Buying and holding at market value??

Cincinnati, OH · Member since 2016 · 12 posts · 6 votes

Hello everyone, I am new to Bigger Pockets and the real estate investment world. I have been reading, studying, creeping on the forums, listening to podcasts, etc. for months am finally feeling prepared and ready to start on my first property. My strategy will be to buy and hold properties as I am looking for passive income.

HOWEVER....I cannot seem to find a property to start with. I am looking in a pretty specific area in Cincinnati, mainly because I know the area very very well, and I know it is a very strong rental market. It is also a hot area to buy so many properties are going into multiple offers or even above market value. So without cash (I will be financing), I am having trouble finding a good deal.

Is it not smart to buy a rental property at market value?? The rental market here is very strong, so I know I will have positive cash flow, but everything I have read says to go for 70% LTV only. How in the world do people do that? Really struggling with getting started...

Thank you so much!

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Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

10y

Purchasing generally has two aspects, positive cash flow and a exit strategy. It is not necessary to buy under market but is essential that you fully understand cash flow at what ever price you buy at. If you fully understand expenses, which most do not, and you have the proper rent to purchase price ratio then the numbers are all the matter.

However it is extremely common for novice investors to not understand the numbers and even experienced investors often ignore some numbers to inflate what they believe their cash flow to be. You must remember that cash flow has nothing to do with your expenses today they are all about long term expenses on a property, 5, 10, 20 years out. A investor that buys a fully renovated property may believe their expenses are minimal but the reality is their expenses long term are the same, relatively, as on every other property.

Additionally many investors conveniently ignore the value of equity tied up in a property. Every investment property generates two separate income streams. One is of course the property itself but the other, that is conveniently ignored, is the equity. Paying down a mortgage does not increase cash flow it simply shifts the flow to a return on equity. Money must earn it's keep otherwise there is no value in having it. To properly calculate cash flow on a property one must at a bear minimum base the numbers as if the property is 100% financed. As a property appreciates this must also be taken into consideration which is why rents must be continually increased. This allows a minimum return on the equity equal to at least the prevailing mortgage rate. However money is far more valuable today and realistically equity should earn a minimum 5% or better return.

Investors should not leave money dead and buried in a income property without insuring that the cash flow on the property is first paying a solid return on equity before considering the cash flow on the property. Many investors do not grasp this concept and believe they have a positive cash flow property when in fact once they apply a return to the equity they are left with negative cash flow on the property itself.

Bottom line is do the numbers and see if it works. Most will not.

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Sean Cole
Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
10y
@Tina D. what part of town are you trying to buy in?
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
Hyde Park/Oakley
2 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
Purchasing generally has two aspects, positive cash flow and a exit strategy. It is not necessary to buy under market but is essential that you fully understand cash flow at what ever price you buy at. If you fully understand expenses, which most do not, and you have the proper rent to purchase price ratio then the numbers are all the matter.
However it is extremely common for novice investors to not understand the numbers and even experienced investors often ignore some numbers to inflate what they believe their cash flow to be. You must remember that cash flow has nothing to do with your expenses today they are all about long term expenses on a property, 5, 10, 20 years out. A investor that buys a fully renovated property may believe their expenses are minimal but the reality is their expenses long term are the same, relatively, as on every other property.
Additionally many investors conveniently ignore the value of equity tied up in a property. Every investment property generates two separate income streams. One is of course the property itself but the other, that is conveniently ignored, is the equity. Paying down a mortgage does not increase cash flow it simply shifts the flow to a return on equity. Money must earn it's keep otherwise there is no value in having it. To properly calculate cash flow on a property one must at a bear minimum base the numbers as if the property is 100% financed. As a property appreciates this must also be taken into consideration which is why rents must be continually increased. This allows a minimum return on the equity equal to at least the prevailing mortgage rate. However money is far more valuable today and realistically equity should earn a minimum 5% or better return.
Investors should not leave money dead and buried in a income property without insuring that the cash flow on the property is first paying a solid return on equity before considering the cash flow on the property. Many investors do not grasp this concept and believe they have a positive cash flow property when in fact once they apply a return to the equity they are left with negative cash flow on the property itself.
Bottom line is do the numbers and see if it works. Most will not.
6 Reply
Craig H.
Cincinnati, OH · Member since 2015 · 214 posts · 107 votes
10y
Tina D. Best of luck in your search. For that area I recommend locating and off market deal. Sounds like you live in the area. Start some streets that you like and target those specific properties. Also, have you thought about surrounding areas that may be the next Oakley? Just a thought... May get more for your money and in the long term if everything goes well it sets you up for that slam dunk property in Hyde Park or Oakley. One other thing I noticed from your post to be cautious of is just because a property is in a strong rental area does not mean you will have positive cash flow. Still has to be managed correctly and maintenance done correctly. I think every investor would love to own a rental in that area, but many of us have to start in neighboring communities and there's nothing wrong with that, we all have to start somewhere. Let me know if you need assistance with anything. I enjoy that area a lot myself if you would like to connect.
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
Originally posted by @Thomas S.:

Investors should not leave money dead and buried in a income property without insuring that the cash flow on the property is first paying a solid return on equity before considering the cash flow on the property. Many investors do not grasp this concept and believe they have a positive cash flow property when in fact once they apply a return to the equity they are left with negative cash flow on the property itself.
Bottom line is do the numbers and see if it works. Most will not.
Thanks for the reply, Greg! What resources do you recommend to "do the numbers"? I see that in a lot of blogs and books but not a lot of how to do that or what it actually means?? I have spreadsheets that I created to calculate what I believe the cash flow will be based on rental income and expenses, but I have no idea what I am doing yet. Any suggestions?? Thanks again!
0 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
BiggerPockets has a Tools section with calculators.
0 Reply
Adam Curry
Real Estate Agent · Cincinnati, OH · Member since 2015 · 156 posts · 42 votes
10y
The deals are definitely scarce in those areas, but they are there. A lot of the multi families that have been turning over in Oakley are way undervalued in my opinion. I got one of my new investors into a two family recently that was bringing in rents of 1400 and with the property as is they should have been bringing in 2000. Add some new counters, backsplash, tile, carpet and paint and I think 2300 -2500 was very feasible. Trick was we got it under contract with within 6 hours on the market which is pretty tough given the 24 hour notice all tenants are supposed to get. We were prepared to write site unseen based on property disclosures but the agent got us in luckily. We gave the sellers $5,000 over asking, no closing costs and nothing else to muddy the deal. Place should have sold for over $200k and we got it for $185k. Deals are there, just have to be ready and be quick. Agree with what others have stated as well, look into neighboring areas as well as the competition in those A neighborhoods is fierce and the returns are not as great in most cases.
Good luck moving forward Tina!
0 Reply
Steve D.
Investor · Cincinnati, OH · Member since 2016 · 34 posts · 53 votes
10y
Tina: I am a buy and hold investor, and have looked in Hyde Park/Oakley area for some time but the numbers just don't work nearly as well as in other neighborhoods which is why I have yet to buy anything there (esp Hyde park).
I don't want to make assumptions but it sounds like you don't have that much capital. If that is the case, those high priced neighborhoods are probably not the best areas to start in.
And this is the challenge of real estate investing -- finding off market deals takes time, and for someone with a full time job who is competing with those who do this for a living, it is extremely difficult. So you end up working with an agent, scouring the MLS or zillow to find deals. You have to realize that you will not get those killer deals with this approach -- it's okay, not all of us can direct mail and "drive for dollars". Ain't nobody got time for that! Especially with a full time job. Keep looking but I would recommend expanding your search territory, learn about other neighborhoods and you will eventually find that property. Just remember it's a learning process, your first deal won't be a killer deal, but you will learn from it and with each purchase you become a wiser investor.
Also, as soon as I find out there are multiple offers on a property I walk away. That is a red flag and sure way to buy a bad deal! The seller is in the driver's seat and you are roadkill in that scenario.
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
Originally posted by @Craig H.:

I think every investor would love to own a rental in that area, but many of us have to start in neighboring communities and there's nothing wrong with that, we all have to start somewhere.
Can you tell me more about this?? Why don't more investors start here?
I am so ready to start but I cannot find a property that feels like the right one. I found a house in Finneytown that is a 1 bedroom that I was going to convert into a 2 bedroom, and rent out, but I was afraid I wouldn't have renters....
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
Originally posted by @Steve D.:

You have to realize that you will not get those killer deals with this approach -- it's okay, not all of us can direct mail and "drive for dollars". Ain't nobody got time for that! Especially with a full time job. Keep looking but I would recommend expanding your search territory, learn about other neighborhoods and you will eventually find that property. Just remember it's a learning process, your first deal won't be a killer deal, but you will learn from it and with each purchase you become a wiser investor.
Also, as soon as I find out there are multiple offers on a property I walk away. That is a red flag and sure way to buy a bad deal! The seller is in the driver's seat and you are roadkill in that scenario.
Steve, thanks for the advice!!! Love what you said about multiple offers. Good to know!
I am open to other search areas, I guess I just don't know those markets as well because I lived in Hyde Park and Oakley for so long. How does one even find out how much rent you can get on a property??? I am so afraid of buying a place that I cannot rent out - how do you overcome that? I think that is why I was looking in HP/Oakley...I know I can keep it rented...but maybe that's not the best reason.
So much to learn :)
0 Reply
Sean Cole
Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
10y
Tina, I'll try not to repeat much of what's already been shared... Buying in HP and Oakley is tough because so many folks want to buy houses for themselves, for rehabs and for rentals. There's a ton of competition, which drives down the returns you can get. I recently purchased a single family house in Colerain Twp. for $23,500 and have put another $10,000 into it. It'll rent for $800-$850/month. It's impossible to find those kinds of deals in HP/Oakley.

I'd suggest taking a look at Norwood, Madisonville, Madison Place, and Fairfax as areas close to where you're located that offer better ROI and more opportunities. I recently sold a house to a customer in Madisonville for $36,900 that they're putting about $10k into and will rent for about $900/month.

Both of these examples were ones I found off-market, by the way. We spend a lot of time and money chasing these kinds of deals so that our customers who work full time don't have to.
0 Reply
David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Tina D.,
Because we're in a housing shortage now (partly why there's so much competition for multi-family property), you'll have no shortage of renters, certainly. It does, however, become a question of the quality of renter your properties will attract based on rents and location.
You do need to learn how to work up the cash flow numbers on multi's, yes. More importantly, however, you'll need to learn about tenant screening to protect yourself and your properties.
0 Reply
Steve D.
Investor · Cincinnati, OH · Member since 2016 · 34 posts · 53 votes
10y
Tina,
There are a couple ways to find out what rents go for in an area. One is by going on rent-o-meter and getting an idea from that, but the most reliable way is much harder and takes time and effort. You go inside house after house that is for sale, especially established rentals and see how much they are being rented for. For example, if you look at ten 2 bed/1 baths in oakley, you'll have a pretty good idea of what to expect in rent for a 2/1 in oakley. Same thing applies in other neighborhoods. If you are serious about this RE investing gig, you need to spend a lot of time looking at homes.
And if you are worried about finding tenants for your first deal, the safest approach is to buy an established rental that has tenants in place. That eliminates this anxiety for your first deal.
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
You guys are amazing. Thanks for your help.
Truth be told I am so overwhelmed. I have so much passion for this and have done so much research but still feel so unprepared to start. And honestly, the more I read about what kind of deal you need to get to get positive cash flow, etc., the more I think it is impossible. I used the calculator to estimate cash flow on this property I am looking at now, and it says about $200 cash flow after all expenses. Which is pretty good I think???? To start??? But I still don't see how I can ever get to my freedom number of $5000 a month. It just seems impossible. That is 25 properties! Or maybe that's how you get there, I don't know...
I know this isn't easy and I am not looking for a get rich quick. It just seems so...difficult! You guys are beasts.
0 Reply
Mario Brown
Investor · Greenville, SC · Member since 2016 · 163 posts · 108 votes
10y
@Tina D.
i have a very similar "seller's market" here in Greenville, SC. Inevitably you are going to overpay for your first property as your criteria will sharpen as you continue to do deals. You also won't have that itch to get your first property like we all have in the beginning. :)
One strategy i have is creating properties that will fit in the 2% BP Model. ( I am typically around 1.75% to 1.9%, its funny that the hotter and more expensive our market gets the better i have become at buying properties right)
The competition for homes that need extensive rehab is nothing like the bidding wars you are seeing in your market for market value, market ready properties. Look for properties you can add value to with some sweat equity. If you can do the work for cheap enough you can purchase/create properties with the type of 70- 80% LTV you are looking for.
Obviously this opens up a whole other can of worms (renovation and pricing upfits) but because you asked "how in the world are folks doing it," i wanted to give you my approach.
Fail forward, get creative on value add stuff that will allow you to charge more for and stay consistent however you are prospecting for property.
3 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Originally posted by @Thomas S.:

Purchasing generally has two aspects, positive cash flow and a exit strategy. It is not necessary to buy under market but is essential that you fully understand cash flow at what ever price you buy at. If you fully understand expenses, which most do not, and you have the proper rent to purchase price ratio then the numbers are all the matter.
However it is extremely common for novice investors to not understand the numbers and even experienced investors often ignore some numbers to inflate what they believe their cash flow to be. You must remember that cash flow has nothing to do with your expenses today they are all about long term expenses on a property, 5, 10, 20 years out. A investor that buys a fully renovated property may believe their expenses are minimal but the reality is their expenses long term are the same, relatively, as on every other property.
Additionally many investors conveniently ignore the value of equity tied up in a property. Every investment property generates two separate income streams. One is of course the property itself but the other, that is conveniently ignored, is the equity. Paying down a mortgage does not increase cash flow it simply shifts the flow to a return on equity. Money must earn it's keep otherwise there is no value in having it. To properly calculate cash flow on a property one must at a bear minimum base the numbers as if the property is 100% financed. As a property appreciates this must also be taken into consideration which is why rents must be continually increased. This allows a minimum return on the equity equal to at least the prevailing mortgage rate. However money is far more valuable today and realistically equity should earn a minimum 5% or better return.
Investors should not leave money dead and buried in a income property without insuring that the cash flow on the property is first paying a solid return on equity before considering the cash flow on the property. Many investors do not grasp this concept and believe they have a positive cash flow property when in fact once they apply a return to the equity they are left with negative cash flow on the property itself.
Bottom line is do the numbers and see if it works. Most will not.
This is very good, Greg!
What you are talking about, if I am not mistaking, is underwriting to the IRR, and possibly even discounting MIRR. This is, of course, the truest form of analysis, but it may be over the heads of most people reading, particularly the newbies :)
Nevertheless, good of you to leave a thoughtful response!
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Originally posted by @Tina D.:

Hello everyone, I am new to Bigger Pockets and the real estate investment world. I have been reading, studying, creeping on the forums, listening to podcasts, etc. for months am finally feeling prepared and ready to start on my first property. My strategy will be to buy and hold properties as I am looking for passive income.
HOWEVER....I cannot seem to find a property to start with. I am looking in a pretty specific area in Cincinnati, mainly because I know the area very very well, and I know it is a very strong rental market. It is also a hot area to buy so many properties are going into multiple offers or even above market value. So without cash (I will be financing), I am having trouble finding a good deal.
Is it not smart to buy a rental property at market value?? The rental market here is very strong, so I know I will have positive cash flow, but everything I have read says to go for 70% LTV only. How in the world do people do that? Really struggling with getting started...
Thank you so much!
Tina - what you need to understand is that there are different kinds of investing, which are driven by differing purpose for said investing. Hyde Park is for wealth preservation, not wealth or CF generation. It is for people who have a business or a very high-paying job, which throws off lots of highly taxed income. So - on the one hand these people have more money than they need, and on the other hand they stand to be highly exposed to taxes. So - they buy proven and very safe real estate to function as their storage of cash. They get minimum CCR, but that's not the point for them.
The reason you are struggling in this location is because you are not one of these people, obviously. You are looking to make money, not preserve it.
Makes sense?
2 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Thomas S.:

If you fully understand expenses, which most do not, and you have the proper rent to purchase price ratio then the numbers are all the matter.
I have to say there is no "proper" rent to purchase price ratio. You should see the rent growth and appreciation to determine profitability.
Also dead equity is definitely something that needs to be accounted for but you also have to determine WHERE that equity is coming from. If it is your down payment and the mortgage paydown then it is bought equity and should be earning its keep as @Greg S. says. But if it is appreciation equity then it is a part of profit and has already earned its keep.
0 Reply
Sara Eastler
Investor · Greenville, SC · Member since 2016 · 26 posts · 20 votes
10y
Hi Tina,
When you acquire your first SF rental, your true education will begin. Up until that point, I think the most important classes you can take revolve around the numbers - loans and financing, profit and loss statements, and learning to budget and run the numbers. The best advice I can give you is to get yourself networked as soon as possible to a real estate broker who is also an investor, and ask that person to recommend three lenders they've worked with. Call every lender. Understand their terms and fees for underwriting your future deal. You'll get a feel right away for how responsive they are, as well as what it would cost you actually, not "theoretically," while establishing your relationship with them. These people will end up being on your team and they'll guide you through the process. Real estate is not a profession that is done in isolation - it's done through cultivated relationships.
The way RE investors are able to grow quickly is because of the equity build up in our rental properties. As your renters pay down the mortgages, your net worth increases, enabling you to obtain better financing on your next deal or deals. I built up enough equity in my first SF homes to do a 1031 exchange into 10 rental units in under three years. The next time I acquire real estate it will be in the range of 18-24 units and so on.
Good luck. Persistence pays off in this profession and secondary markets are where it's at for beginner investors at the moment. Look outside of what you think you know to the secondary markets.
Best, Sara
0 Reply
Tina D.
OP
Cincinnati, OH · Member since 2016 · 12 posts · 6 votes
10y
Originally posted by @Ben Leybovich:

I see what you are saying. What types of areas should I be looking at for CF generation?
0 Reply
Christopher Smith
Investor · Middleton, WI · Member since 2016 · 10 posts · 6 votes
10y
Look for mismanaged properties and buy at wholesale. Wholesale is based on current income. Often times people who have a lot of equity with long term ownership get lazy and sit on the property as is. Look for ways to improve the property to increase the income. A BP podcast had just discussed this idea. Never underestimate the importance of property management to enhance value and increase cash flow.
0 Reply
Christopher Smith
Investor · Middleton, WI · Member since 2016 · 10 posts · 6 votes
10y
Remember: income property is different than purchasing a home. You are valuing the income flow not so much the building. The building is only as valuable as the income generated.
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Originally posted by @Tina D.:

Originally posted by @Ben Leybovich:
I see what you are saying. What types of areas should I be looking at for CF generation?
That's a million dollar question :)
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Ben Leybovich:
Originally posted by @Tina D.:

Originally posted by @Ben Leybovich:
I see what you are saying. What types of areas should I be looking at for CF generation?
That's a million dollar question :)
Nah! I'll sell it for $10.00 For cash flow look for rent growth. For profitability look for appreciation. Guess what? Appreciation markets usually have higher rent growth. Send yer $10,00 to your animal rescue.
So Tina, what did Hyde Park properties rent/sell for 10 years ago, 20, 30?
0 Reply
Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
10y
@Thomas S. for the win! I was very interested in the responses to this thread as I think it was a very good topic. I don't think Greg could have explained it any better and I really appreciate the sharing of that knowledge. I'm going to be referencing that response to every rental I purchase from here on out as I think those are very good points!
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