When is it a good investment?

45 Replies

Ok, I own two properties that I have had awhile, they are rentals and I am loving the numbers.   I am now looking to buy more and the market has become super tight here.  Prices are high and inventory low, a definite sellers market...   My question is, how much cash flow if any should my rental unit generate, knowing that I am generating equity in the property.

Every new position I buy moving forward will be 100% financed. That being said, If I amortize at 20 years, and after rent and expenses the property generates very little cash flow, like $30 per month, would that be considered a horrible investment? Keeping in mind after 5 years I should have accrued $25,000 in equity in with zero money of my own? That sounds like a good return to me..... Further, its a condo with zero outside maintenance and fees other than the HOA, which I love.... (I already have one its the easiest thing ever to manage)

In my searching, I have found most listings are generating negative income when looking at a 20 year mortgage and 100% financing.   It's far and few between that result in these zero net or positive cash flowing properties....

If I could fully finance a property that was at all positive, on a 20 year am note, I’d buy 10s if thousands of them 

@Cody L. Interesting.....   It's much different in California though...  Does the rent there scale with the added expense of property?   Are we comparing apples to apples just it's a larger scale out west?

@Timothy Joseph if your focused on cash flow, why the 20yr note? And how are you getting 100% financing, asking for a friend :).

STOP, DONT BUY THAT DEAL !!!

The deal you described will make your bankruptcy attorney very happy.  That deal ONLY works if your property appreciates over the life of the loan. What happens when there is a market correction?  You will suddenly find yourself upside down in the loan, and unable to refi out. Then you will lose the property and destroy your credit. 

The super weak cash flow at $25 wont cover any major repair and at some point you will need a roof. You would be far better off investing out of your market and getting a decent ROI with less risk

Even as an owner finance deal, this deal sort of sucks.  The advantage in an owner finance deal is that you would just default privately.  That would keep you from destroying your future credit. 

The only way I would touch this deal is as a sandwich lease option or something similar where someone else was holding all the risk.

Can you get a mortgage for a longer term? This would decrease those payment. For condos, the HOA fees eat up some of the profit.

Make sure the company that runs the condo and the board are good and the financials are in good shape. I've had three condo type homes.  The first was my first home which I turned into a rental.  It was not well run and while I had it for a long time, I was happy I sold it when I did as they took out a massive loan (millions of dollars) for repairs-many that didn't need to be done-shortly after I sold it.  The other two I bought a few years ago and are well maintained and managed. They don't have special assessments, they do major repairs but have saved the money ahead of time.  They are night and day from the first place.

@Will C.  Cash flow isn't that important to me, what is important is being positive and having enough money to afford any repairs in the future.  I want each property to sustain itself.   

Why a 20 year note?   No good reason.   I pulled it out of thin air.   I'm not joking.   Since it's an investment I don't want to pay on it for 30 years.   

Ill PM you the last question.

@Timothy Joseph

It's all about YOUR goals. If CF isn't that important and you have the reserves to take care of issues when they arrise then I don't see an issue with a shorter am period. Your just trading cash flow for equity, liquid cash for "value". The only thing is since this is a condo, they are more prone to value drops and don't appreciate like sfr.

Im waiting for all the cash flow gurus to chime in now 🤣.

@Timothy Joseph

Rental property investing typically pays 5 ways:
1.) monthly cashflow
2.) appreciation
3.) tax benefits
4.) loan pay down by tenant
5.) inflation-profiting

With a condo investment, you might be forgoing #1 and #2 in the immediate term. The last 3 would still be to your benefit, so you might make your decision based on opportunity cost of your time and money. You might be able to be paid all 5 ways by investing in a property outside of your local market.

If you go the condo route, make sure to have at least $5,000 in cash reserves per property before you jump back in.

I'm dumb when it comest to taxes and how it helps.   My accountant rocks and just let her do it all.   We have alot going on so I cannot follow it.   I'll have to go see her and learn some more....

Great advice everyone, thank you.

Originally posted by @Timothy Joseph :

@Cody L. Interesting.....   It's much different in California though...  Does the rent there scale with the added expense of property?   Are we comparing apples to apples just it's a larger scale out west?

I would say no. The cost to rent ratios here are pathetic at purchase. SFR purchased at retail are typically worse the 0.5% ratio. So why do investors consider purchasing RE that at retail will have negative cash flow. One word: appreciation. This includes both property and rent appreciation. There was recently a 3 year period where the average rent on a SFR went up $500/month. The market appreciation at that time on the previous 5 years was also over $100K.

So many investors are willing to have negative cash flow at purchase with the belief in a few years the rents will have appreciated enough that it now has positive cash flow.  They also believe that the market appreciation will provide great equity in addition to the equity pay down.

San Diego has a great track record of long term appreciation but when that track record is looked at closely there are periods of depreciation and slightly long periods of stable prices.  If an investor purchases a San Diego negative cash property I have confidence that in the long term (>15 years) they will do fine but what do they do if the market and rents are flatish for the next 10 years?  Do they eat the negative cash flow every month for 10 years?

Originally posted by @Cody L. :

If I could fully finance a property that was at all positive, on a 20 year am note, I’d buy 10s if thousands of them 

I agree with your sentiment because I trust my cash flow estimates and suspect I would trust your cash flow estimates.  I believe I am conservative on vacancy, cap ex/maintenance, misc costs, etc.

However, if I had to use the cash flow estimates of the typical BP poster, there is no chance in hell I would purchase with that low of a projected cash flow because it is a poor cash flow estimate.  I have seen maintenance/cap ex estimates for an entire unit that would not cover the kitchen over the life of the kitchen.

Second issue is units take time even with a PM.  $30/unit is not enough for me to want to deal with the hassle.  For your unit count, each unit likely is not much work but my RE path has been different than yours and my unit count is small (especially compared to your unit count), but quite profitable.

So the sentiment that nothing invested into it and getting some cash flow out of it does produce infinite return it true but does not place any value on the effort and RE is not passive.

I do understand that you were trying to indicate by your post (i.e. that scenario is infinite ROI).

30$ cashflow ... wouldn’t waste my time . The kid down the road selling night crawlers for a buck a dozen on the side of the road makes more than that in a month .

@Josh Caldwell

Just curious, why do so many investors assume cap ex comes out of cash flow? I see a lot of people say that. My cash flow is after I’ve saved 30% for future cap ex. I don’t call it cash flow unless it’s untouched capital.

Originally posted by @Timothy Joseph :

@Josh Caldwell   Which markets are the hottest right now for rentals???   

I don't really bother to look at markets outside of my own.  What I see, is people all over America trying to invest in my backyard, so I haven't felt a need to look for greener pastures.  As a landlord I value cashflow above all other things  Not exclusively, but it is my #1 concern.  I have no problem finding property that will cash flow. The draw back to my market is that it is hard to find multi family units above 8 units.  We just have no inventory, but if you can deal with single family houses, we are among the best.

Originally posted by @Kyler Cook :

@Josh Caldwell

Just curious, why do so many investors assume cap ex comes out of cash flow? I see a lot of people say that. My cash flow is after I’ve saved 30% for future cap ex. I don’t call it cash flow unless it’s untouched capital.

Capex isn't supposed to come out of cash flow, but capex is also a fund that builds up. If you take a major hit before you build that fund, it has to come out of cash flow. That is why you need to consider cash flow first and foremost.

Condos are tough. HOA runs the show and cost can go up whenever which will eat into your profits. They also seem to be the first to lose value and the slowest to appreciate. I'm about to off load one and buy a duplex or something not under the reign of an HOA

@Josh Caldwell

I guess that makes sense if you’re not starting your investment with a rehab. Not the way I’d want to do it...

@Timothy Joseph Kiyosaki refers to something called "infinite returns" which is earning a return when you have zero money or skin in the game. Unless I missed a post- May I ask what the property or properties are worth that you are buying with zero money down? I'm not following if you're buying these properties at 100% LTV or if you are buying them for under market value with 100% financing somehow...

If you asked me if it is a good investment to buy a house that has a value of $120k for $70k with zero money down I would say yes that is an excellent investment. But in theory that situation would provide more cash flow than you’re saying.... To further emphasize the point I am trying to make- is it a good investment to buy a house worth $120k for $150k with zero money down and hope for appreciation? I would say no this is not a good investment.

I would rather earn 1% of 100 people’s efforts than 100% of my own efforts.

- John D. Rockefeller

@Kyle M. yes, This particular property is worth about 150,000.   I’d be paying market price for this.   I have been to a few auctions, in fact have one tomorrow, but we have a few people in town that seem to be willing to take about any risk on properties, leaving tiny margins after rehab, and will bid just about anything.   It’s crazy.  I am finding it very challenging to add anything to my portfolio at wholesale prices.   I’ve made what I think are very good offers on foreclosures, auctions,  you name it and no bites yet.

I can easily buy anything with 20% down and drive positive cash flow Since I would finance less, but isn’t that cheating?   I could get 250$ in cash flow but it cost me 30,000 up front.  (I just made up those numbers)    I could also draw the note out to 30 years and have an even larger cash flow...   I can fudge numbers to make anything look good, but what truly is acceptable?

@Dennis M. How is the Erie market? What cap rates are you seeing on the multi family properties out there? I am on the other side of the state here in Bethlehem.

Additionally what is your metric/goal you aim for on a per door cash flow number when screening a multi family deal? $100-200 per door after expenses and reserves?

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