A lot of negative cash flowing properties

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A lot of negative cash flowing properties

Stephen Brown
Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes

Hello All,
I'm just getting started with Real Estate and now that I'm analyzing properties I'm finding it very hard to find positive cash flowing properties where I live. Here is just one example of a property that I found that barely cash flows. I feel like property taxes are just way too high. I even analyzed a property in a neighboring city that is known for high cash flow (Toledo, OH) but again the taxes somewhat killed the return. So I'm wondering if I am doing something wrong. Here are some numbers on a property I analyzed recently, I was able to tweak numbers around a bit, but in reality this is the best property I have found in my area, which is more expensive.

Did  anyone ever have any mistakes when analyzing properties that I may be making or do I just need to be more patient?

Repairs and Maintenance 7.7%
Property Management Fees 11.1%
Property Taxes 22.6%
Insurance 5.4%
Vacancy rate 10%
Monthly Rent 1200
Monthly Payment (4.75% @ 30 years) 399
Monthly Cash Flow 63
Monthly NOI 462
CoC Return
 1.49%
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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y

How do we know this isn't a good deal? People on this forum are so quick to make assumptions based on limited information. What if there is $35k in equity from day one- would that be a good deal? What if the appreciation in this market is 25% year over year- would that be a good deal?

My point is- good deals are relative to the market and the buyer's risk tolerance. I have clients that pay $500k cash for SFR that will rent for $2500/month and appreciate at 15% per year and they kick back and don't get a PM call for the first 8 years. I have other investors that agonize over $50 repairs in an entry level rental.

If your area is appreciating at a decent rate, chances are you are going to have to sacrifice SOME cash flow to enjoy that appreciation. I have no idea if this is a good deal, but in markets where appreciation is reliable, there are plenty of experiences investors who will worry much less about cash flow in order to sit on an appreciating asset and leverage against it in a year or two. 

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  • Andrew R Lee
    Real Estate Broker · Toledo, OH · Member since 2016 · 17 posts · 8 votes
    6y

    PM and Vacancy seems a bit high.  We have a few places in Perrysburg that do great but we don’t primarily look here.  Taxes can certainly be a killer though.

    0Reply
  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    Try the bigger pockets deal analyzer.

    Plug in real numbers like taxes are 1266/year instead of using a %

    1Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    6y

    @Stephen Brown That's not a good deal.  I believe @Andrew R Lee is selling a 4plex on MLS right now and those numbers work better. Take a look as you can house hack a 4 unit with 3% down.

    0Reply
  • Max Versteppen
    Member since 2020 · 113 posts · 33 votes
    6y

    Essentially a negative cash flow property is when the income doesn't cover the expenses and you need to kick in some funds from your own pocket. Investors often purchase negative cash flow properties as the income isn't as important to them – it's capital growth they are after.

    1Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Account Closed:

    Try the bigger pockets deal analyzer.

    Plug in real numbers like taxes are 1266/year instead of using a %

     Yep, this is what I've been doing. I just wanted to share the % because it's crazy high.

    0Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Stone Jin:

    @Stephen Brown That's not a good deal.  I believe @Andrew R Lee is selling a 4plex on MLS right now and those numbers work better. Take a look as you can house hack a 4 unit with 3% down.

    I'm aware that this isn't a good deal, hahaha. I'm just looking around at SFR right now near Perrysburg and Maumee. I plan to house hack next year!

    0Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    6y

    @Stephen Brown My advice is to try to find a property where the rent is $1800.  Check your numbers with a property like that.  In the suburbs, the low rent stuff is just destroyed by the taxes.  I've found that the higher the rent the better the return in the suburbs.  

    2Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Stone Jin:

    @Stephen Brown My advice is to try to find a property where the rent is $1800.  Check your numbers with a property like that.  In the suburbs, the low rent stuff is just destroyed by the taxes.  I've found that the higher the rent the better the return in the suburbs.  

     I'm assuming that $1800/mth would be for 4 bedroom or larger properties? The averages I've been seeing (and using) are around $1300 but for 3 bedroom properties. 

    1Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    6y

    How do we know this isn't a good deal? People on this forum are so quick to make assumptions based on limited information. What if there is $35k in equity from day one- would that be a good deal? What if the appreciation in this market is 25% year over year- would that be a good deal?

    My point is- good deals are relative to the market and the buyer's risk tolerance. I have clients that pay $500k cash for SFR that will rent for $2500/month and appreciate at 15% per year and they kick back and don't get a PM call for the first 8 years. I have other investors that agonize over $50 repairs in an entry level rental.

    If your area is appreciating at a decent rate, chances are you are going to have to sacrifice SOME cash flow to enjoy that appreciation. I have no idea if this is a good deal, but in markets where appreciation is reliable, there are plenty of experiences investors who will worry much less about cash flow in order to sit on an appreciating asset and leverage against it in a year or two. 

    5Reply
  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    6y
    Originally posted by @Stephen Brown:
    Originally posted by @Account Closed:

    Try the bigger pockets deal analyzer.

    Plug in real numbers like taxes are 1266/year instead of using a %

     Yep, this is what I've been doing. I just wanted to share the % because it's crazy high.

    Doesn’t sound right people from all over the country invest in Toledo because the abundance of good deals. There is a way to link to the calculator results to get feedback from people.

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    6y
    Property Taxes-?????22.6%
    2Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    6y
    Originally posted by @Stephen Brown:
    Originally posted by @Stone Jin:

    @Stephen Brown My advice is to try to find a property where the rent is $1800.  Check your numbers with a property like that.  In the suburbs, the low rent stuff is just destroyed by the taxes.  I've found that the higher the rent the better the return in the suburbs.  

     I'm assuming that $1800/mth would be for 4 bedroom or larger properties? The averages I've been seeing (and using) are around $1300 but for 3 bedroom properties. 

    I'm not sure what you are looking at but larger or 4bedroom properties are fine if the returns are better.  I would prefer 4bed rentals in the suburbs as there is no supply.  Currently on Trulia for Perrysburg there are 4 4bed houses with lowest rent being $1850 for a weird small furnished house, all others are $2100+.  If you can find a 4bed for under 200K with good appeal, you will be at 1% rule with A class property.  

    Also why wait to house hack?  To me if would seem the most logical path as you can buy cashflow with 3% down and then continue to look for rentals.  

    0Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    6y
    Originally posted by @Corby Goade:

    How do we know this isn't a good deal? People on this forum are so quick to make assumptions based on limited information. What if there is $35k in equity from day one- would that be a good deal? What if the appreciation in this market is 25% year over year- would that be a good deal?

    My point is- good deals are relative to the market and the buyer's risk tolerance. I have clients that pay $500k cash for SFR that will rent for $2500/month and appreciate at 15% per year and they kick back and don't get a PM call for the first 8 years. I have other investors that agonize over $50 repairs in an entry level rental.

    If your area is appreciating at a decent rate, chances are you are going to have to sacrifice SOME cash flow to enjoy that appreciation. I have no idea if this is a good deal, but in markets where appreciation is reliable, there are plenty of experiences investors who will worry much less about cash flow in order to sit on an appreciating asset and leverage against it in a year or two. 

    You're right, there are plenty of people who invest for appreciation.  However, in this particular case, Toledo area is not known for an appreciation market.  Most investor who invest in the area do it for cashflow.  Based on those assumptions, the deal is no good.  

    1Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    6y
    Originally posted by @Sam Shueh:
    Property Taxes-?????22.6%

     Yeah $3200 a year in taxes is pretty average for houses between 100-150K.  A lot of my properties have taxes in the 4000-5500 annually range.  That the major reason a lot of investor do NOT invest in the suburbs.  They can get a house in Toledo proper and have taxes under 800 a year.

    0Reply
  • Steve Mandelbaum
    Developer · Jacksonville Florida · Member since 2015 · 57 posts · 39 votes
    6y

    Assuming your numbers are correct and I am not sure I agree with all of them.  You have left out tax implications and principle paydown.  Appreciation is a possibility, but it is impossible to predict.

    1Reply
  • Geoff Perkins
    Rental Property Investor · Prosper, TX · Member since 2013 · 27 posts · 18 votes
    6y

    One thing I would suggest is to learn how property taxes work in the area you are looking at and calculate them yourself. There are several factors that could skew the annual property taxes up or down for example:

    - If there were previously delinquent taxes, I have seen websites list the taxes as the total accrued amount instead of the individual yearly amount resulting in a huge error in your analysis. 

    - Most taxing entities have some reduced tax programs that the current owner may be qualified for but you wouldn't and could end up taking a good deal and turning it into a cash loser.

    - Taxing entities re-evaluate property values on schedules. Some may be every year but some are multiple years apart. Where I live properties are inspected once every 6 years. So if a house has been taken from a beater & fixed up the tax assessment will go up significantly. Always calculate taxes based on your estimated ARV.

    - Its also important to know the factors that influence how your taxes are calculated. Some states are on a "budget based" system where the government budgets dictate the amount of taxes due and other states are on the "Rate based system where there is a set property tax rate that doesn't change when market values go up or down resulting in taxes owed mirroring the market.

    Property tax laws very greatly though out the county so its very important to understand your local rules. Local Assessors/tax collection offices can guide you to the information for your area.

    1Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    your math, as presented, is a bit off. if you sum up all those expenses, you should be at $682/mo + $399 in pmt = $119/mo cash-flow. still bad, but not as bad as before. also, 1.49% c-o-c translates to $50k down, if we go by your $63/mo cash-flow annualized. Is that right?

    1Reply
  • Deniz Eker
    Philadelphia, PA · Member since 2019 · 102 posts · 48 votes
    6y

    @Stephen Brown

    And taxes mostly tend to go up each year.Have to give an extra cushion for those increases when calculating cash flow

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    Is 22% for property taxes the norm there?  Ouch.  For that amount of taxes, I'd expect a lot from the city.

    0Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Victor S.:

    your math, as presented, is a bit off. if you sum up all those expenses, you should be at $682/mo + $399 in pmt = $119/mo cash-flow. still bad, but not as bad as before. also, 1.49% c-o-c translates to $50k down, if we go by your $63/mo cash-flow annualized. Is that right?

     Correct, I'd be putting down a large down payment... I think 50%. It doesn't cash-flow at anything lower.

    0Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Geoff Perkins:

    One thing I would suggest is to learn how property taxes work in the area you are looking at and calculate them yourself. There are several factors that could skew the annual property taxes up or down for example:

    - If there were previously delinquent taxes, I have seen websites list the taxes as the total accrued amount instead of the individual yearly amount resulting in a huge error in your analysis. 

    - Most taxing entities have some reduced tax programs that the current owner may be qualified for but you wouldn't and could end up taking a good deal and turning it into a cash loser.

    - Taxing entities re-evaluate property values on schedules. Some may be every year but some are multiple years apart. Where I live properties are inspected once every 6 years. So if a house has been taken from a beater & fixed up the tax assessment will go up significantly. Always calculate taxes based on your estimated ARV.

    - Its also important to know the factors that influence how your taxes are calculated. Some states are on a "budget based" system where the government budgets dictate the amount of taxes due and other states are on the "Rate based system where there is a set property tax rate that doesn't change when market values go up or down resulting in taxes owed mirroring the market.

    Property tax laws very greatly though out the county so its very important to understand your local rules. Local Assessors/tax collection offices can guide you to the information for your area.

     As always, thank you Geoff!

    0Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Stone Jin:
    Originally posted by @Stephen Brown:
    Originally posted by @Stone Jin:

    @Stephen Brown My advice is to try to find a property where the rent is $1800.  Check your numbers with a property like that.  In the suburbs, the low rent stuff is just destroyed by the taxes.  I've found that the higher the rent the better the return in the suburbs.  

     I'm assuming that $1800/mth would be for 4 bedroom or larger properties? The averages I've been seeing (and using) are around $1300 but for 3 bedroom properties. 

    I'm not sure what you are looking at but larger or 4bedroom properties are fine if the returns are better.  I would prefer 4bed rentals in the suburbs as there is no supply.  Currently on Trulia for Perrysburg there are 4 4bed houses with lowest rent being $1850 for a weird small furnished house, all others are $2100+.  If you can find a 4bed for under 200K with good appeal, you will be at 1% rule with A class property.  

    Also why wait to house hack?  To me if would seem the most logical path as you can buy cashflow with 3% down and then continue to look for rentals.  

     I'm not house hacking yet because I can live at home with my parents for free. I think that's a smarter move right now.

    0Reply
  • Joe Cassandra
    Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes
    6y

    You're learning about the #1 rule in real estate (and one I've broken before and lost money)

    ...

    Get a great deal.

    ...

    Unfortunately, in most markets in 2020, great deals aren't hanging out on the MLS waiting to be picked up. You have to dig ferociously for them.

    Any house in America could run at a cashflow positive clip if you lock it up at an amazing price. 

    ...

    I say this half-joking making a playful jab. 

    But you're really asking: "How do I find a great deal?" 

    You're after what all investors on here are after :)

    2Reply
  • Stephen Brown
    OP
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    6y
    Originally posted by @Joe Cassandra:

    You're learning about the #1 rule in real estate (and one I've broken before and lost money)

    ...

    Get a great deal.

    ...

    Unfortunately, in most markets in 2020, great deals aren't hanging out on the MLS waiting to be picked up. You have to dig ferociously for them.

    Any house in America could run at a cashflow positive clip if you lock it up at an amazing price. 

    ...

    I say this half-joking making a playful jab. 

    But you're really asking: "How do I find a great deal?" 

    You're after what all investors on here are after :)

     Thanks Joe! I figured this!!

    0Reply
  • Rich Bultema
    Crown Point, IN · Member since 2018 · 56 posts · 23 votes
    6y

    looks like management cost of 11.1% is a little higher than what is standard around my area which is 10% and also the mortgage rate of 4.75% is maybe something you could get down some as well?

    Of course I dont know what your credit score is or down payment but I'm in the process of a mortgage at 3.625% on an investment property. or pay for the home via a cash out refinance/or home equity on your primary residence if you have a primary residence and have enough equity in it. rates for primary residences can be even lower, maybe 3%?

    neither of these turn a "bad deal" into a "great deal" but it may help

    1Reply
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