Do most properties you buy cash flow positive?

[Bryan Tasumi]

Do most properties you buy cash flow positive? What percentage of properties that you purchase will cash flow positive when rented out? 95%, 90%, 80% or less? What is the risk of buying a property that does not cash flow positive? 

Do all condos and town homes in Texas cash flow positive? I am talking about in the Houston, Dallas, and Austin areas where the property taxes are high 2.6%+ and have high HOA fees.

I don't really understand the percentage of properties that cash flow positive and whether high property taxes in states such as Texas and high HOA fees always make the cash flow negative or what.

Any advice/insight is greatly appreciated. Thank you!

[Dan Heuschele]

These posts make the decision to be black n White when in reality a lot of analysis determines if a property meets your investment criteria.  

My least cash flow purchase I estimated at neutral cash flow but it was an easy decision to purchase.  I showed about $100k forced appreciation.  I showed after the forced appreciation that I would have positive cash flow.  It played out better than I predicted even with an appraisal that came in lower than market (a common issue in my market on refis).    By appraisal we made $130k on our forced appreciation (helped a little by market appreciation).  The rents increased $1150 and now the RE cash flows about $1150/month.  

Similarly many of the posters discount market appreciation.  There is risk in relying on market appreciation but there could be great rewards.  If you are young and starting out taking this risk could rocket your finances.  Of course an analysis of probability of appreciation should be part of any analysis.   Investing in Ohio for appreciation has a lot different risk than investing in coastal So Cal for appreciation.

History indicates investing in coastal So Cal RE for appreciation is very likely to be a great investment for long term buy n hold.  Is it risk free?  No!   

Typically returns are proportional to risk.  The goal should be to find a risk level that is low for the potential return and a risk you as the investor can feel comfortable with.  Each investor needs to determine their comfort zone and invest appropriately.  

I look for forced appreciation opportunities with positive cash flow and likely high appreciation (the trifecta).  My investment returns have by far been mostly by appreciation.  Cash flow could not have produced this type of return.  My best appreciation increase on investment is approaching 2000% (approaching 20x my investment).  This particular property also has had great cash flow but minimal forced appreciation.   It was not a trifecta  

My point is there are many ways to make money in RE with varying risk.  Cash flow is not the only way to produce profit.  

[Cara Lonsdale]

Originally posted by @Thomas S.:

@Cara Lonsdale

"end up with a free and clear property is the point. It beats buying an asset and paying for it yourself, only to have the same result."

Yes but a free and clear property should not be an end point. You have taken your asset (cash) and turned your real estate into a liability by ignoring it's true value.

My point is that as your equity grows, especially approaching having a property paid off, it becomes a very poor investment/use of cash. Although you have benefited from a tenant paying off your mortgage you have basically stuffed it under your mattress and forgotten about it (dead equity). You have spent 30 years working to attain a certain level of net worth and then have left it to languish in a extremely low level return investment. The logic defies normal investment mentality.

The money came from a tenant but has become your earnings on your investment and by not liquidating a free and clear property you are turning your back on a lifetime of investing to bring in a meager (2% - 3% ) ROI.

I do not understand why old investors give up or lose their ability to understand the value of their money. I guess it's because they no longer need the money and simply no longer care if it earns it's keep. 

 As a retirement strategy, that is the end goal though Thomas.

By the time you are ready to retire, your properties should be paid off, and income coming in should be free of mortgages as to not have that burden PLUS the added burden of passing that to heirs.

It's nice to think that you will be doing the RE hustle when you are 80 years old, but is that really a realistic picture of retirement?  No.  In fact, by that time, most investors want a steady investment with steady returns.  That is why most investment strategists will suggest a more conservative approach the older a person gets (think stocks).

I know you are very hands on with every part of your properties, and even self-manage them, but are you REALLY going to be running around your properties to change light bulbs and AC filters at 80?

[Thomas S.]

@Dan Heuschele

"Cash flow is not the only way to produce profit."

Keeping in mind that appreciation is not income or profit until it is accessed by pulling it out. Until then it does not exist in real terms. For the most part cash flow is realised on a monthly bases and utilised for other purposes. It is profit. Appreciation on the other hand does nothing aside from increasing taxes and decrease cash flow based on lost opportunity value. The perceived profit of appreciation causes a decreased profit of cash flow (from the property) or at best a reduction of ROI.

Real profit as opposed to imagined profit.

[Hal Thompson]

Learn how to crunch the numbers, and then you won't have to ask simplistic questions like this:

https://ocw.mit.edu/courses/urban-studies-and-plan...

Even the term "cash flow" is subjective. Cash flow on day 1? Cash flow over the next 1 years? Cash flow over the next 10 years?

We have properties where we put 25% down on day 1, in order to get the best possible interest rate over 30 years. On a 150k property, that is $37.5k cash out. But that property only "cash flows" $500 per month. Oh no, I lost $31k in "cash flow" my first year!

Real estate investors don't really speak in terms of "cash flow". We use NOI, cash on cash return, IRR, etc. to describe these things.

I will generally analyze my properties as if I have financed them 100% at the prevailing rate, and then if I am break even or greater after all costs, then that is generally a pretty good deal. In real estate finance, we assume a certain percentage of rent growth depending on the market, while our financing costs are fixed (I do 30 year loans). You also have to look at tax rate growth in your area as well, in addition to HOA fee growth if you're buying in a condo.

Does it sometimes make sense to buy a property that has negative month-to-month cash flow on day 1? Sure...it all depends on what your assumptions about rent growth vs. costs is for that property. Maybe you know that Whole Foods market is scoping out that property for their next store and will be announcing the move in the next 6 months.

http://www.rclco.com/advisory-wholefoods-effect

You would obviously never buy a property that you predicted never to cash flow. So the obvious answer to your question is no. But as I have noted above, it's not so simple as a yes or no answer.

[Dan Heuschele]

Originally posted by @Thomas S.:

@Dan Heuschele

"Cash flow is not the only way to produce profit."

Keeping in mind that appreciation is not income or profit until it is accessed by pulling it out. Until then it does not exist in real terms. For the most part cash flow is realised on a monthly bases and utilised for other purposes. It is profit. Appreciation on the other hand does nothing aside from increasing taxes and decrease cash flow based on lost opportunity value. The perceived profit of appreciation causes a decreased profit of cash flow (from the property) or at best a reduction of ROI.

Real profit as opposed to imagined profit.

Being an investor that is not risk adverse I take my money out when it makes sense to do so.  I agree that an investor that never takes the equity out does not have money to be utilized for other purposes but his net worth has increased.  It is similar to the stock investor that has portfolio that has increased but never takes the money out but reinvests it.  His worth has increased even if he chooses to never take the money out to spend it on other items.  

Even though I take equity out when there is enough equity to justify it I seldom spend the equity.  I either purchase more RE with the equity or otherwise invest it.  So from your description this profit does not count because I do not need it to live the life that I chose to live?   With equity being so easy to access I see little difference between profit achieved via cash flow, forced appreciation, or market appreciation.  

I RE invest almost exclusively in Ca and therefore do not need to worry about increased property tax.  Along with the market appreciation it has guaranteed that a coastal So Cal non rent controlled purchase will cash flow eventually.  

[Paul B.]

Originally posted by :

I do not understand why old investors give up or lose their ability to understand the value of their money. I guess it's because they no longer need the money and simply no longer care if it earns it's keep. 

 But isn't there a point where preservation of capital becomes more important than growth of capital? Since you're a frequent poster, I can see that you believe any dollar not earning its keep is losing 10% in opportunity cost every year. Do you hold any cash at all then? 

[Marion Nicholson]

Yes all do. Only time they don’t cash flow if they are vacant.

[Adam Gott]

All of my properties (3) have postive cash flow, why buy otherwise?

I did have a fourplex that required a bit of maintenance so I lost $14,000 my first year but I budgeted for that in my calculations... actually it was my first unit and I may have underestimated a bit!

Lately it has been hard to find anything with positive cash flow in my area (Pocatello, Idaho) and most of the multi-family properties that sell are somewhat confusing to me!

[Rachel H.]

@Bryan Tasumi Most definitely yes! Though, I buy all cash and specialize in mobile home investing. 

[Lane Kawaoka]

Bryan Tasumi it’s hard to say but I would say I cashflow a 2000-3000 per door on my turnkey rentals. That said I could go through two months and incur listing fees there for my answer is 10/12 months.

[Ben G.]

@Bryan Tasumi, all the properties you are purchasing as an investor should cash flow. Otherwise, there is no point to purchasing them. They become a liability at that point and not an asset. Now, that said, all the properties you come across on your search may not cash flow at the original list price, but if you are going to purchase one, you need to make sure the price is right and you are cash flowing.

You can check out some of the calculators on BP by hovering over the "Tools" tab at the top of your screen. I also recommend reading "Cashflow Quadrant" by Robert Kiyosaki. You can read "Rich Dad, Poor Dad" if you want, or just skip it and go straight to Cashflow Quadrant. I thought CQ was better than RDPD anyway.

[Joe Scaparra]

Originally posted by @Thomas S.:

@Cara Lonsdale

"end up with a free and clear property is the point. It beats buying an asset and paying for it yourself, only to have the same result."

Yes but a free and clear property should not be an end point. You have taken your asset (cash) and turned your real estate into a liability by ignoring it's true value.

My point is that as your equity grows, especially approaching having a property paid off, it becomes a very poor investment/use of cash. Although you have benefited from a tenant paying off your mortgage you have basically stuffed it under your mattress and forgotten about it (dead equity). You have spent 30 years working to attain a certain level of net worth and then have left it to languish in a extremely low level return investment. The logic defies normal investment mentality.

The money came from a tenant but has become your earnings on your investment and by not liquidating a free and clear property you are turning your back on a lifetime of investing to bring in a meager (2% - 3% ) ROI.

I do not understand why old investors give up or lose their ability to understand the value of their money. I guess it's because they no longer need the money and simply no longer care if it earns it's keep. 

 Thomas you are looking at RE investing only from a point of trying to grow a portfolio and in that regard I do see the point your making.  

However, my friend if your eye is to an easy retirement and effective transfer of wealth a free and then a clear portfolio of RE has true value.  By having a long term hold on property that is paid off, you know the property, your comfortable with the asset and you have a great peace of mind.  You have all the cash in the world and you don't need more.  At 62 I am on easy street in terms of cash flow.  I can't spend all I make, but I get your point I could sell, or cash out refi and double my holdings........for what reason, more wealth, more cash flow.  If I have all I want, why fix something that ain't broke.

Your probably one of these guys who would tell someone who just won a $250 million lottery that we need to invest it to make more...for what reason???????

I got you an you, and you make an excellent point for someone who has a GOAL to maximize portfolio growth by taking on additional risk.  No problem with that and I understand your point!  But if the goal of cash flow is met and you have great peace of mind, then why rock the boat.    IF on the other hand my GOAL is do all I can to maximize my wealth, you make a good argument.

BTW, in Texas a community property state, on the first death of a spouse, all assets not in retirement accounts get a step up in basis.  Thus passing on RE with no tax consequence.  Just another incentive for me to stay the course with my paid off portfolio at 62 and enjoying financial stress free life.