Need Help Analyzing Deals

8 Replies

I am learning how to analyze deals but almost all of the properties that I analyze have a negative cash flow. At this point I am starting to think that I must be doing something wrong. Three of my reports are linked below. Please note that I live in the Los Angeles area so the one LA deal that I analyzed assumes that I manage the property myself. For the out-of-state deals I would be using a property management company. If anyone has any advice for me I would appreciate it very much. Thank you.

  1. 1. Deal 1
  2. 2. Deal 2
  3. 3. Deal 3

    @Tyler Foshe

    Hey Tyler. A Single family home for 1.6 million is never going to cash flow. If you want to cash flow in the LA market buying SFH you will need to get creative. Maybe that property works as a short term rental where you can break even but even then its going to be really tough.

    If your end goal is to learn how to analyze deals, then I found it very helpful to do practice deals over and over again in a notebook that I had kept. Because I took the time to write out about 100 practice deals on paper, I can analyze a deal pretty quickly now and pass on deals or get very interested very fast. You can even use a mortgage calculator in 1728.org/mortpmts.htm to get your principle and interest payments for the term of the loan. You can do something like just see what the difference in ROI is between a house that brings in the 1% rule and a house that brings in the 2% rule and once you do it over and over, you will start to know immediately what price to pay for the amount of rent that a house will produce because you will start to understand and find your comfort level of how hard you want your money to work (If you are comfortable with your money working extremely hard and producing what may seem like a higher return, "sometimes" you will invest in lower class areas because the price points are low compared to the rents).

    If you ran those reports because you are actually considering purchasing one of those properties (I only saw the first one), its stuck in my mind to never buy "negative cash-flow" properties and to never buy properties based on appreciation (I'm just assuming that since they are negative cash flow that you are considering them for the appreciation and principle pay down and the tax benefits).  With that said, its not totally impossible for someone in those markets to see some sort of value in those properties that may not be visible to the untrained eye. So you may want to have someone in your market have a look.  And if they are possible deals for you, you may not want to leave the address on here just in case they turn out to be valuable. 

    Deal #3 looks okay to me. Try lowering your purchase price, lawn and snow care expenses and see if the numbers work.

    Thanks to everyone for your great feedback. After analyzing a number of deals in Des Moines I read in one of the forums that property taxes in Iowa are very high. When you combine that with the property management fees that I was assuming that explains why those deals had a negative cash flow. This is why I moved on to analyze deals in the LA area. Just to clarify the $1.6M property in Torrance in LA County is actually a duplex. I thought the lower property tax and the assumption that I would manage it myself would result in a positive cash flow but it did not work out that way. It seems like the best strategy is to pay less than market prices for properties that need work and then fix them up to get a better cash flow. I will take your advice to keep analyzing deals and adjusting the numbers to see if I can make any of these deals work before I try a different strategy. Thanks again.

    @Tyler Foshe invest out of state for cash flow, invest in LA for appreciation.

    I live in Torrance and decided myself to start investing out of state a couple years ago because I couldn’t find anything local that cash flows. Now that I have a few out of state rentals I’m considering buying a house hack in San Pedro.

    Biggest advantages investing locally in my opinion are the financing and SoCal appreciation. I need 20-25% down when buying out of state but I can buy a duplex in SoCal for 3.5% down. I can control a million dollar appreciating asset in SoCal for 50K OR 100K house in a stable cash flow market for 25K.

    Reach out any time if you’d like to chat.

    Dan

    @Tyler Foshe In LA's defense there are absolutely properties that you can get to cash flow. I bought my house with 5% down and built an ADU and it cash flows no problem. Yes, that cash flow is a low return on equity, but the appreciation has been great. In regards to the specific property in Torrance you were looking at, that's a new construction next to a Jiffy Lube and across the street from an oil refinery. In my opinion that makes the list price difficult to attain. If it were me, I would calculate max offer prices instead of calculating if something cash flows or not. Determine how much you would need to pay in order to get the returns you want and then make those offers even if they're below list. Eventually one of your offers will be accepted and it will be a great deal!

    @Tyler Foshe , I saw that you were analyzing some deals in Des Moines.  Agree, taxes in the city of Des Moines are fairly high, but you still shouldn't have a negative return on ALL of the deals, if you are able to get all the correct data on the front end. (market rents, age of cap expense items, prop mgmt fees etc).

    NOT to tell you that Des Moines is the best option for you, as I have no idea of your goals.  LA vs Des Moines are two drastically different markets :)

    Best of luck to you!