Hi, just wanted to get some general advice from some seasoned investors. My wife and I currently both work and make pretty decent salaries, were in our 30's and are paying off our 15 year mortgage on your primary residence. We have some excess money and would like to purchase our first investment property. Since we live in NYC any single family or duplex is out of our price range. We were looking to purchase a 2 BD Condo with low HOA fees. We could have the option to pay off the unit entirely and not have to worry about paying the mortgage.. Or I can just just put the 25% and try to use the remaining fund somewhere else, however due to high price of units here in NYC most properties do not generate positive cash flow. The reason this is even an issue is because of the few variables 1. I have little to know experience in real estate investing. 2. I tend to worry easily and having negative cash flow concerns me. 3. Real estate is a portion of my investment portfolio, not the only 1. I do not really have any intention of owning 5 10 100 units like some the veterans on this site.
Open question for @David Yue and everyone else; why would anyone buy a cashflow negative property?
I would only do it (and I have) if I were 100% sure that the appreciation would be huge...like buy for $200k and sell 2 years later for $400k. You have to factor in everything....
Investor · Member since 2021 · 591 posts · 695 votes
3y
@Bruce Woodruff I agree in theory, but I've never seen a situation where 2x appreciation in 2 years (or any amount of appreciation in any amount of time) is a certainty.
Nobody knows for sure how a property will (or won't) appreciate in the future, so it's a speculation.
If the speculation is a small percentage of a person's net worth (and they can afford to be completely wrong), sure, maybe it's worth rolling the dice... ...but, there seem to be a surprising number of folks willing to make speculations that their net worth can't support. :(
Reminds me a bit of that scene in Top Gun: "Son, your ego is writing checks your body can't cash"
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
3y
Of course I agree we are talking speculation here...but if you can take a very educated guess, then it is really not all that hard. Upcoming gentrification is real easy to spot. Maybe not for newbie I guess. Or maybe I've just been lucky....
Of course I agree we are talking speculation here...but if you can take a very educated guess, then it is really not all that hard. Upcoming gentrification is real easy to spot. Maybe not for newbie I guess. Or maybe I've just been lucky....
Yeah, I agree it's possible to make reasonably accurate appreciation projections (though, even experts get it wrong)...either way, the bigger the speculation, the bigger the person's net worth needs to be to absorb the hit if the speculation is inaccurate.
Warren Buffet can afford some speculative plays...most of us are not Warren Buffet.
Open question for @David Yue and everyone else; why would anyone buy a cashflow negative property?
Upside potential outweighs negative cash flow is why perfect example was SF peninsula most every thing 20 to 30 years ago would not cash flow unless you put a very large down.. but then that 500k property that was negative 250 a month in 5 years doubled in 20 went up 6X and rents caught up in 4 to 5 years and at 10 years massively positive .. I know I have 3 homes i owned in Palo Alto and Milpitas that I sure could have rented and afforded the negative for few years.. today would be about 6 to 7 million in equity ..
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
If you're looking to invest in Real Estate, but are hesitant because of cashflow worries and don't want too much risk, why not consider something in the middle? Opting for a property with only 40% down can help keep more reserves while still providing strong cash flows and less debt. This way you won't get returns as high as putting more money down, but it could be worth the tradeoff. It's completely up to you if you'd like to own one or two properties or scale later. Take some time to learn about what goes into managing property before making any decisions! Ultimately, Real Estate can be a great investment if done properly.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
To me this is a three part question.
Where to Buy:
How to Buy:
What to Buy:
along with the sleep well live well principals of risk management.
some of it is personal preference some of it is just math IE the cash Vs Leverage debate.
Paying cash has some advantages U can usually drive a harder bargain. NO risk of foreclosure or screwing up your credit.
Leverage wins the math debate every time as math does not lie ( as long as you have consistent cash flow and low risk property)
So location and type is your choice. U can pay cash the property is not going anywhere rates are high and going to stay that way for awhile
as a cash buyer you should make 5 to 6% NET return pretty easy plus write offs .
If you want to pull cash you can see if you can get a bank or credit union to put a heloc on it.. but only draw on it when and if you need it.
A lot of times U will find you simply dont need the money and your fine with the positive cash flow lowest risk profile and a great asset on your balance sheet if that does any good for you in other banking situations.
Yeah, I agree it's possible to make reasonably accurate appreciation projections (though, even experts get it wrong)...either way, the bigger the speculation, the bigger the person's net worth needs to be to absorb the hit if the speculation is inaccurate.
Warren Buffet can afford some speculative plays...most of us are not Warren Buffet.
I agree this is not for everyone. Worked for me many times. You really have to know the city and the specific area. Easy to find these though in almost any city. Newbies beware I guess, but that is a good reason to buy even with poor cash flow, which was the point....
@Bruce Woodruff I agree in theory, but I've never seen a situation where 2x appreciation in 2 years (or any amount of appreciation in any amount of time) is a certainty.
Nobody knows for sure how a property will (or won't) appreciate in the future, so it's a speculation.
If the speculation is a small percentage of a person's net worth (and they can afford to be completely wrong), sure, maybe it's worth rolling the dice... ...but, there seem to be a surprising number of folks willing to make speculations that their net worth can't support. :(
Reminds me a bit of that scene in Top Gun: "Son, your ego is writing checks your body can't cash"
Some thoughts:
- cash flow can decline and go negative. It is not guaranteed. At the Great Recession residential cash flow fell in many markets (Detroit, Vegas as 2 extreme examples). - there are many markets like mine that have never not experienced appreciation over any period of 8 years or more. This is going back as far as you can find RE values for. - research fundamentals of a market can reduce risk that it will not appreciate in the long term. - initial cash flow has a poor relationship to actual cash flow over a long hold. This is not happenstance because RE markets are efficient and price in expected rent growth. The cheapest markets are often markets with poor of even inflation adjusted negative rents (Detroit, cleveland for example). - appreciation can dwarf cash flow. In my market I have properties that have appreciated more than the total rent collected. My worse appreciating property has appreciated $2300/month. That is the lowest. My best has appreciated over $12k/month. Would I have cared much if they had a few hundred negative cash flow per month? Would that have resulted in a poor ROI?
- appreciation typically has a relationship with rent growth. The high appreciation property is likely to have high rent growth. - cash flow is taxed on the year earned. This makes it my least desired source of return. Extracted appreciation is tax deferred until sold and forgiven at death. At sale, it can be 1031 into another RE to postpone the taxes further. With current rules, I never expect to pay taxes on my RE appreciation.
Cash flow is required by some investors to pay the bills. After a certain level of financial freedom is achieve, a successful RE investment is judged more by its ROI than it's cash flow.
Hi, just wanted to get some general advice from some seasoned investors. My wife and I currently both work and make pretty decent salaries, were in our 30's and are paying off our 15 year mortgage on your primary residence. We have some excess money and would like to purchase our first investment property. Since we live in NYC any single family or duplex is out of our price range. We were looking to purchase a 2 BD Condo with low HOA fees. We could have the option to pay off the unit entirely and not have to worry about paying the mortgage.. Or I can just just put the 25% and try to use the remaining fund somewhere else, however due to high price of units here in NYC most properties do not generate positive cash flow. The reason this is even an issue is because of the few variables 1. I have little to know experience in real estate investing. 2. I tend to worry easily and having negative cash flow concerns me. 3. Real estate is a portion of my investment portfolio, not the only 1. I do not really have any intention of owning 5 10 100 units like some the veterans on this site.
Any advice would be appreciated
David, this is actually very simple.
#1 - You MUST invest OUT-STATE. MUST, not should, MUST. (a) Already pointed out you've got diddly and squat for decent opportunities there, ok, go where the deals are. But most importantly (b) I get a strong sense your the personality who NEEDS it to be away, so you don't sit and fret and hover on it all the time, which you will if it's close by, and ironically being a "helicopter landlord" is what will greatly increase tenant issues, not decrease them.
#2 - PM use is a MUST. Now, factoring in items for 1, again, it's GOTTA be out-state because if it's close, your possibly going to get sucked into the foolish action of hiring the worst PM you can find, YOURSELF. So, again, gotta remove that option to force only better options as the available ones. Out-state will force you into the healthy actions.
#3 - let the market split the difference. Look, leverage is a key ingredient in REI, without it it simply does not have half the returns it could and should. But over-leveraging is dumb too. So go somewhere like OH, where units are cheap, things are rather simple, and you can "split the difference" of using a very healthy down, but also using leverage, and just let that puppy pay itself down/off.
#4 - KEEP IT SIMPLE! Yes, REI has a lot of factors, but it's not complicated, it's complex in function but not complicated, PEOPLE complicate it. When persons get in this obsession of smashing square peg's in round holes, yeah, I bet it feels complicated. If the market your looking at doesn't work STOP looking there, change markets. If you don't have the knowledge, HIRE knowledge. If your risk averse, GO to low risk investment strategies and assets. Again, square pegs in round holes THAT's the problem makers, not the markets, not the assets, not the REI'ing, that's all rather simple and straight forward.
Rental Property Investor · New York, NY · Member since 2017 · 13 posts · 1 vote
3y
One thing I like about a 30-year mortgage, that money I borrowed and use today, will be less valuable over time. Especially with the current inflation rate.
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Define your risk parameters and time line @David Yue
If I was you, I'd focus on out of state(landlord friendly) first & foremost. That means find the location(s), the right agent, right PM, etc. Then depending on how deep you're trying to get, that varies for leverage, scaling, etc.
St. Petersburg FL · Member since 2018 · 6 posts · 2 votes
3y
With 25% you get easier payments and with inflation your 500k loan overtime will be decrease in actual value. With 2% inflation in 10 years the real value would be about 382k.
All cash gives you equity to play with. You could get a line of credit and invest in other properties.
Rental Property Investor · Cleveland, OH · Member since 2018 · 60 posts · 49 votes
3y
I grew up in NJ and understand the high cost of living. I would look to invest in markets that provide a lower cost to entry but with good cash flow. Read David Greene's book which will help you better understand the concept of investing at distance.
Real Estate Agent · Sacramento, CA · Member since 2022 · 36 posts · 6 votes
3y
Hey David,
You might want to look into being a Private Money Lender or Private Money Investor.
This is a more stress free way of getting started with your Real Estate Investing while still being able to rest and focus on your family after your regular job.
You could be earning a check every month from an investment property you didn't have to find, you don't have to risk your credit, and you could even earn the property if the original investor can't make his payments or pay you back.
Look up Pace Morby on Youtube and what he has to say about being a lender for other people's deals.
