Is Losing Money Normal In the Beginning?
I've been analyzing deals for a couple weeks now. A mix of single-family, small multi-family, BRRRR, and even a 20-unit apartment.
I'm a numbers guy, so I've done my research and believe I am using accurate numbers when calculating NOI and cap rates.
What I've found is that on-market deals typically have a cap rate of 5% or less, and after debt service cash flow is often negative, especially at current loan rates.
So do investors just have the income and cash to buy and wait for spreads to widen as rents increase?
Would love to hear your thoughts!!
Looking at your numbers they don't work, buying a house for 450,000 that has a monthly revenue of $3,100 won't cash flow. Not a good deal. Need to find a good deal. I like to see the monthly rent be at least 1% of the mortgage.
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@Ross Kline Hi, and welcome to the forums.
No, investors (if they're smart) know that they make their money "going in" , i.e., when buying. Of course, crazy market appreciation and dumb luck can occasionally work in our favor. But that's no strategy. The numbers you're seeing are common in many markets today. But you still don't buy negative cash flowing properties with the hope that something will happen. You dig in deeper looking for those true value-add deals - these will mostly be off-market in many areas. Best wishes and stay patient.......
How are these sellers/realtors coming up with their prices when the numbers don't seem to jive for an investor?
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I'm a numbers guy. You have done the analysis which is good. It's time to move on in your REI learning path.
Go buy a trailer in a mobile home park for around $30,000 to $50,000. Check the rules to make sure you can rent it versus live there. This will teach you the non numbers side without a large downside.
Keep looking at properties but don’t wait for a great deal before you continue your path.
Figure out your downside scenario. Determine if this is acceptable to you.
This property just doesn't work thats all. Don't get discouraged. Part of the process is locating a good deal. Even in todays market they are out there. You want to look at distressed property and bring value to them. In those numbers you have repairs estimated at $4,500 for a 5plex. My SFH alone cost about 40k to renovate and it basically tripled the price of the home. I was able to leverage the refi and cash flow correctly. But this is the game. Finding the deals and making them work. Just keep looking.
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No, don't ever lose money. In a very rare case where you know for 100% certain that the property value will double next year, ok go ahead and snatch it up and wait. You can rationalize a year of NCF. But the numbers have to work, or don't buy.
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Depends which market you're in. Investors in expensive/growing markets such as Austin are happy to be negative cash flowing to take advantage of appreciation
Quote from @Ross Kline:
It's not normal. Prices skyrocketed for two years straight so the numbers don't work. You have to be patient. We'll eventually see sales prices hit bottom and rents catch up, then you'll see more properties that make sense.
@Ross Kline don't buy it if it loses money. Keep analyzing deals and you'll find something! A couple of weeks is not a lot of time to be looking.
Quote from @Nathan Gesner:Should I adjust the numbers and make an offer at a certain cap rate? Say 8% or 10%?
Quote from @Ross Kline:
It's not normal. Prices skyrocketed for two years straight so the numbers don't work. You have to be patient. We'll eventually see sales prices hit bottom and rents catch up, then you'll see more properties that make sense.
From what I can tell, BRRRR is the main play right now. Most SFH or Multi-units wont cash flow unless its in a market where prices are low and rents are high...there are a few still out there. You can still find a deal but it will take analyzing tons more to find that needle in the haystack.
@Daniel Shuler I think whats going on is that a lot of those buildings you are seeing are owners who are long-term holders and are willing to wait until they either get a buyer at their price or until they NEED the money in which case they might sell. How else can you explain buildings listed for over 400 days in some cases with no price changes and no seller financing available? They must not need to sell, so why not wait until they get the offer they wanted.
Buying for cashflow is income. Buying for appreciation is "ifcome" - IF things happen in your favor, you get income.
Quote from @Amit Chawla:
From what I can tell, BRRRR is the main play right now. Most SFH or Multi-units wont cash flow unless its in a market where prices are low and rents are high...there are a few still out there. You can still find a deal but it will take analyzing tons more to find that needle in the haystack.
@Daniel Shuler I think whats going on is that a lot of those buildings you are seeing are owners who are long-term holders and are willing to wait until they either get a buyer at their price or until they NEED the money in which case they might sell. How else can you explain buildings listed for over 400 days in some cases with no price changes and no seller financing available? They must not need to sell, so why not wait until they get the offer they wanted.
Ah, I hear ya. That makes sense also. I’ve seen some of those listed for over year also and just assumed either something is really wrong with them or they’re not in any need to sell yet.
@Ross Kline. Short answer, no. There are some fundamental rules to investing. Otherwise you are simply buying, not investing.
1) Buy at a discount. If the numbers don't work, don't buy.* This might be the hardest thing to grasp for most beginning investors.
2) You make your money when you buy. You collect it when you sell or as cashflow. See rule #1.
3) Study market cycles and adapt to the market. I know this one is a bit contentious but hear me out. If the market is raging and buyers are competing for properties, as an investor, how are you going to get a discount? If the market has appreciated at record levels and now interest rates are rising, is it the best time to BRRRR or flip? Not if you can't get a discount. At the same time, if sellers have financing at lower rates, and rates are rising - this is an opportunity! *In some cases, you may not be able to get a discount, but if you learn to buy on terms, you can really find deals that work for all. To be a successful investor you go against the tide. If everyone is buying, it's best to wait and sharpen your skills, up your reserves, stock pile cash. Then, when everyone else stops buying, you swoop in and buy on your terms.
I've done almost every acquisition and exit strategy. I've never lost money. A couple times I've certainly not made as much as projected. However, I was covered by my buy rules. I live in spreadsheets too :) I'm a licensed agent but will be the first to say that most deals are not found on the MLS.
I know Mr. Kline posed the question if investors just accept losses to get in on a deal, but I am surprised to see that no one suggested making an offer on the property where the numbers make sense. In my limited experience, I thought this was a common practice. As the market cools sellers will find that their properties won't sell at the current prices. As the properties sit on the market an offer in the pocket will start to look more enticing even if it is significantly lower than the asking price at least that is what I was taught. Does this still hold true? In my opinion, if you are prepared to buy a deal that makes sense, submit offers at a price point where the numbers work for you until someone agrees to your price.
Quote from @Ross Kline:
In any market, a property is only worth what it's worth to you. If the numbers don't work, then you have to adjust your offering price to make it work or walk away. The market hasn't cooled off much yet, so you may not be able to make the numbers work.
@Chris Brown yes! Do that too! I guess, I'm old school and don't even bother dealing with sellers who aren't realistic or motivated in some way to make a deal. I'm patient and know good deals are just around the corner but in my market, are not quite there yet.
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Quote from @Nathan Gesner:
Quote from @Ross Kline:
It's not normal. Prices skyrocketed for two years straight so the numbers don't work. You have to be patient. We'll eventually see sales prices hit bottom and rents catch up, then you'll see more properties that make sense.
nathan one thing we have to keep in mind 5 caps in 7% interest rate market never cash flow with minimum down.. but there is a ton of cash in the market still and thats who are buying these cash buyers.. for sure the minimum down 20% down buyer is going to have to look long and hard to find anything, simple solution is to either wait or put a little more down to at least break even.. or invest in something else.. nothing says that real estate has to cash flow with 20% down thats just like saying everything should hit the 2% rule because it did back in 2011 LOL.. things they be changing.
Quote from @Ross Kline:
I've been analyzing deals for a couple weeks now. A mix of single-family, small multi-family, BRRRR, and even a 20-unit apartment.
I'm a numbers guy, so I've done my research and believe I am using accurate numbers when calculating NOI and cap rates.
What I've found is that on-market deals typically have a cap rate of 5% or less, and after debt service cash flow is often negative, especially at current loan rates.
So do investors just have the income and cash to buy and wait for spreads to widen as rents increase?
Would love to hear your thoughts!!
I love the line "I lose money on every deal but I'll make it up in volume". Seems Opendoor, Offerpad, Redfin, Zillow all had that approach and now they are leaving the market with substantial losses and their tail (in this case spreadsheet) between their legs.
The first rule of investing: 1. Don't lose money,
the second rule: 2. See rule 1
Quote from @Ross Kline:
I've been analyzing deals for a couple weeks now. A mix of single-family, small multi-family, BRRRR, and even a 20-unit apartment.
I'm a numbers guy, so I've done my research and believe I am using accurate numbers when calculating NOI and cap rates.
What I've found is that on-market deals typically have a cap rate of 5% or less, and after debt service cash flow is often negative, especially at current loan rates.
So do investors just have the income and cash to buy and wait for spreads to widen as rents increase?
Would love to hear your thoughts!!
It is normal in the sense that it happens a lot lol but it shouldn't be the case. I'd look at how you're running your numbers, the team you've built, and the market you're in. Most likely the market you're in doesn't match you're investment goals and/or criteria. Consider looking out of state maybe? I'd be happy to make some suggestions in Ohio if you'd like!
is it normal to lose money in the beginning? no. but as others have said, most on-market properties aren't going to cash flow right now. so, you have to find a way to add value / change configuration / go off-market / or some combination.
also, you mentioned "offering at a different cap rate." SFH and small multi are valued based on comps - you won't get anywhere making a cap rate based offer.
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Quote from @Daniel Shuler:
This is something I've been seeing a lot of lately that leaves me scratching my head. Sometimes I feel like "Am I missing something here?". What I'm seeing are numerous multifamily properties, brand new, old, updated, not updated, that are listed that even after a 20% down payment, with today's interest rates, wouldn't even cover the mortgage, let alone all of the other things you may need to account for like CapEx, PM, etc.
How are these sellers/realtors coming up with their prices when the numbers don't seem to jive for an investor?
because you use the 20% down - a 2009 environment number ; in year 2022. It's that simple.
the logic you guys using fo not calculating all the appreciation dynamics that happened since 2008-2009.
You can find deals that cashflow. All over Chicago A/B areas you can get positive cashflow. Same with many cities. This is for 2-4 units. Single families tend to not cashflow unless in a bad neighborhood. The 5+ it's harder as many buyers buy cash or with low LTV but cashflow deals definitely out there usually involving significnt rent increases.