First investment Property Advise - Cash flow vs Equity

[Josh Rodriguez]

Hello, Bigger Pockets this is my first post so not sure if y'all would respond but I have a couple of questions on my first rental property I'm 24 with my own business that trying to build a REP. this may be a long post sorry                    

(side note I'm doing a BRRR without the major renovations i will maybe possibly do a kitchen but its basically turn-key sorry if in the wrong forum)

 I have about 70k and I am willing to put up to 50k(20%) on a 250k house and have the other 20k as reserves. I live in South Florida and it's basically cooked down here so I have been scouring my state and found fairly promising properties under or around 250k but it's 5 hours away from where I live?! . That's just to start but I want to know if the deal that I'm about to get to makes sense. 

So I'm going through DSCR because of LLC purposes and I know the interest rates are higher than normal, with my credit about 7.2% hopefully ngl haven't confirmed. I have a spreadsheet of how profitable I am going to be with the deal and these are the numbers: 245k purchase price, 20% down (49k) 7.2% interest giving me about $1,330 payments, looking at neighboring rentals with the same layout and interior I can potentially rent it for $2,200 hopefully but I expect the worst.

Expenses: Insurance is about $145/m property tax about $208/m (my guess, lowkey the property got tax assessed at $89k in 2022 and now its worth what it is now so I'm guessing $2450 a year). Monthly expenses $390 a month

 I am going to pay a one-time fee to find a renter with property mgmt so I am not paying a monthly fee, i would like to hire handymen instead of a consistent property management fee but I am a novice so please inform me! But carrying on like I said I would have about 10-20k depending on closing costs in reserves and have another bank account with back up back up but I really do not want to touch that, with that being still said I am not adding to capex, maintenance, or vacancy every month even though I probably should. 

So looking at everything after expenses I'm looking at:

Monthly expenses - $1,720 

Monthly net cash flow - $480

initial Coc- 9.75%

Total return % - 13%

putting up to 59k depending on closing cost 

I guess my question is should I be looking at other deals? My original goal before starting was chasing cash flow and not equity so I was doing the numbers in my head for like 1k a month cash flow before I got to the real numbers and saw the reality and tbh if I have to pay for PM and capex and maintenance then I can kiss my cash flow away BUT I would still be building equity should I still look at this as a good deal? It will appreciate because that is what prices are saying and if or when they lower the interest rates the prices of the houses will go up. Also my goal is to cash out refi and buy another property with the profits and and equity built. Sorry for the long post and if it's not as professional as other posts but anyone willing to give me good advice I'm willing to hear I am a novice and want to be entrenched with this information 

[Marc Winter]

To cut to the meat of your story:

1. ALWAYS BE LOOKING for another deal!

2. Remember, just because interest rates fall, housing prices don't necessarily appreciate right away.  Prices can (and have before) tumbled after rate cuts.  It can take several years before the prices come back up to pre-drop levels, and then as per the usual cycles, continue higher.  

3. The question is, do you have the staying power to weather a multi-year storm?  If you have several months of vacancy, you'll be out of pocket at least $1,730 each month.  

4.  How familiar are you with the subject property's location and demographics?  If/when the SHTF, will there be any qualified tenants to rent to?  Will the rents be rising or declining?  A five-hour drive gets even longer when you are traveling to a vacant house.

5.  To get a feel for what history can teach us, talk to some seasoned investors who lived through the real estate market from 2007 to 2010.  I'm not saying that we are looking at a repeat of those times, or trying to discourage you.  Just be informed and prepared.

Good luck.  Keep investing and moving forward!

[Josh Rodriguez]

Thanks Mark for the time to reply, I am always looking for more deals but not all homes meet these numbers most don't, to be honest.

I have been reading others' stories and I am fully prepared to weather the storm and the mistakes along the way i just don't want to underestimate myself in how much things will cost. But I feel the location overall will see a lot of growth. I feel like I may be buying it 5 years too early but see potential for sure. 

I have done extensive research on the area on the population, schools, hospitals, jobs, and the age group I'm targeting, and I've seen all the streets and the whole town as much possible without actually being there on google street view but i will be driving over there this weekend to get a real vibe of the place probably talk to locals.

I pray that another major 2008 does NOT happen while I'm incurring on my first investment property lol.. But wasn't the approval process the main cause of 08, that unqualified people were qualifying?.

[G. Brian Davis]

Hi @Josh Rodriguez, congrats on getting into real estate investing!

I started my career in real estate doing BRRRR deals. They're a lot harder than the average person thinks. There are a lot of "micro-skills" required: finding a great deal, forecasting returns accurately, financing it, hiring and managing contractors (difficult!), permits, inspections, permanent financing, managing tenants, managing property managers, and so on. That all gets infinitely harder when you invest long-distance.

Personally, I invest in real estate passively today. That mostly means syndications but it also sometimes means notes and funds. I like to spread relatively small amounts ($5K/month) across many property types, many states, many syndicators. You can do that by going in on deals with other investors, either friends and family or through an investment club. We typically aim for 15-25% annualized returns for instance, as a mix of cash flow and appreciation.

In short, I'd take a step back and ask yourself if you're just looking for the investment benefits of real estate (cash flow, appreciation, tax benefits), or whether you want to build a side business around real estate investing. There's nothing wrong with the latter, you get full control, but it takes a lot more expertise and a lot more time and labor.

Just my two cents. Best of luck!

[Jacob Sherman]

I take the equity vs the cashflow . Depends on how liquid you are for more real estate purchases 

[Jake Baker]

@Josh Rodriguez

I look at Cash Flow and Forced Appreciation as a hedge against market corrections. Market Appreciation is where you will make the most money over a 10-year period but is the least predictable.

[James White]

I want cash flow in every deal. Equity is a bonus. 

[Evan Polaski]

@Josh Rodriguez, every property wears out eventually.  You don't mention the current condition of the property, but let's assume it is brand new construction.  Well, in 25 years (typically) you will need a new roof.  If a roof costs $6,000 (probably low, so fill in what you want) and it will last 25 yrs, you need to hold back $20/mo for that roof.  HVAC: 15 yrs, let's say $10,000 = $55.56/mo reserves.

And if things are not brand new, you can shorten the life and increase the reserve amount.

But more realistic, turnover costs will cost you.  I average about $500/yr on average, and in most areas common wear and tear are not able to be withheld from deposit.  If you are paying someone to lease the property (even if you self manage), common finders fee is 1 month rent for new leases and 1/2 month rent for renewal.  So, if you get $2,200/mo, and you are turning over every year (hopefully you get multi-year tenants), that is 4 1/2 months of your cash flow, combined with turnover averages, and if you are turning every year, you will be out $2,700, assuming you immediately find a new tenant to take over the day after the old one leaves.  And again, this is still not including any capex/repairs.  You also want to take a look at what insurance rates have done over the last few years in FL.  I have several friends that increased more than 2x in one year's renewal.

To your bigger question, as other's mentioned: cash flow helps keep you afloat and can buy you out of bad markets, but appreciation /equity is where you will actually make money.  Buying a turnkey property has never been something that has appealed to me, personally.  All of my rentals involved a reasonable amount of renovation.