Do You Buy for Cash Flow or Cap Rate... or Both?

Buying & Selling Real Estate
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Do You Buy for Cash Flow or Cap Rate... or Both?

Jordan L.
Investor · USA · Member since 2013 · 86 posts · 17 votes

In searching for my next investment property in the market I'm looking at, I'm starting to question my ability to attain the cap rate I'm shooting for in the neighborhoods I'd like to buy in.  I'm looking in and around Charlotte, NC at A- and better areas.

I know there are differing opinions on this--  if I find a property that will break even or cash flow ever so slightly at asking with 100% financing, but with only a 5.6% projected cap rate at this price, is it worth considering?  Obviously I wouldn't offer asking, but should I even bother?  10% allowances for maintenance & repairs, 10% for vacancy, and 10% plus half a month's lease for property management have all been calculated in.

There are cash-flowing deals to be had but nothing with a mind-boggling cap rate that I've seen.  Should I be discouraged?  FYI--  my investment strategy is to pay properties off ASAP and live off their income once I've acquired a large enough portfolio.  I've done this twice already.  I live in one free-and-clear and rent the other.  It's awesome.  The more I get, the faster I'll be able to go...

Should I sit on my money and keep hunting for that ever-illusive 10% cap rate in a good neighborhood or start getting more aggressive with my offers?

Thanks all.  :) 

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Julien Plouffe
Investor · Miami, FL · Member since 2015 · 23 posts · 10 votes
10y
Alex Franks I believe there will be a market correction in lots of markets as the cashlfow doesn't seem to make sense but there is still opportunity never the less. Here in South Florida, prices are starting to already trend downwards. Save your money, patience young Jedi, then swoop up some great deals.
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  • Melissa N.
    Rental Property Investor · Charlotte, NC · Member since 2016 · 293 posts · 88 votes
    10y

    The Charlotte market isn't allowing for much cash flow these days. With that said, I'd also say only invest for cash flow - you can't use your Cap Rate to go to Hawaii or put food on the table. 

    Some experts are saying there is another recession on the way. I tend to agree. The playing field is about to clear when that happens and perhaps people will stop overpaying. Maybe not in Charlotte because people are paying for appreciation. Only time will tell but I'm not in the business of buying and praying for appreciation. Just my two cents :) 

    0Reply
  • Jeff Graves
    Investor · Fort Worth, TX · Member since 2016 · 107 posts · 62 votes
    10y

    You may not be able to use your cap rate to go to Hawai i, but you could have a VR on M aui, and generate cash flow, and have your trip paid for each year. At this point no need to pray for appreciation, but prayer is always good.

    Aloha

    Jeff

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Melissa N.:

    The Charlotte market isn't allowing for much cash flow these days. With that said, I'd also say only invest for cash flow - you can't use your Cap Rate to go to Hawaii or put food on the table. 

    Some experts are saying there is another recession on the way. I tend to agree. The playing field is about to clear when that happens and perhaps people will stop overpaying. Maybe not in Charlotte because people are paying for appreciation. Only time will tell but I'm not in the business of buying and praying for appreciation. Just my two cents :) 

    Keep in mind with our low entry point and newer city folks are going to keep over paying.

    My thought process was after 2013 the numbers on a whole did not make sense here for rentals ( in most cases). Again the market dictates what can, and cant be done. For most investors that window has passed.  Look any where in Charlotte in 60 mile radius. You will see new construction every where. There is a reason for this. Though a few groups are promoting their low end deals with super high returns  but I wont say anything more on that.

    Mellisa, hope all is well with you and your family.

    Alex

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  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Jeff Graves:

    You may not be able to use your cap rate to go to Hawai i, but you could have a VR on M aui, and generate cash flow, and have your trip paid for each year. At this point no need to pray for appreciation, but prayer is always good.

    Aloha

    Jeff

    Keep in mind some markets are false appreciation when folks are over paying and pushing pricing up. Then again I had a rehab in Rock Hill SC on golf course. Lowes screwed up cabinets. Well long story short 5 months later. My agent was listing originally for $209k she is now listing for $259k.

    We are 20 minutes below Charlotte  but crazy jump but I'm not complaining.

    Same time I had another house for $479k and is selling at $449k,  so funny guess no Hawaii trip in that house.

    Alex

    0Reply
  • Account Closed
    Investor · Rock Hill, SC · Member since 2016 · 40 posts · 20 votes
    10y
    Alex Franks your team did a great job on the country club house. Really like the kitchen and bath designs. Really nice shower too! If it was on the York side of Rock Hill I'd probably make you an offer! PM me your tile guy if you're willing to share.
    1Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Account Closed:

    Alex Franks your team did a great job on the country club house. Really like the kitchen and bath designs. Really nice shower too! If it was on the York side of Rock Hill I'd probably make you an offer! PM me your tile guy if you're willing to share.

     Patrick I hate rehabs LOL but no problem at all.

    That bedroom shower is a huge

    Alex

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y
    I go for all Cashflow until I have reached my free done number. Once I get to that point I will screw around with flipping or appreciation plays.
    1Reply
  • Jeff Graves
    Investor · Fort Worth, TX · Member since 2016 · 107 posts · 62 votes
    10y

    @Alex Franks Yes...false appreciation does occur...I would say in almost every market.  For example, on the mainland prices generally move up in the Spring and summer months.  Why?  There tend to be more active buyers.  More demand.  Prices move up.

    Is appreciation false if someone is willing to pay the price?  If so, who makes the determination the it was false appreciation?

    Aloha,

    Jeff

    0Reply
  • Julien Plouffe
    Investor · Miami, FL · Member since 2015 · 23 posts · 10 votes
    10y
    Alex Franks I believe there will be a market correction in lots of markets as the cashlfow doesn't seem to make sense but there is still opportunity never the less. Here in South Florida, prices are starting to already trend downwards. Save your money, patience young Jedi, then swoop up some great deals.
    2Reply
  • Sam Priddy
    Corryton, TN · Member since 2016 · 8 posts · 4 votes
    10y

    I have owned a few businesses, all small but still somewhat profitable. I have studied business and owned real estate as well as played the stock market.  I say all this to preference the fact that the numbers on paper can always look beautiful, just depends on how things get 'tweaked'. That's the Cap Rate...the tweaked number. Bottom line, what is going into your pocket at the end of every month/deal/whatever?  Of course, I am not saying to tweak the numbers to make them look good...I am simply illustrating the fact that those numbers on that paper really don't mean anything if they don't actually put money in your pocket. It sounds like you have calculated a Cap Rate that makes since. But I don't recommend relying strongly on the paperwork because too many things can get in the way and change the numbers...even just a day after you close on the property, and at that point all your numbers just went out the window. 

    0Reply
  • Ian Tudor
    Specialist · Charlotte, NC · Member since 2013 · 260 posts · 245 votes
    10y

    @Jordan L. 

    The better the neighborhood the lower the cap rate because it comes down to desirability. If it is a great place to live, people will pay more for the real estate. It goes back to the old adage - location, location, location. A- locations in Charlotte, NC, you will be hard pressed to find great cash flow in our current market because prices are elevated. 

    Cash flow and cap rate are interconnected. I think the real question is appreciation or cash flow. In today's market when we have seen a large rise in prices in a lot of markets. It is prudent to find cash flow and let appreciation be icing on the cake. 

    1Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Jeff Graves:

    @Alex Franks Yes...false appreciation does occur...I would say in almost every market.  For example, on the mainland prices generally move up in the Spring and summer months.  Why?  There tend to be more active buyers.  More demand.  Prices move up.

    Is appreciation false if someone is willing to pay the price?  If so, who makes the determination the it was false appreciation?

    Aloha,

    Jeff

    Jeff for me it all about the numbers. So when I buying Charlotte and Atlanta properties for 20 to 40k these were the vinyl villages. 4 bed , 3 bed 2 bath type homes. That was 2009 -2013 time period for us. I don't think we learned our lessons last time or ever really will. So I don't think any one makes that determination. As folks keep buying others keep selling...

    Charlotte NC being such a young city prices are still attractive to most folks.

    Hope all is well


    Alex

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Julien Plouffe:

    Alex Franks I believe there will be a market correction in lots of markets as the cashlfow doesn't seem to make sense but there is still opportunity never the less. Here in South Florida, prices are starting to already trend downwards. Save your money, patience young Jedi, then swoop up some great deals.

    Julien love it young Jedi ,,,

    I was in florida buying in 2009 -2011. You are correct we don't buy now we build. If and when the price drops like 2009. I will and would  swoop in and buy at a frenzied pace. I just try to let the market tell me what to do and what not to do.

    I just have a solid game plan ,and goals, along with a exit strategy for this business. 

    Hope all is well

    Alex

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Cash flow is what pays my bills so obviously #1 priority for me. Appreciation is a animal I can not control, rental income I can so that is a simple equation.

    Paying off a rental ????? Where is the logic in that. Equity in a property is dead money. It hides real cash flow and is very sad for dedicated investors to see such a waste of resources.

    May your money RIP.

    2Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Lane Kawaoka:

    I go for all Cashflow until I have reached my free done number. Once I get to that point I will screw around with flipping or appreciation plays.

    I was using my flips to support my buying cash flow rentals. I been doing that same system since 2004. I have always looked for ways to create additional capital. Cash flow great but does not pay the bills. I rather pay of the asset as fast as possible.  Using and diversifying my portfolio with a few different plays.

    Alex

    0Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Thomas S.:

    Cash flow is what pays my bills so obviously #1 priority for me. Appreciation is a animal I can not control, rental income I can so that is a simple equation.

    Paying off a rental ????? Where is the logic in that. Equity in a property is dead money. It hides real cash flow and is very sad for dedicated investors to see such a waste of resources.

    May your money RIP.

     Greg I am the complete opposite I like free and clear portfolio( just me). So I use leverage and then pay down the properties asap. No debt my cash flow goes up. Flipping or New Constrution pays down or buys more ( Apartments now )My wife and I want out of the business. So looking at other avenues( franchises) while we will control  200 units (now I think 500 is my end goal). I am not greedy so I have a set number in my head that I am trying to accomplish. Actually I have a detailed list of  goals and numbers on my fridge as I type.  Back in 2004-6 I was flipping 4 turn key at a time. Keeping one each time very close to nothing, or free and clear. I was up to 37 at the time. I made a huge mistake listened to what ever guru was out then. Refinanced all put the money in to Million dollar flips. Need less to say I lost it all.

    So for me it more personal and having free and clear makes me sleep better at night.

    Hope all is well

    Alex

    1Reply
  • Douglass Benson
    Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes
    10y

    For me it is always cashflow.  Of course I am a mid-Michigan investor and that is pretty much what the market will grant.  That being said, we purchased all our buildings over the last 13 years or so and this last year?  Voila!  Appreciation!  

    But honestly, we will use the equity gained as leverage for another purchase.  And the only reason we would buy anything else is so we can increase our cashflow.  That is what shows up in the bank account.

    0Reply
  • John K.
    Investor · Mahopac, NY · Member since 2015 · 110 posts · 32 votes
    10y

    @Thomas S. stated once the debt goes away the cash flow goes up. Also this allows you to use the equity as leverage for another property and to continue the process no?

    1Reply
  • Ron T.
    Investor · Sharon, SC · Member since 2014 · 77 posts · 40 votes
    10y
    Originally posted by @John K.:

    @Thomas S. stated once the debt goes away the cash flow goes up. Also this allows you to use the equity as leverage for another property and to continue the process no?

    To keep the conversation going...

    I share the vision and strategy you and Alex.

    The other argument is instead of having a $100k property paid for, you leverage that $100k (at 20% down) into $500k in portfolio. The additional properties minus their notes will exceed the cost difference of the note on the $100k

    However with an expanded portfolio you also expand your risks exponentially. I'll take the sure thing because of spiritual beliefs, but understand the analytical argument behind the other side.

    1Reply
  • Alex Franks
    Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes
    10y
    Originally posted by @Ron T.:
    Originally posted by @John K.:

    @Thomas S.

    Can you go a little further and explain why you said equity in a property is dead money? Like @Alex Franks stated once the debt goes away the cash flow goes up. Also this allows you to use the equity as leverage for another property and to continue the process no?

    To keep the conversation going...

    I share the vision and strategy you and Alex.

    The other argument is instead of having a $100k property paid for, you leverage that $100k (at 20% down) into $500k in portfolio. The additional properties minus their notes will exceed the cost difference of the note on the $100k

    However with an expanded portfolio you also expand your risks exponentially. I'll take the sure thing because of spiritual beliefs, but understand the analytical argument behind the other side.

    @Ron T.

    I think folks are missing my point first leverage is everything. 20 % down all day long if I was buying homes. To aquire then I use my other projects to pay down the debt. Even teaching folks to diversify , us investor need to think the same way.

    Its just some thing I always thought about is having multiple streams of income coming in. I don't like debt. At the end of the day we are still relying on tenants that down. No offense I rather rely on  my self then others.

    Expanding portfolio is great but accelerating or paying down debt is even better.

    I guess the game of monopoly is the best comparison.

    PS Ron you still owe me a beer.

    Alex

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