Location vs cash flow

14 Replies

Hey all,

I'm curious to see what everybody thinks about the location of a property vs the cash flow it produces.

A property I'm currently looking at could be considered the nicest house on the block, especially with the interior finishes. The cash flow is there, considerably higher than higher quality neighborhoods nearby. However, it's in an investor heavy area where many of the cheap houses are being gutted and turned into higher end finish rentals. The number of low income properties still substantially outweighs the refinished properties in the area.

What risks are there in buying in lower income areas where redevelopment is slow, but still apparent?

Thanks,

Steve

You can't turn a pig's ear into a silk purse unless the location supports it. You can spend time changing the area and reputation of an area, takes years to do, but you can't build a higher priced rental next to the city dump, at least I've never seen it.

Location is to value is to rental pricing.

You may have more in cash flow on a trashy house, be a slumlord and take on the additional issues with that title and your additional cash flow doesn't pan out to be as profitable as you think, especially kissing any appreciation goodbye.  

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Steve, buying the best house on the block as a rental doesn't make a lot of sense, but if it is a solidly cash flowing property that can attract people who are willing to live in a gentrifying neighborhood, then the upside potential on the neighborhood improving is icing on the cake.  You may want to seek out Al Williams, his podcast, and his book on how you can influence the outcome of the neighborhood by being a catalytic landlord.

I would think the ugliest house on the block of a nice prestige neighborhood would be a nice catch. Especially neighborhoods with a lot of tear downs for rebuilds. I see this all day where 1500 sqft bungalows become 3500 sqft mansions that double to triple in value. Especially when you own a house where your neighbors on both sides are owned by the same investment company calling you everyday offering to give you 20% over market value for your property so they can tear it down and make row townhouses with all 3 parcels of land. This is high roller investing in Toronto..

There is a saying that the three most important words in real estate are

Location, Location, Location.

that is 

Wrong, Wrong, Wrong

The three most important words are Cash Flow and Equity.  In other words, what counts is how good is the deal.  A lousy deal in a great location is still a lousy deal. If you could buy a property with no money down, and it generated 100,000K a year in net positive cash flow would you really care where it was?

Location is only important to the degree it increases the value of the deal.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Ned Carey  I like that. Would you also add appreciation and/or forced appreciation to cash flow and equity?

@Ned Carey  "A lousy deal in a great location is still a lousy deal. If you could buy a property with no money down, and it generated 100,000K a year in net positive cash flow would you really care where it was?"

The numbers don't lie, so never argue with them.  You'll lose every time.  Where the location becomes important is how that location dictates "the numbers".

JV

Ned, that is totally wrong, I rarely have seen you say anything I'd disagree with, but you've been guruized my friend. Location is the basis for the economic benefits people pay for, it is the basis of value and how values are determined.

Location is also to the growing areas, those areas that have the highest appreciation in an area will all be great locations. Buying a property right out of the MLS at full price is done every day, and people make money in time.

You can certainly say that cash flow can be higher in areas that are not premium locations, that is true, often if you pay a premium or even more for the location it may not equate to higher rents in residential areas, but the appreciation never failed to pay me back with a profit. You will ALWAYS come out better having a property in a better location than the similar property in a bad location.

Saying location doesn't matter is, if not the most incorrect statement on BP, it's in the top three.

I bought a house in a good area, kept it over 5 years, utilities on and never rented the place, not one dang tenant every touched the door! Sold it and cleared over 80K !!!

I can give a dozen benefits of holding RE without a dang dime from rents but those with the mindset that rental income is all there is in life wouldn't get it, nor do they put themselves in other positions to profit or benefit in other ways.

And, for those suckered into contrary thinking, location is an economic and financial factor, it shows up in your taxes, it's part of the appraisal process, from there it effects what lender's do, it effects demand and supply, it's a key aspect to the foundation of assessing real estate, if you think otherwise, you're not going to be around long starting off.......

     Please show me a property that pulls 100K a year in rents that is in a bad location! Even commercial properties. If it pulls a 100K in rents the location has to be good enough to someone to pull those rents.

Lots of folks have brain pharts on BP. 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @Steve Wilmers:

Hey all,

I'm curious to see what everybody thinks about the location of a property vs the cash flow it produces.

A property I'm currently looking at could be considered the nicest house on the block, especially with the interior finishes. The cash flow is there, considerably higher than higher quality neighborhoods nearby. However, it's in an investor heavy area where many of the cheap houses are being gutted and turned into higher end finish rentals. The number of low income properties still substantially outweighs the refinished properties in the area.

What risks are there in buying in lower income areas where redevelopment is slow, but still apparent?

Thanks,

Steve

Hi Steve,

I would focus on having the right people in place to look after your best interests.

If you don't have those right people, the location itself and the numbers in the deal don't really matter much.

Its the people that make the numbers work.

Just my opinion.

Thanks and have a great day.

Medium list n sell logo designEngelo Rumora, List'n Sell Realty | [email protected] | 419 740 6999 | https://agentscomefirst.com/ | Podcast Guest on Show #89

Originally posted by @Jody Young:

@Ned Carey I like that. Would you also add appreciation and/or forced appreciation to cash flow and equity?

 Of course that should be included in any evaluation. However Other that "forced appreciation" appreciation is difficult to predict and is a function of market cycles and inflation. 

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Joe Villeneuve

The numbers don't lie, so never argue with them. You'll lose every time. Where the location becomes important is how that location dictates "the numbers".

Agreed Joe that is my point

@Bill Gulley

 Ned, that is totally wrong,

Bill I agree with most everything you said except that part LOL. I think you are reading into my post more than I actually said. 

You will ALWAYS come out better having a property in a better location than the similar property in a bad location.

Bill with all of your experience you have never seen a good neighborhood take a turn for the worse? Sometimes the hottest markets are hit the hardest when the cycle turns. Not everyone can hold on long enough to make it through that cycle.

Saying location doesn't matter is, if not the most incorrect statement on BP, it's in the top three.

Bill no where in my post did I say location doesn't matter. Of course it matters. However it only matters to the degree it affects the numbers. See Joe's comment above. Part of those numbers is anticipation of appreciation (increased equity). Appreciation is difficult to predict as I mention in the reply just above.

Please show me a property that pulls 100K a year in rents that is in a bad location! Even commercial properties.

Bill I used a little bit of hyperbole to make my point. I did not say the property was in a bad location, i just said would you really care?

If it pulls a 100K in rents the location has to be good enough to someone to pull those rents.

There see you agree with me!If it nets 100K in income the location must be good enough to support it. So again do you care where that location is? 

Bill I will end with this; I could has used as an example that if you bought a property that generated 80K in equity over 5 years, would you care where it was located?

Thank you my friend

Ned

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Bill Gulley @Ned Carey  

I love this discussion. Yes, you can get some amazing positive cash flow in the remote areas of the country. However, I have only ever lived in the NYC and LA metro areas. Yes, you can say that you can not predict appreciation, but some areas are easier than others. I know I would never live in any area other than a big city. So, I lean towards appreciation. It is the same as a single family vs multi argument. Being that I have so much exposure to multis living in the biggest cities in the country, I lean towards multis. I have never actually living in a SFH.

Love the banter everyone.

[email protected] | NJ Agent # 0565737 - NRS REFERRAL SERVICES, LLC

Originally posted by @Steve Wilmers:

Hey all,

I'm curious to see what everybody thinks about the location of a property vs the cash flow it produces.

A property I'm currently looking at could be considered the nicest house on the block, especially with the interior finishes. The cash flow is there, considerably higher than higher quality neighborhoods nearby. However, it's in an investor heavy area where many of the cheap houses are being gutted and turned into higher end finish rentals. The number of low income properties still substantially outweighs the refinished properties in the area.

What risks are there in buying in lower income areas where redevelopment is slow, but still apparent?

Thanks,

Steve

 It all depends on your strategy. War zones may look like the cash flow great on paper, but they rarely do. If you want to flip, you usually want to be at a higher price point where there are more buyers and the margins aren't so tight. If you want to buy and hold, it should (usually) be cheaper areas that will require less debt service. But of course, not war zones. So it really depends.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Ned, thanks for the clarification, a bit anyway, it was posting location, location, location is wrong, wrong, wrong that lit my fire. Location is the first consideration. As to appreciation, there are many areas that you can bank on. solid economic basis, steady increases in prices for decades, the balloon pop didn't even phase some areas here, slowed, but still constant. Many areas across the country weren't phased at all, those areas with high demand.

No one can claim that one size fits all in RE. Every property is unique, every property is different, no two properties are identical, even in condos, no property can occupy the same space as another, which is the location of your subject property and to every location there is a value.  :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

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