What to do about mortgage rates negatively impacting cash flow?

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Thanks, Jay! More money down makes sense. Would you mind explaining how "credits" work?

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Podcast Guest on Show #222

Quote from @Christopher Dru:

Thanks, Jay! More money down makes sense. Would you mind explaining how "credits" work?

talk to a lender they will explain how sellers can buy down the rate.

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Ash Hegde

Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes

When cash flow is tight it becomes a play on appreciation of the property value but also appreciation of rents over time. It takes more work to find the right properties with these prices and interest rates but they are out there. Perhaps a value add property where you can increase the rent after some improvements. A good agent may have connections to find a better deal for you than what you see on the MLS. It's really hard to tell when rates will come down, so I wouldn't bank on a refinance for a lower payment any time soon. If you're in it for the long haul you will get that opportunity though! Best of luck and feel free to connect if you want to talk more.

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OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Thanks, Ash! Rent appreciation is something I can surely consider more heavily in my analyses. I'm a buy-and-hold investor so given a 20+ year time horizon, current market fluctuations may be moot given the lifetime of the investment. Appreciate your response!

3 Reply

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Jay Hinrichs:

Quote from @Christopher Dru:

Thanks, Jay! More money down makes sense. Would you mind explaining how "credits" work?

talk to a lender they will explain how sellers can buy down the rate.

I will do some more research, appreciate your time and recommendation, Jay!

Dave Skow

Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes

@Christopher Dru- thanks for the post ...1) 30 yr fixed rates for PRIMARY SFR are around 7% right now - rates for a 2 unit duplex thats a rental are signficantly higher right now ...2) also worth noting - the points ( loan fee ) for many rental loans are very high right now so make sure to get an accurate picture of these plus all other costs and prepaids to plug into your calculations 3) rates are likely going to eventually drop but dont make any decsions based on hoping rates drop 4) private financing terms will likely be higher than traditional loans

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

...or, you could just not buy it in the first place. Sometimes the best deal you make is the one you don't.

11 Reply

Aidan Dobbins

Member since 2022 · 15 posts · 5 votes

Hey @Christopher Dru couple things here

1. Looking for deals on the MLS will generally only lead to market priced properties. Have you considered looking off-market? You can network with wholesalers to find deals below market value.

2. Have you considered hard money? Rates for hard money DSCR loans can be lower than what you can get for a conventional loan right now

I'll shoot you a PM

Mark S.

Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes

@Christopher Dru If I understand your post correctly, you would live in one side and the rent on the other side would cover all your expenses except $1-200/month. So basically it would be costly you only that amount out of pocket to purchase and live in the duplex. Doesn’t sound like a bad deal to me, especially if you could rent both sides out down the road and cash flow quite nicely. Am I reading this right ?

4 Reply

Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

Change up your strategy, offer seller finance and get creative with how you're going to cash flow. So many tools to use and navigate in this environment

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

Quote from @Christopher Dru:

It's a basic fact of life: not every day can be the best day to find a deal. Properties were much more affordable in 2016 than they are in 2022. Mortgage rates were better in 2021 than they are in 2022. We had more inventory in 2019, but we had even more inventory in 2012.

Sometimes the market is bad for investors. You may need to look at different markets. You may need to wait it out to see what happens with real estate, mortgage rates, and our economy. Things change and you should adapt accordingly.

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Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

@Christopher Dru

It's difficult to find an investment property off of the mls at this time. I believe in looking for fixer uppers by using the BRRRR method. When you force appreciation it reduces your cash outlay and you can use that same cash for the next one.

I've had great success contacting local banks in my area and inquiring about properties they have foreclosed. Banks seem to just sit on these properties until they must sell them. I was able to acquire many properties this way and either flip or BRRRR them.

This is where private lending comes in hand. I met many private lenders at local REIA groups and built relationships which helped build my portfolio.

In my opinion, I would not buy at negative cash flow. That is not a good investment. Things are not going up in value, they are actually going down or will be stagnate for a while.

As some others have said wait for the right property that will have positive cash flow. It’s not but a bad property that will only cause pain, frustration and regret.

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Kenneth Garrett:

@Christopher Dru

In my opinion, I would not buy at negative cash flow. That is not a good investment. Things are not going up in value, they are actually going down or will be stagnate for a while.

As some others have said wait for the right property that will have positive cash flow. It’s not but a bad property that will only cause pain, frustration and regret.

Thanks, Ken! - So even if I plan to hold the property for 20+ years you still wouldn't recommend buying at negative cash flow?

What if I am bullish about my local area expanding and growing over the next decade?

How would you factor in market appreciation?

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Nathan Gesner:

Quote from @Christopher Dru:

It's a basic fact of life: not every day can be the best day to find a deal. Properties were much more affordable in 2016 than they are in 2022. Mortgage rates were better in 2021 than they are in 2022. We had more inventory in 2019, but we had even more inventory in 2012.

Sometimes the market is bad for investors. You may need to look at different markets. You may need to wait it out to see what happens with real estate, mortgage rates, and our economy. Things change and you should adapt accordingly.

Sound words of wisdom, Nathan. You're right, I'm looking for a deal, not just to purchase a multifamily for the sake of purchasing a multifamily.

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Mark S.:

@Christopher Dru If I understand your post correctly, you would live in one side and the rent on the other side would cover all your expenses except $1-200/month. So basically it would be costly you only that amount out of pocket to purchase and live in the duplex. Doesn’t sound like a bad deal to me, especially if you could rent both sides out down the road and cash flow quite nicely. Am I reading this right ?

Hey Mark - In my analyses, if I rented out both units I'd receive a negative cash flow of around $200/month.

If I lived in one unit the cash flow would be worse, but the rented unit would still supplement my living costs.

You're right, the prospect of positive cash flow may get better down the road if I rent both units and rent appreciates in my market.

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Joe Villeneuve:

...or, you could just not buy it in the first place. Sometimes the best deal you make is the one you don't.

"You've got to know when to hold 'em, and know when to fold 'em!"

Very true, Joe

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Quote from @Dave Skow:

@Christopher Dru- thanks for the post ...1) 30 yr fixed rates for PRIMARY SFR are around 7% right now - rates for a 2 unit duplex thats a rental are signficantly higher right now ...2) also worth noting - the points ( loan fee ) for many rental loans are very high right now so make sure to get an accurate picture of these plus all other costs and prepaids to plug into your calculations 3) rates are likely going to eventually drop but dont make any decsions based on hoping rates drop 4) private financing terms will likely be higher than traditional loans

Interesting point, Dave - I've wondered why financing terms are generally worse and/or more stringent for investors than for traditional mortgages to homeowners. Intuitively I would think it would be the opposite. Wouldn't your typical homeowner tend to be more insolvent or less financially savvy than your typical investor going for a rental loan?

I imagine the bank's risk of non-payment would be higher for non-investors but I must be mistaken somewhere. Maybe overall, investors pose more quantitative risk of insolvency to banks given their leverage, potential for cash flow loss, etc.

Appreciate your thoughts and time.

Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

Quote from @Christopher Dru:

Quote from @Kenneth Garrett:

@Christopher Dru

In my opinion, I would not buy at negative cash flow. That is not a good investment. Things are not going up in value, they are actually going down or will be stagnate for a while.

As some others have said wait for the right property that will have positive cash flow. It’s not but a bad property that will only cause pain, frustration and regret.

Thanks, Ken! - So even if I plan to hold the property for 20+ years you still wouldn't recommend buying at negative cash flow?

What if I am bullish about my local area expanding and growing over the next decade?

How would you factor in market appreciation?

I’m just not a fan of relying on appreciation. I treat it as a bonus. Of course overtime and historically values increase, but I still wouldn’t take a negative cash flowing property. It’s just my own philosophy. Right now your seeing values drop in many markets. There is no guarantee your value will not fall when your ready to sell. In theory, an investment is something that makes money. Negative cash flow is not an investment in my mind. Look people have invested in appreciation and has worked for them, but what happens in 20 years if the market drops, then your projections are worth nothing. What if you need to sell in 5 years? A cash flowing property makes money, year after year.

OP

Investor · FL · Member since 2022 · 21 posts · 19 votes

Good point - appreciation is not as practical as cash flow and really only pays off when you realize the gain after you sell.

I'll definitely keep your philosophy in mind as I move forward.

Best,
Chris

Daniel Apke

Investor · Greater Cincinnati · Member since 2018 · 25 posts · 12 votes

You can and will definitely still find properties that can cash flow well. You may need to work a little harder to get them but keep in mind, as interest rates rise buying power also rises. Focus on getting deals under market value and everything will work out.

Nate Sanow

Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes

Consider targeting value add opportunities where properties don't check the box of brrr but also are not flying off the shelf, have a higher DOM, and maybe have a small amount of built in equity where you can get them at 90% of ARV. I call these "in-betweeners " because they are overlooked by owner occupants as they are not move in ready but also overlooked by investors because they are not slam dunks with immediate ROI. You could do a gentle grade remodel, like, fresh paint, resurfaced cabinets and vanities, and new, bright, LED light fixtures. You'd be amazed how far $1000 can go, and can really add $100-200 per month in rents. I don't have examples because I focus on brrr but often I get leads or see opportunities like this in my market and I often think if more investors were in the traditional 20% down camp + open to minor value add they would open up a door to further possibilities

Dave Skow

Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes

Quote from @Christopher Dru:

Quote from @Dave Skow:

@Christopher Dru- thanks for the post ...1) 30 yr fixed rates for PRIMARY SFR are around 7% right now - rates for a 2 unit duplex thats a rental are signficantly higher right now ...2) also worth noting - the points ( loan fee ) for many rental loans are very high right now so make sure to get an accurate picture of these plus all other costs and prepaids to plug into your calculations 3) rates are likely going to eventually drop but dont make any decsions based on hoping rates drop 4) private financing terms will likely be higher than traditional loans

Interesting point, Dave - I've wondered why financing terms are generally worse and/or more stringent for investors than for traditional mortgages to homeowners. Intuitively I would think it would be the opposite. Wouldn't your typical homeowner tend to be more insolvent or less financially savvy than your typical investor going for a rental loan?

I imagine the bank's risk of non-payment would be higher for non-investors but I must be mistaken somewhere. Maybe overall, investors pose more quantitative risk of insolvency to banks given their leverage, potential for cash flow loss, etc.

Appreciate your thoughts and time.

Thanks … 2 reasons 1) rental prop loans are historically higher in default rate …. If someone owns both primary home and rental and then falls on tough times - rental loan payments will be missed first …. 2) secondary markets- lenders don’t keep loans anymore - loans are almost all resold and because of this - the price on rentals is now very high because it’s the price needed to get the loan sold and off the books

Bob S.

Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes

Quote from @Christopher Dru:

I'm a beginner real estate investor doing all the learning, reading, and mock deal analyses that I can before I'm able to locate a cash flowing duplex in my target market and purchase my first property (I plan to live in one unit and rent the other).

As I scan the MLS and analyze potential deals based on current market prices and expenses, it seems that the major factor preventing nearly every property I analyze from cash flowing is the mortgage rate.

I plan on putting down 20% into my aspirational duplex and having around 10% or so above the down payment in cash reserves for unknown expenses, maintenance, emergencies, etc.

With mortgage rates being as high as they are (7%+) at the moment, it seems like a true "needle in the haystack" situation to find a property that will cash flow in my area (Central Florida).

Note that in my analyses, I am running the numbers as if I am renting both units of the duplex as well as if I were to rent only one unit of the duplex (both situations produce negative cash flow).

Let's say I find a duplex that I want to purchase and everything fits my standards with the exception that I have negative cash flow of $100-$200 per month. At that point, am I basically making an appreciation play? Would the best move be to hope rates come down in the near future so I can refinance to a lower rate? In this situation I'd need enough cash reserved to keep the property operating at a negative cash flow for the indefinite future.

What are investors to do in situations like this when there just are not any positively cash flowing properties if you're not purchasing the property outright? Standby until the cost of capital goes down or get creative with private lending?

Thanks for any and all insight.

Chris

Simple answer, PAY LESS for the property .

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes