If I'm cash-flowing why does Bigger Pockets make me feel like I failed?

104 Replies

I just joined Bigger Pockets. I'm a buy and hold landlord with 6 properties in a middle class area of Atlanta. All are rented and rents are all $500 above PITI. So, though there's been some repairs, for the most part they all do okay in my book. Yet, only one met the 1% rule.

I like renting out Middle Class housing where their close to my house, most of the renters are easy to deal with and take good care of the homes. But it's soooo hard finding properties that fit in most of the calculations that I have found on Bigger Pockets.

I don't want to buy bad deals.  I don't want to have to go too far out for a deal. And I still want to grow my portfolio, so I'm not sure what to do.

David

Hey David

It's funny reading this post.   I am actually sitting in Atlanta in the West End.   

I am going to tell you this.   If it makes financial sense and the properties support themselves then I don't actually see the issue.   It may not fit their criteria, but if a property is putting a cushion in your pocket every month then keep doing what you are doing.   Your niche makes sense to you.  It definately makes sense to me.   

Keep going!   

Best of Luck to you!    

Gerald

Congrats for having six that cash flow! I own two and am nowhere near the 2% rule. Both are slightly above the 1% rule. I could easily get 2% in some of the rougher areas of San Antonio but choose nicer homes in middle class neighborhoods. I find I relate to these tenants and understand them more than the higher or lower end tenants as I was them once. My houses are below the median home price for my city.
Also, I would only use these rules as rules of thumb. I could buy a 2% rule house and put 20% down and 10K in repairs and have a poor ROI or CoC return. There are lots of ways to evaluate properties. I am a newbie and am cognizant of the 2% rule and like the 50% rule but use other measures as well.
I say congrats on what you have accomplished and keep it up!

I'm right there with you, David. Just remember that all of those "rules" are only guidelines. In my book, if you are making money while operating within the parameters that you have set for yourself then you are doing fine.

And though we are in this to make money, money is not the be-all and end-all. Many other factors affect our investment decisions, and in the end, no one but you can decide if you are successful.

Lots of properties work as long as things go well.  But as soon as you have a major problem you're suddenly out of pocket thousands of dollars.  Big repairs do eventually need to be made - roofs, furnaces, sewer lines ($6200 last summer).  Tenants do occasionally require evictions and cause extensive damage.  Some months your only expenses are taxes and insurance.  Some they're not.

@David Cohen  

Congrats on getting to six properties. While the calculations can save you from a bad deal they are simply just rules and guidelines to keep you away from risky deals. Considering the types of properties you like to purchase for buy and hold hitting the 2% rule in Atlanta is going to be difficult. 

There are far more determining factors when deciding on a property. If you properties are cash flowing the 2% rule is not as important.

Good luck with all your investments.

@David Cohen  

You haven't failed at all.  So long as you are making money at your minimum rate or above, you are winning the game.  Geography determines whether the 1%, 2% or 3% rule applies.  

Here in Boston you can't get anywhere near the 1% rule in the city itself unless you venture deep into the scary parts.  But there is a ton of money to be made in condo conversions, so long as you have the up front capital available.

Your portfolio sounds like it is making you good money. I would examine the money you have left after your PITI. From that $500 I'd examine how much you spend on:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

With SFH, the tenants are going to pay most of those, but there are a few that you'll have to pick up. Between those and PITI I don't use much else to look at properties.

I find that here's a fair amount of "one-upsmanship" between investors. Most of it is good spirited, but it can have the effect of making you second guess what was in fact sound choice for you. Also- some of the deals that you see discussed (especially in the "what was your best deal" type of post) were from a few years ago, when there were outstanding deals just lying around for whoever could pick them up. Not so true today. Actually, there have been some great threads recently about how buying too low can backfire, and the advantages of being in that somewhat more expensive but solid middle-class market. 

There are SO many factors at play in what makes an investment work or not work. If everybody went by the "2% rule" there would be no investors in a lot of places. And just because a place meets the "2% rule" doesn't mean you're not going to loose money on it for some reason.

Yes, what I've learned on BP has changed my investment strategy. But it didn't make what I did before a failure, it just sharpened my discernment moving on. I hope you'll feel the same!

The 2% rule is more of a guideline than a rule. By following it, you usually ensure that you have enough money to cover PITI, along with vacancy, repairs, and management (but not always). You will obviously pay a premium for buying in better neighborhoods and will hardly meet the 2% rule, but if that is your niche and are comfortable with it, then go for it. Just make sure you take into account ALL of the expenses while analyzing a deal, and not just PITI.

David,

My name is also David. And I also have the same issue you do.  

There is definitely an element to real estate investing where it becomes a bit heavy on the boasting side as people talk about how their new purchase meets all the 1%, 2% red%, blue% rules.  It can be discouraging when you compare yourself to others and it appears you don't measure up.  I was just thinking about this today and here are a few things to keep in mind concerning these rules:

1) The 50% rule says about half of your income will go to expenses.  I, like you, have bought nicer homes in nicer areas.  And my expenses don't come to even CLOSE of my rental income. They are much less.  I think this has become a rule of thumb because in order to obtain the coveted 1% or 2% rules, most investors are forced to invest in lower income, older homes.  In general, these homes sell for less, cash flow more, but will need more maintenance and repairs.  Since it sounds like your homes are nicer and don't require as much maintenance, this rule doesn't really make sense for you and it wouldn't make much sense to try and follow it.  

2) Vacancy rates on your nicer homes are also much less likely to be as high as standard vacancy rates on less desirable homes.  Turnover is probably also cheaper as nicer homes tend to attract nicer tenants which in turn take nicer care of your house.  This is likely not reflected in any of these "rules" either.

3) There is a very good chance that you, like me, bought nicer homes in nicer areas which have a much higher appreciation potential than homes meeting the 2% rule. Because we typically don't count on appreciation this doesn't come up in many "rules", but you'd have to be a fool to ignore it.  It is a financial impact and sometimes it's worth sacrificing cash flow if the expected appreciation justifies it.

So, in general, try to keep in mind that everything kind of flows together.  People buying homes with massive cash flow usually are paying the price in more headaches, while people buying homes with less headaches generally don't cash flow as well.  It sounds to me like you have houses that are making you money, and hopefully more money than you would be making anywhere else.  THAT is the most important metric here.  If you are getting a higher return with less headaches than you would in any other investment category, you are doing a good job.  That's what matters. Don't get frustrated by others comparing your investments to theirs.  It's not always apples to apples.  Please let me know if this helped.

David Greene, Real Estate Agent in CA (#R01979801)
(209) 690-7757

Welcome @David Cohen .  You have done the most important thing...taking action! Like you, I invest locally and where I am very comfortable with the growth of the area and quality of homes and tenants.  I believe the ones that are failing are the ones that never take action. Just like any other type investing, the amount of time that you are actually in the market usually counts. I would rather have a quality existing 1% property today and have the tenants already paying down the mortgage, then spend the next year crunching numbers and searching before finding a 2% out of my preferred area.  Just my opinion!

Jonna Weber, Real Estate Agent in ID (#SP41257)
208-608-4884

First let's establish one thing, if you have 6 properties and they are all cash flowing you are far from being a failure, which makes you a success. The guidelines are there to give you guidance in finding a niche and a comfort zone which it appears you have done. Can you do certain things to get a higher yield I don't know your particulars but I am sure the answer is yes. But do you currently own properties with a positive cash flow and appreciating value I would say yes and that is a great place to be. Keep it up and keep searching for ways to improve.

The 2% "rule" was discussed much in 2009 when I first became active here at BP.  The market was different then. The blood was in the streets.  If you had cash/financing you could buy distressed property in a lot of states at 50-75 cents on the dollar.   At the same time, rental demand was increasing as so many "homeowners" were turned into renters.

The 2% "rule" could be met in many areas.  Not so much today.  There are still pockets where you can do it, but maybe not areas you want to invest in.  These homes may sell for the same amounts 10 years from now as they do today, while yours may be worth substantially more then.

Are you hitting your targets on yield?  Do you like the area and property?  You are the one you have to please, not someone else who claims to average 30% return over the long term.

Thanks for the thorough responses.  I really appreciate the encouragement and that we have the same strategy with the real estate.  Recently, I've tried to increase the portfolio but prices have gone up and now it's so hard to meet my own criteria, let alone the BP criteria. Hope you're having more luck.

@David Cohen   David sounds like our philosophy is the about the same it looks we're both close by both being in Decatur. I think all of the post here are spot on and to get the 2% rule anywhere in Decatur is almost impossible. I don't think even the undesireable area of Decatur will get you there. Sounds like you have a sound plan. However, now it's hard to find most any deals out there in my area. Going to start my first direct marketing campaign this month.

Kevin Polite, Real Estate Agent in GA (#269676)

@David G and @Jean Bolger, you're definitely offering clarity and comfort! I discovered BP in '08, just as the market was crashing, and learned a tremendous amount and got started. Our first 2 deals in '08 met the 1.5% rule but are in a sketchy area that has provided more than its share of anxiety, expense and a massive learning curve. Sure, they still cash flow, but the headaches involved in those areas generate a lot of angst flow, too. And they're still underwater. 

My husband and I did well in the years 2010 - mid 2013 in south FL, when as you said, great deals were lying around for anyone. Things have changed a lot and my husband isn't quite near the early retirement we were hoping for yet.

Although we aren't zillionaires by now, with a portfolio of hundreds of properties that cash flow and appreciate, without having put a penny down, we haven't failed. We have done well overall and need to adapt our investing strategies to the changing market. Real estate investing is a long term play; we knew we wouldn't get rich quick and haven't. Some have. That's encouraging, and helps us continue to learn.

As others have mentioned the 2% I call it more of a guideline than a rule is not the end all to determine if you buy or not.

I focus on commercial real estate and not these single family houses. I do however have many discussions with other investors over them.

The MAIN point is are you wanting to live off these investments??

If you make 30,000 a year at a job and want to escape the rat race then many people are looking at 2 to 3%  mark and dealing with crappy areas. They want the highest cash flow to get out of their jobs. The hope is to eventually sell off those intensive properties for ones with less yield but more long term holds. The downside to the crappier areas also is the cash flow might be high going in but these depressed areas tend to have tenants on very limited incomes and turnover is high due to job instability and personal life issues and rent increases are tougher to get annually.

So in better areas you might have an even amount of cash flow and appreciation and in very desirable areas hardly any cash flow at all. The appreciation factor and rent growth however tends to be better. People that are planning for retirements, estates, and do not need the money but want tax write offs are prime for nicer areas. Yes they want cash flow but is not the number one on the list. If they are making  six figures or more from their job or businesses the landlord doesn't need the cash flow to live on.

I am not saying all investors are like this just what I see from discussions I have.

While it is true that your expenses might not be 50% today OVER TIME average out your expenses. We get investors on here saying my expenses only run 40%. Okay let's see where you tracked ownership of the property over 10 years and see if it Is still 40% annually for eviction, repairs, property management etc.

I have seen some that are BUT when they go to sell there is a ton of deferred maintenance to the property which comes off the offer price. So as a landlord I see people suck out all the cash flow during ownership, not fix much, and then want to sell at a premium when they haven't kept the place up. You can't have it both ways unless you land an idiot buyer who is a newbie and knows nothing. I do know sellers that specifically try to target newer investors to sell too. 

@David Cohen  Great to see another Decatur investor on BP! 

In addition to soaking up the broad perspective and deep expertise from BP, you might also seek out some local insight from GAREIA or Atlanta REIA.

Atlanta's market is diverse so ultimately, it helps to find local investors with similar strategies for benchmarking, motivation, and synergy.

If after these responses, you're not feeling much better search 'help', 'getting started', 'starting out', or 'fail', and you'll see thousands of forums by people who would place you in the 'successful investor' category.

I heard there are good deals all over Georgia.

Joe Gore

@Jon Klaus 

I have to disagree with you Jon. I buy the same way now as I did in 2009 - only much more conservatively. True - I don't get most deals I go after in today's market. But, there really is such a thing as "anatomy of a good deal". I know what this is for me; I've learned the hard way about CapEx (to Jon Holdman's point), and I see it as unexceptionably too much risk to jeopardize this anatomy...

@David Cohen Good for you to re-think your approach.  I can't tell you what's right for you - you must make that call.  I will, however, caution you against listening to reassurances that in today's marketplace "it's OK".  There are many reason why people will tell you that "it's OK"; none that matter.  You decide what's OK based on the knowledge currently available to you.  You have bought the only way you knew how.  Now you know more - is the old way still good enough?  If not - change!

Good luck to you!

@Aaron Montague  

Thanks for sharing your experience with the Boston market. I've been looking (and new to investing) and based on my calculations, getting even 1% was difficult. It made me very cautious about acquiring properties.

Roof and HVAC replacement happen. Then there are the unforeseen things like a good tenant going very bad or a sewer issue. There are so many things that can go wrong and often do go wrong it is better to plan for the worst and assume you are going to be spending the long term average for SFR which is basically 50% of you rent. Obviously rent is variable and thus that 50% rule doesn't alway apply but it as mentioned above it is a good rule of thumb.

My feeling is as long as you are not totally relying on the month to month rental income, you should be fine particularly if you have access to cash or cash equivalent reserves.  If you are living off of that $400 in cash flow on each of several properties, you are going to have major cash when (not if) your property has major problems. To illustrate say you have 15 properties making $400 each.  You have no other income other than the $6,000 of cash flow.  If for some reason you suddenly had to spend four, five or ten thousand dollars unless you have access to other funds, then you will have to spend at least a good portion of one month's living expenses to take care of the emergency.  What are you going to use to eat?  Realize this is an extreme case, but I'd bet there are people on here who live like that.   

  

I think Cal hit the nail on the head.

If you have a big reserve account and another source of income then you don't have to worry about CapEx killing you. Like you have a JOB that covers your personal expenses and you have a $10K liquid reserve fund and get $400 a month in cash flow, not putting anything away for CapEx. You have to do the roof on that house and it costs $7,000, well you had the cash on hand and you don't need the cash flow to live so you just don't make any money for 1.5 years as you replenish your fund.

The issue is a lot of people spend all that cash flow and don't have the liquid reserves or supplemental income to handle a prolonged vacancy or major capital repair, so they should be accounting for this and putting away money for the inevitable. 

Shaun Reilly, Real Estate Agent in MA (#9517670)
1-800-774-0737

@Joel Owens  

  What Joel said !!!!!  and many others on this thread...buy cheap and chances of financial failure are pretty great  over time... buy nice or top of the line things will run better and you will probably get some appreciation.. in todays market the only profit that is going to be made is on appreciation.. forget about 100 200 or 300 a month cash flow.. Unless you have the wherewithal to buy 20 to 100 of these what's the point risk far outweighs reward.

Go for better props that will hold value or go up substantially... Its the bases of all wealth on the Left coast.. cash flow only hold your position... Appreciation is how you make money and again unless you can get large scale small cash flow in low end markets will kill you over time  IT just will

@Jay Hinrichs  

in todays market the only profit that is going to be made is on appreciation

I respect your experience, but I respectfully disagree with this statement. There is definitely money to be made outside of just appreciation. I agree that it's "easier" to make money with appreciate in market that's going up, because you don't have to do anything but hold that property, but cash flow will always be there in up or down market. A lot of people lose money in "lower" end rentals because they over leverage, mismanage, don't have a trustworthy team, etc.

IMO, the key is not to buy cheapest rental property available, but to buy smart, inexpensive rental properties.

I have built my whole business buying these kind of properties and if I could go back and start all over again, the only thing I would change is buy more of these properties.

I know we have talked couple of times on the phone and I may be in slightly better market than you refer in your post.

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