Cash flow with rising interest rates
Appraiser · Houston, TX · Member since 2016 · 2 posts · 11 votes
Cash flow with rising interest rates
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Rental Property Investor · Houston, TX · Member since 2019 · 102 posts · 113 votes
3y@Marcos Falcao here are your levers to pull on:
Equity - To keep traditional debt you outlined; you probably need to increase your equity position. You can do this by using a larger downpayment, or buying at a steeper discount. A lower LTV can make a property cash flow.
Debt - If you want to move away from traditional debt, you can use creative solutions like seller finance to get a more favorable rate. Here you can set terms that aren’t constrained to a bank’s lending requirement. Just have to get the seller on-board, which most won’t be, but you only need one.
Income – Look at ways to maximize rent. You mentioned rent comps at $1,500 to $1,800. Could you rent by the room? Could you add a bedroom to get a bump in rent?
Location – Are you looking in an area that is already established? You could look to buy in a gentrifying area where you can see that the path or progress is moving.
Right now, is a time to sharpen our axes as investors. In this market it is harder to just stumble onto a deal, we need to be figuring out different ways to make deals.
43 Replies
- Real Estate Agent · Skagit Valley, WA · Member since 2021 · 256 posts · 283 votes3yIf homes that seemed "relatively cheap" would all cash flow under "normal market conditions" they would all be purchased immediately.... and then you would have a different market condition. There are always deals to be had but with the markets constantly changing (and hyper local) you may have to work harder for each deal.
Quote from @Marcos Falcao:
I know this is just one example, but this is a relatively cheap house so it should cash flow under normal market conditions.
High interest rates and low inventory are working against you right now. Droves of realtors are leaving the business because there are limited listings. Lots of arm-chair RE investors will also give up because they can't find easy "cash-flow" deals. But here's the secret: now's the time to bear down and hone those search skills. Realtors that are out there doing the work will easily get through....and with a bigger market share when things return to "more normal" - whatever that is. Investors can do the same. Might be a good time to team up with others.....pool resources......try some off-market strategies..... Anyway, welcome to the forum Marcos! ....and best wishes. - Investor · DFW, TX · Member since 2022 · 197 posts · 160 votes3y
In this economic environment my next property will be a lipstick rehab buy and hold. Buying at a discount due to the needed repairs will help ensure cashflow.
- Rental Property Investor · Houston, TX · Member since 2019 · 102 posts · 113 votes3y
@Marcos Falcao here are your levers to pull on:
Equity - To keep traditional debt you outlined; you probably need to increase your equity position. You can do this by using a larger downpayment, or buying at a steeper discount. A lower LTV can make a property cash flow.
Debt - If you want to move away from traditional debt, you can use creative solutions like seller finance to get a more favorable rate. Here you can set terms that aren’t constrained to a bank’s lending requirement. Just have to get the seller on-board, which most won’t be, but you only need one.
Income – Look at ways to maximize rent. You mentioned rent comps at $1,500 to $1,800. Could you rent by the room? Could you add a bedroom to get a bump in rent?
Location – Are you looking in an area that is already established? You could look to buy in a gentrifying area where you can see that the path or progress is moving.
Right now, is a time to sharpen our axes as investors. In this market it is harder to just stumble onto a deal, we need to be figuring out different ways to make deals.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Owner finance and subto.
- Bay area, CA · Member since 2021 · 383 posts · 306 votes3y
Check out some turnkey providers if they have good cash flowy deals. That's what I have been doing for the last two years.
- Investor · Cleveland · Member since 2021 · 247 posts · 240 votes3y
On the commercial side, a lot of people are using less and less leverage to make deals work. Debt is too expensive so they're not using it!
A year ago, we saw people pushing 75+% LTV/LTC. Now we're looking at 50-60% LTV or maybe even less. I closed a deal at 30% LTV!
Of course, it's easier for the big buyers to do that, since they have lots of cash.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Marcos Falcao:
How are you guys able to make deals cash flow with new rates (assuming traditional bank financing)?
Question: I used to buy two Dr. Peppers for $1. The price of Dr. Pepper increased to $0.75 each, so how can I buy two Dr. Peppers for $1?
Answer: you can't.
The purchase price increased. The interest rate increased. That means it costs more to buy a property than it used to. The property no longer cashflows like it did in 2019 because you can't buy it for the same price and rate as you could in 2019.
Question: I bought a house in Macon, Georgia that cashflows $200 a month. Why can't I buy a house in San Diego that cashflows $200 a month?
Answer: because the ratio of purchase price to rent income is very different in San Diego.
The math formula hasn't changed. You have to understand that the purchase price and mortgage rates increased faster than the rent rates, so the numbers won't produce the same results as they used to. You need to look in different markets, change your strategy/goals, or wait for the market to balance out again.
The DIY Landlord Book4.7248 Reviews - Appraiser · Houston, TX · Member since 2016 · 2 posts · 11 votes3y
Thanks for all the feedback guys. Looking to get my 2nd property and its clear that I should start thinking more creatively in this climate. I appreciate you guys taking the time to offer some advice to a newb!
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Marcos Falcao:
Thanks for all the feedback guys. Looking to get my 2nd property and its clear that I should start thinking more creatively in this climate. I appreciate you guys taking the time to offer some advice to a newb!
STR/MTR/Rent by the room are ways we're getting cash flow in Austin. Traditional LTR doesn't cut it here and hasn't since before 2019.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Best values are typically not listed. They are off market. Most off market either are in rough condition or have a risk item.
Seller provided financing (subject to or owner financing) can provide better terms that traditional financing.
Value adds can increase value and rents. These can be rehab, add BR, or more sophisticated value adds.
Alternative rent models other that LTR can cash flow. Rent by room, STR, LTR.
Lower LTV will cash flow with traditional LTR. Only question is how low does LTV have to be to cash flow. Recognize this option kills return and that you are buying that cash flow and paying for it up front.
Some/many investors are willing to purchase properties that are cash flow negative at purchase and rely on rent growth and appreciation to produce their return.
This is the most scary of all. Some people do not do underwriting or lack the knowledge to do proper underwriting. Being on BP, you would think this would be rare. I am convinced it is not that rare. I talk to investors at various meet ups. They state they purchased a great property. Ask what the COC is, no idea. Ask what expense projection they use and they respond the PITI is so and so. Even on BP I see it. Saw a post yesterday of a nice home with a rent/value ratio that was near 60% (I did not calculate it). They seemed to include only PITI and PM in the expense projection on a large home where maintenance/cap ex likely was going to exceed $500/month. Using their expenses it cash flowed. Yes it will cash flow until a big expense item. Fortunately for them they purchased it as a retirement home and not an investment (it is a poor investment RE). They will have a tenant pay much of their expenses until they are ready to retire. I resisted the temptation to show why it was a poor investment because it will work for their primary purpose.I suspect I am missing a couple ways people are buying residential RE in this high cost, high rate market but covered most of them.
Be careful. Definitely do conservative underwriting prior to purchase. Look for ways to make it work. How many wholesaler lists are you on? How many meet ups do you attend? Do you have the time to do value adds? Have you looked into STR, MTR, rent by room? Have you placed search on MLS for seller financing? Have you contacted FABO? Do you drive for dollars? Have you considered SEO? There are a lot of ways to increase the chances of obtaining cash flow properties. If you are simply waiting for a turnkey cash flow property to fall into your lap, you may be waiting a long time.
Good luck
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes3y
Quote from @Marcos Falcao:
How are you guys able to make deals cash flow with new rates (assuming traditional bank financing)?
For example, a retaltively cheap house in the Houston market is listed at $250K. Assuming 6.73% rate, 20% down, 30 year note, and taxes and insurance, we're looking at a monthly note of $1,900 per month. If HOA fees are included, then its nearing $2,000 per month minimum.
The three most recent rent comps in the neighborhood are in the $1,500 to $1,800 per month range. So how are you guys making long-term hold deals work? I know this is just one example, but this is a relatively cheap house so it should cash flow under normal market conditions.
I have come across this issue with nearly every listing I analyze. Am I missing something? Are there methods around this issue?
the "1% rule" has lasted so long for a reason. If you don't get 1% of the purchase price in rent (in the case of a $250k home, that would be $2,500/month), it's very hard to cash flow. Your numbers prove that out.
"But there are no homes that meet that rule"
Well then there are no homes that cash flow. That's not uncommon. Just means the price of housing is high relative to rent. Only way to 'fix' that is:
* find something that's maybe $180k, put $20k into it, now you're into it for $200k, but you have a nice rental you can get $2k/month for.* look at other property types (5+ multi will normally cash flow more).
* go to less desirable areas (the more in demand the area, the higher the price of the home vs. it's rent)
- 3yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
to make deals cashflow in coastal areas like San Diego, Los Angeles, San Francisco, etc wasn't easy before and now it is just more difficult. Every market is different, here in San Diego for instance you have to get creative and be able to add value through renovation and increasing rents, adding units/ADUs, medium term rentals, etc. You won't likely find anything on the market that will cashflow day 1 other than some off market deals I'm working on where seller has super low assumable interest rates which allows buyer to cashflow right away.
Cash flow is only one part of the overall return in real estate and should not be used as the only measurement of something being a good deal or not which many seem to do, especially those looking in markets throughout the US and trying to find cashflow.
For example, there are markets in the Midwest where pretty much anything can cashflow or meet the 1% or 2% rule, that does not necessarily make it a good investment. There are properties that will cashflow on paper and if you look at the overall returns and appreciation it may tell you a different story. For instance, some markets in the Midwest easily meet the 2% rule or better but the value of the property is depreciating on an annual basis.
All that said, I generally encourage new investors getting started to look locally and get creative to make things work instead of finding other cheaper markets. Going to cheaper markets isn't always better or easier, especially when just starting out.
Compass5122 Reviews - Warsaw, IN · Member since 2017 · 229 posts · 270 votes3y
@Marcos Falcao my last purchase was Jan 2020. Prices in my market have been too high since then for me to pull the trigger.
Take what the market gives you: 4% risk free returns and Covered Call etfs or REITs at 6 to 10%.
Note I am not a financial advisor and this is not financial advice-just actions I’m taking personally.
If you’re set on buying, you’d need enough equity to make Cashflow numbers work. RE is the long game-you can cash out refi in a year or so when rates are better, or you could hold out a few months longer with a war chest and go shopping for big assets when the commercial bridge debts all expire.
With all the bank failure, getting a loan might be harder today than it was earlier this year or late last year (I don’t know, since I’m not really in a position to buy anyway).
- Member since 2019 · 223 posts · 261 votes3y
Interest rates, housing cost, insurance, maintenance, and materials have risen beyond rental prices. This has made cash flowing impossible unless you put a significate amount down. Then your ROE will go down considerably. Alternative safe investments such as CD's and bonds are closing the gap with real estate. It's not worth the hassle and risk to get an extra 2% ROI.
Just 5 years ago you could pretty much buy anything within reason and it would have been a good investment. Not so much now.
- 3yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
- 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
It is important to focus on mortgage rates because they have a direct influence on real estate prices. If you're a prospective homeowner or real estate investor, an easy way to research current interest rates is to use a mortgage calculator.
That said, it's important to note that changing interest rates affect numerous aspects of real estate. Beyond the price of your new home, interest rates also affect the availability of capital and the demand for investment. These capital flows influence the supply and demand for property and, as a result, they affect property prices.
Also, interest rates also affect returns on substitute investments and prices change to stay in line with the inherent risk in real estate investments. These changes in required rates of return for real estate also vary during destabilization periods in the credit markets. As investors foresee increased variability in future rates or an increase in risk, risk premiums widen, putting stronger downward pressure on property prices.All the best!
NETWORTH BUILDERS5236 Reviews - Member since 2022 · 2 posts · 0 votes3y
Quote from @Ruchit Patel:
Check out some turnkey providers if they have good cash flowy deals. That's what I have been doing for the last two years.
Can you recommend in Houston area?
- Lender · Nationwide · Member since 2018 · 571 posts · 310 votes3y
My strategy is to do the lending and let the rising interest rates improve my cashflow.
- Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes3y
Quote from @Rahim Rogatia:
Quote from @Ruchit Patel:
Check out some turnkey providers if they have good cash flowy deals. That's what I have been doing for the last two years.
Can you recommend in Houston area?
Rahim,
I am not a Turnkey provider, but I do help investors in the area find investment properties and if turnkey is what you are looking for, we can help with that. If you would like to talk about what we are seeing in the Houston market feel free to reach out.
- Karl
- Member since 2022 · 2 posts · 0 votes3y
Quote from @Karl McGarvey:
Quote from @Rahim Rogatia:
Quote from @Ruchit Patel:
Check out some turnkey providers if they have good cash flowy deals. That's what I have been doing for the last two years.
Can you recommend in Houston area?
Rahim,
I am not a Turnkey provider, but I do help investors in the area find investment properties and if turnkey is what you are looking for, we can help with that. If you would like to talk about what we are seeing in the Houston market feel free to reach out.
- Karl
Karl,
Lets connect - what is the best way to reach out?
- Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes3yFeel free to shoot me a request on here or msg!
Quote from @Rahim Rogatia:
Quote from @Karl McGarvey:
Quote from @Rahim Rogatia:
Quote from @Ruchit Patel:
Check out some turnkey providers if they have good cash flowy deals. That's what I have been doing for the last two years.
Can you recommend in Houston area?
Rahim,
I am not a Turnkey provider, but I do help investors in the area find investment properties and if turnkey is what you are looking for, we can help with that. If you would like to talk about what we are seeing in the Houston market feel free to reach out.
- Karl
Karl,
Lets connect - what is the best way to reach out?
- 3yJared HottleBusiness MemberReal Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
I have seen people put more money down to get it to cash flow with the idea they will refinance when interest rates drop.
Jared Hottle Real Estate59 Reviews - 3yJaron WallingPro MemberRental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
Buy cheaper and push market rents. Buy property in a cheaper market. Buy or assume someone's debt (subject to). Buy property with a creative strategy (STR, MTR, rent by the room).
- Lender · San Clemente, CA · Member since 2017 · 74 posts · 35 votes3y
Quote from @Marcos Falcao:
How are you guys able to make deals cash flow with new rates (assuming traditional bank financing)?
For example, a retaltively cheap house in the Houston market is listed at $250K. Assuming 6.73% rate, 20% down, 30 year note, and taxes and insurance, we're looking at a monthly note of $1,900 per month. If HOA fees are included, then its nearing $2,000 per month minimum.
The three most recent rent comps in the neighborhood are in the $1,500 to $1,800 per month range. So how are you guys making long-term hold deals work? I know this is just one example, but this is a relatively cheap house so it should cash flow under normal market conditions.
I have come across this issue with nearly every listing I analyze. Am I missing something? Are there methods around this issue?
- Lender · San Clemente, CA · Member since 2017 · 74 posts · 35 votes3yOne point that is omitted are tax breaks! When purchasing, everyone wants cash flow from day 1, great if it happens but that's unusual. Rates are double what they were two years ago and cash flows are, of course less, if at all. I own a 12% cap rate on an office building and my write offs are incredible. If you have 20% down that's great! If you have that and take a hit on cash flows for a couple of years, who cares? Everytime you paint your rental, raise the rent, but keep checking comps to ensure you can justify the increase. Generally, tenants take care of the minor issues because they are terrified that you will raise their rent. You are in control. Meanwhile, never lose site that THEY are making your payments. Losing $100 per month, so what! Eventually you will be smelling like a rose, meanwhile.
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