crappy windshields so that because it's like curved glass, you have to pay like $1,400 to get a windshield replaced.
00;01;06;14 - 00;01;22;03
Kevin
And. And this girl who I was talking to, whose brother works for Tesla, has had multiple cracked windshields. So I think there's a secret money making plan by Elon Musk. It's not X, it's not even Tesla. It's not SpaceX. It's windshields on Tesla. That's what it is.
00;01;22;03 - 00;01;29;02
Steve
Well, you did notice he just took a another public or a company public. You know, that's a car windshield company okay.
00;01;29;02 - 00;01;58;17
Kevin
See all of a sudden it's all making sense now. No, it was awesome. The conference was great. And any time that we. And that's why I think we love to do the podcast and why we hope when you guys listen, that the podcast creates an environment for you that we try to put ourselves in, which is an environment where we're having lots of conversation, where we're talking about all kinds of stuff and where our brains start to go through and spin through other ideas, other ways to look at the same topic.
00;01;58;19 - 00;02;28;12
Kevin
And, this has also been the case, recently, because next week I have two separate opportunities to go and present who Dunphy Real Estate is and what we do for our clients to two separate groups financial planning type groups. One is a whole group of dentists down in Oceanside, California. The other is a whole bunch of people who, are more kind of utilizing life insurance.
00;02;28;14 - 00;02;49;23
Kevin
And that's going to be here in Utah. But I've not given what I would consider, a traditional sales presentation for DFI in like a long time. I mean, we used to do these presentations all the time. I used to travel all over and do these presentations, and it was years and years of fixing slides and honing the message.
00;02;49;25 - 00;03;12;11
Kevin
And that was such an incredible time to think about what we're saying and to think about what we're doing, that we've actually decided to sort of, usher in that as part of our next year where we are going to be doing weekly live webinars. We're going to be doing events live to present and teach done for you real estate, right here at our office.
00;03;12;13 - 00;03;39;15
Kevin
And as I was building the slide deck, kind of thinking about the future, I found myself reorganizing some of the things that I've said in other sales presentations and, sales presentation. All that means is we're just selling the the viewer on the idea that real estate could be done for them and that it could give them the ability to create some walk away income, to walk away money that they can kind of do whatever they want.
00;03;39;17 - 00;03;58;17
Kevin
And, and so we're not selling anything at the end of the presentation, it's just like, hey, here, here it is. And as I was going through the presentation, Steve and I was kind of reordering it, I put a slide in there that I knew was going to be controversial, especially if somebody thinks about real estate a lot, even if they listen to this here podcast.
00;03;58;20 - 00;04;15;20
Kevin
It was a little, there's a couple controversial things I put in there, but the one that I want to talk about specifically is I used to go through like, we even do it in the book, like the 6 or 7 ways that real estate makes you money. And one of the first ones that we would always talk about is cash flow.
00;04;15;22 - 00;04;34;27
Kevin
Now, I still have some content in the sales presentation about the ways that real estate makes you money. But I took the cash flow side slide and I moved it all the way to the bottom of the list. And I call it a bonus, not a given. Like I'm saying, here's these 5 or 6 ways that real estate makes you money.
00;04;35;00 - 00;04;58;08
Kevin
And bonus, there might be some cash flow as well. And I take it one step further and I'm going to tell the audience that I would like, and if you really if we look at real estate long term big picture and that's the key long term big picture, I could make the case that interest rate and cash flow both don't matter.
00;04;58;10 - 00;04;59;26
Kevin
Thoughts?
00;04;59;29 - 00;05;01;08
Steve
You just blew my mind. I feel.
00;05;01;08 - 00;05;02;05
Kevin
Like the church lady.
00;05;02;05 - 00;05;23;25
Steve
Know what you're talking about. Know like exactly what I mean. We we've talked about this like I don't know how many times, right. That the idea that at the end of the day cash flow although it's in many or probably most investors mindset, it's like, that's the thing. That's the thing. And in fact, this whole podcast, our podcast is called Replace Your Income.
00;05;23;28 - 00;05;53;06
Steve
Yeah. Which requires cash flow does. Right. And so yeah, of course it's important. But the timing of when to focus on cash flow is, is is an item of importance to to know and understand, how to generate that, that cash flow with your real estate is super critical to really understand and to understand its place in the overall goal, like it's it's place today in the overall goal to create this cash.
00;05;53;09 - 00;06;11;24
Steve
In fact, cap, I just I sent a text, one of our clients literally right before, you know, we started this podcast, to have a conversation with myself and, with, with Mike Chamberlain to talk about another concept that we'll talk later on, in, in our podcast called buy, borrow, die. Yeah.
00;06;11;27 - 00;06;14;17
Kevin
I can touch on that today too, because it's part of the same conversation.
00;06;14;17 - 00;06;36;05
Steve
Yeah. Because because the question that that this client had posed to me was, it's like, it's so funny. He's been doing this for years. He has multiple properties. He's like, he's like, Steve, can you remind me why we're doing this again? It's it's kind of like, yeah, like he's just been buying up these properties and, but and, and and he kind of lost sight of like the end goal.
00;06;36;09 - 00;06;58;22
Steve
Like what is it we're trying to do. Yes. Cash flow is is super critical at the right moment in time. And it would surprise many of our listeners like the strategies that can be employed, because the ultimate strategy is to create significant, if not massive cash flow. One day with zero tax liability. There you go. And that's the end goal.
00;06;58;26 - 00;07;26;03
Steve
Right. So but on the way to accomplishing that and achieving it, this whole concept that you're talking about, that cash flow really doesn't matter today. And guess what. Neither does interest rate. Of course they matter in in the in the grand scheme of things they matter today in a certain way. But where they don't matter or where they shouldn't matter is if they're keeping us from executing our plan, then we should forget all about them completely.
00;07;26;03 - 00;07;29;06
Steve
And they and they and they don't matter, and they shouldn't matter.
00;07;29;08 - 00;07;44;18
Kevin
All right. So let me give you an example on interest rate. Right. So so this is kind of what I mean in terms of interest rate and cash flow don't matter okay. So let's say we buy a home today or we bought it 20 years ago. It doesn't really matter. In fact, let's use the example. Let's say we bought a home.
00;07;44;18 - 00;08;11;24
Kevin
We'll go ten. We bought a home ten years ago okay. During that ten years the home is likely increased dramatically in value. Now let's say that along those ten years, the interest rate was what I considered to be trash, right? Let's say it was like 15% even I don't care. And let's say that I've been unable to generate cash flow on that property during the last ten years.
00;08;11;24 - 00;08;39;01
Kevin
Okay, high interest rate, no cash flow. Let's just assume that my expenses were at least covered. Okay? Now, if I wanted to do something with that home today, would I look at. Maybe I bought it for 100 grand, 150 grand ten years ago. Maybe today it's worth 300,000. That would not be unrealistic, right? So if I have a home that I haven't made, I'm using air quotes that I haven't made any money on.
00;08;39;04 - 00;09;04;09
Kevin
That's been an expensive interest rate for the last ten years, and today it's worth 300,000. And I bought it for 150. Does that mean I was out of bad investment because it doubled my equity? And you know what? An interest rate then and now gave me the ability to do like I wish that we would look at interest rate as the master key to riches.
00;09;04;09 - 00;09;25;00
Kevin
There's actually a Napoleon Hill book called The Master Key to Riches. And I've been thinking about that lately. Like interest rate for me is the master key to real estate riches. But interest rate in terms of a number doesn't matter, because this is why I call it that. Because interest rate unlocks something. Do you know what interest rate unlocks?
00;09;25;02 - 00;09;49;05
Kevin
Interest rate unlocks your ability to acquire a property for significantly less than what the property costs today, in order to take advantage of all of the growth and benefits from that property, and even usher in the opportunity to generate tax free income. Now, when we talk about tax free income, this is what you were alluding to. Like, let's say that that property, it's covered my expenses for the last ten years.
00;09;49;05 - 00;10;15;02
Kevin
Okay. But it hasn't generated any cash flow in a high interest rate. I haven't refinanced, I've just let it go. Let's say today that property is now worth $300,000. If I wanted to go and do a cash out refinance, right, let's say I want to go and cash it out for $240,000. Now, if it was worth 150 and somebody else has paid down my principal, let's just assume I owe a $100,000 on this home that I've had for ten years.
00;10;15;05 - 00;10;51;22
Kevin
It's worth 300, and I could do a cash out refinance at 240 grand today. That $140,000 that would come from my property, that I did effectively nothing to earn. I owned the property. We kept a tenant in it. But the interest rate, even if it was 15%, gave me the master key to unlock this growth potential. And if I were to go refinance today, regardless of what the interest rate is today, and I could pull that 140 grand out of that property, how much tax do I have to pay on the $140,000?
00;10;51;24 - 00;11;12;24
Kevin
Oh, interesting. So are you telling me that in theory, I could take that $140,000 out of my property? Not sell the property? But let's just say I wanted to spend 140. Let's say I wanted to go buy, tricked out. Like, let's say I wanted to buy a Corvette, right? I don't know why, but let's say that's what I want to do.
00;11;12;26 - 00;11;37;22
Kevin
Are you telling me I could pull that $140,000 out tax free, go buy a Corvette cash and still hang onto my property that my tenants are still likely paying for and continuing to pay down the principal. All of a sudden I got six figures of tax free income because the interest rate is what was the master key to unlock the riches that were found in that real estate, the cash flow.
00;11;37;22 - 00;11;46;22
Kevin
Did it matter? And the interest rate didn't matter. And that's the that's the only thing I'm saying with that idea is that it's principally I don't think we look at real estate like this often enough.
00;11;46;22 - 00;12;07;27
Steve
So here's here's one other way to look at this, Kevin. So let's say that your interest rate, is such that you are going to have you're going to be at a, at a break even at best, maybe even maybe the negative for that matter. But let's just for for sake of argument for my, for this illustration, let's say there's just a breakeven.
00;12;08;02 - 00;12;30;28
Steve
And so you buy a property at breakeven it so there's no cash flow, there's no immediate benefit where you can't go to the store and spend money from, you know, from that property coming in every month like you just mentioned. Right? You have all the other things working for you. So let's look at this from this scenario. So from a cash flow standpoint it's like you didn't buy a property.
00;12;30;28 - 00;12;31;07
Kevin
Yeah.
00;12;31;09 - 00;12;50;00
Steve
And so you made you made the decision. It's like I'm not going to buy the property because I can't cash flow. So let's say that me because let's just say that I'm, you know, although this is stretching, you know, things, let's say that I'm intelligent enough to like to, to buy this property. And my buddy, this thing is.
00;12;50;01 - 00;13;07;16
Steve
And any, you know, my. But my buddy, he's like, why are you doing that? Yeah. You're like like you're just you're not even breaking even. He's like, I'm not going to buy a property. And and you're like, well, I am. And so you're walking along in life and over the years, my hair, my beard's getting a little bit grayer.
00;13;07;18 - 00;13;35;01
Steve
His hair's getting a little bit grayer, getting a little bit fatter, the whole thing. Right. Ten years down the road, I bought this property and he didn't buy his property. And he didn't have any cash flow, and I didn't have any cash flow. Yeah. Now that what you just described there at the end of ten years, well, now this thing that I bought and let's just say again, for sake of argument that I never raised the rent and I never got any cash for the whole ten years.
00;13;35;01 - 00;13;52;02
Steve
Yeah. And then ten years later, we look at each other and he's like, man, you were so dumb for buying that property. Did nothing for you. You did all this work and all this stuff. And he's like, and like, I didn't and I didn't go to the trouble, and I didn't have this liability of a loan hanging over me.
00;13;52;05 - 00;14;16;03
Steve
Now it's ten years later and let's take a look. Neither one of us had cash flow, but at the end of the day, just like you just described, my property that I bought for 100,000 is now worth, you know, $200,000. Yes. My tenants have paid down the principal. So now you know the the down payment or the like, that the equity that I have is even greater because they paid that principal down every month.
00;14;16;06 - 00;14;35;00
Steve
On top of that, one of the many benefits I did get over a year was he paid about $6,000 more in taxes because we have the same job, we work the same hours, we get paid exactly the same. Well, actually, we didn't get paid the same because I got to deduct about $6,000 off my tax bill every year or from my, my income tax.
00;14;35;04 - 00;14;47;05
Steve
And and he didn't. And, and then in this whole thing, the appreciation they took. So this concept the cash flow it doesn't matter. Right. Like I don't know if that that scenario makes sense to you, Kevin.
00;14;47;06 - 00;15;07;03
Kevin
Oh yeah. 100%. And I'm sitting here and I'm thinking, okay, let me extrapolate it out even further. Here's where else you and your friend would have benefited. Okay, let's just assume for a moment that you put 50 grand into that property. All right. Let's say that he put 50 grand into, for A1K over that ten year time frame.
00;15;07;03 - 00;15;32;21
Kevin
Right? Like he didn't have it. You had it to go buy the property. Let's say he didn't have. Let's say he contributes it over time. Okay. When you when you, when you sell your property, if you were to be, if you were to sell the property, you're only taxed on capital gains not capital contribution. Correct. Right now as he's contributing money to his 401 K, he's getting the deduction for contributing that money.
00;15;32;21 - 00;15;48;12
Kevin
But then when the money comes out he's still going to be taxed on it. Right. So you're already ahead of the game from a tax standpoint. In addition, over those ten years he's been funding the retirement account and hoping that it grows. Who's funding your real estate retirement account?
00;15;48;14 - 00;15;49;04
Steve
My tenants the.
00;15;49;04 - 00;16;08;05
Kevin
Tenants. So you were smarter because not only are you are you not future taxed on your principal contribution? And if you were to refinance the money, you're not taxed on the money that comes out and you were smarter because you weren't contributing to something that both will later be taxed and your personally having to contribute and hope for the market to grow.
00;16;08;08 - 00;16;17;00
Kevin
You have somebody else funding your investment instead of you funding your investment and all of that, without once having to consider interest rate and cash flow.
00;16;17;07 - 00;16;20;20
Steve
Exactly like, dude, you can't make this stuff up, Kevin.
00;16;20;21 - 00;16;44;28
Kevin
It's crazy. And if you just look at appreciation, right? Like like just look at appreciation, okay? We know that real estate will continue to appreciate there will be times when it doesn't appreciate as much. There will be markets where it doesn't appreciate as much. There may even be times I doubt it, but maybe if we had a massive financial correction, whatever you could see property values go down temporarily.
00;16;44;29 - 00;17;11;04
Kevin
But in the presidential debates, even the the both parties are acknowledging that there is a massive shortage of affordable housing. Okay, now shortage of housing is the operative phrase here. Shortage of housing means demand but not supply. But if you own the supply where demand is high, then no matter how much you try to force feed bad economics into a capitalist system, the invisible hand is at work.
00;17;11;04 - 00;17;31;24
Kevin
Okay, so you want to own supply where demand is high because there will be an upward pressure on the prices of that supply. So, you know, no matter, no matter how you slice it, owning real estate will create some appreciation over time period, okay? Especially if you do the right property in the right market with the right set of conditions.
00;17;31;27 - 00;17;45;11
Kevin
But what's interesting about that is like, okay, we don't know how much the property's going to appreciate. All right. We know there's a shortage. We know that we're on the right side of the supply demand curve. All right. We know all of the other benefits that we were just describing with a property versus your friend who didn't buy property.
00;17;45;11 - 00;18;04;23
Kevin
Or in my example, you know, a property that I made nothing on for ten years and whatever, like however, where we want to word it and talk about it. But if you look at the appreciation on just an average property, okay, what we know is for the last 100 and something years, appreciation has averaged at a minimum 3.5%.
00;18;04;23 - 00;18;27;26
Kevin
Okay. Do you know that that means that if if the economy just yields an average of 3.5% between 10 and 15 years, your property value doubles, and if it does like 5%, it's like ten years that it doubles. And if it does like 7%, it's less than that. Which just dude. So look, I'm not going to I don't have a whiteboard.
00;18;27;26 - 00;18;44;00
Kevin
I'm not going to. Beautiful. Mind the thing you could go to ask ChatGPT. In fact, you should do this. Everybody, if you have a ChatGPT account or even if you don't go and say, if I bought a home today for $300,000 and it appreciated at 3.5% for the next ten years, how much would it be worth in ten years?
00;18;44;00 - 00;19;12;26
Kevin
How much would it be worth in 15 years? How much would it be worth in 20 years? And what you're going to see is it's going to blow your mind. I you know, I have this example that we actually put in the intensive, which is and I talk about all the time on the podcast, my parents home, like all of the fluctuations of economies and all of the fluctuation of interest rates and all of the fluctuation of presidential administrations and all of the fluctuation of, you know, times of economic crisis and recessions and all that.
00;19;12;26 - 00;19;56;10
Kevin
Dude, end of the day, it was the time that created wealth for my parents because it was attached to real estate. And I just hope you guys, if you're listening, I just hope that you will come along and outlook full admission here. Steve. You and I and our team, we haven't even been fully, I think, acknowledging the power of real estate in this regard because even we as real estate investors, as owners, have done for you, real estate as the team that's helping all of our clients do real estate, we've even been sort of like obsessed with cash flow, right?
00;19;56;13 - 00;20;15;28
Kevin
For years. It's like, and then when cash flow started to go away, it forced us because look for the average lay real estate investor, right. And all I mean by that was like somebody that this is not the number one thing that you think about all day, every day, all of the time when cash flow goes down. It could be a really simple explanation and that's most important to me.
00;20;16;01 - 00;20;50;27
Kevin
I'm not going to invest for us. We're not getting out of real estate. We're always going to be in real estate. So if cash flow goes down, we have to look at ourselves and say, does it still make sense or is it still worth it? And what's been so crazy is now in this environment over the last couple years, as we continue to to to drill down additional layers of what real estate does and provides for us and for our customers, I think we are more convinced than ever of the power that is available and this kind of real estate and it it's all in this discussion right here.
00;20;50;28 - 00;21;08;01
Kevin
We've never, frankly, talked about real estate quite like this in these terms where we've said interest rate and cash flow don't matter if you look at it in this context, right. This is even new for us, just in terms of really talking about it in this way. We've known it, you know, but really sort of focusing in on this aspect.
00;21;08;02 - 00;21;32;24
Steve
Yeah. We just haven't framed it quite this way. Yeah. And what's interesting is we're we're heading into a time period where cash flow is naturally going to improve. Yeah. But and so I think it's timely from, from that standpoint that, that it's not, you know, you know, it's something that we're going to get more of, but we're, we're helping people understand that it's not that important anyways.
00;21;32;24 - 00;21;48;09
Steve
Yep. Right. So we're not having this conversation because cash flow is going down. We're like, oh, what are we going to do. Right. Like we this conversation because we continue to have these epiphanies as to how to frame this conversation to help our clients understand what it is. A they're they're really getting their sell themselves into.
00;21;48;10 - 00;22;02;15
Kevin
Yeah, 100%. And so we hope that like, this is a shorter episode today, but I think it's because I want you to if you're listening, I want you to go back and re listen to this, and I want you to chew on the example that I shared in that Steve shared. And I want you to chew on just.
00;22;02;18 - 00;22;20;12
Kevin
Yeah, I love our brains have this really remarkable capacity when we feed our brains a question, our brain starts to work on it to try to answer it right. So that's effectively what we've done today. That's the exercise. So if you're listening, I just want you based on if you've listened for a long time, you know how we look at real estate.
00;22;20;12 - 00;22;41;29
Kevin
You probably look at it the same way. I want you to ask yourself the question, if I assume that interest rate and cash flow don't matter in my real estate, does it still make sense for me to own and buy real estate? Ask yourself that question and allow your brain to chew on that and work it through. And I'll tell you, I know exactly what you're going to find because it's exactly what we found.
00;22;42;05 - 00;23;10;04
Kevin
There are so many reasons why it still always makes sense, and why it's always the right time to buy. Like we've always said, if you look at what you're hoping your real estate is going to accomplish for you in the long run, what is that thing? You know, we give game plans, we talk to people. But I don't know how many of you have really sat and said, what is it that I want the real estate to accomplish?
00;23;10;07 - 00;23;30;15
Kevin
Because if it's an amount of money, there's different ways to get there. If it's a certain amount of cash flow, it could be owning a portfolio that produces that cash flow. It could be owning a portfolio that allows you to refinance chunks of capital out, and then spread that capital over a certain amount of time so that you can increase your standard of living while owning the real estate continually.
00;23;30;15 - 00;23;58;17
Kevin
Right. That I want you if you're listening to, ask yourself the question, why am I doing real estate? What am I wanting to accomplish? What is the actual long term goal? And I would I would make the case that I think what we're all really looking for is walk away money. We want we want to be able to walk away, either from the job we don't like or the part of the job that we don't like or the job altogether, or we want to walk away from the idea that the job is the only way that we generate income.
00;23;58;17 - 00;24;17;08
Kevin
We just want to walk away. We want to be able to walk away from something that's anchoring us, holding us down, holding us back. And real estate gives us the ability over time to create that kind of walk away money. So I want everybody to kind of think about that, chew on that, and, and think about it for yourselves, because it might lead you down an interesting road.
00;24;17;10 - 00;24;18;14
Steve
Love it. For good.
00;24;18;16 - 00;24;22;16
Kevin
Awesome. All right, everybody, thank you so much for joining the Replace Your Inc.com podcast. We'll talk to you real soon.
00;24;22;20 - 00;24;25;18
Steve
Take care.
00;24;25;21 - 00;24;26;02
Steve
And.