Is positive cash flow possible?
Hi all,
I'm new to this forum and have have a few questions I'd like to get your opinions on.
Situation: I'm interested in purchasing a 2 bedroom apartment anywhere in the US, which I would rent out over many years.
First of all, how accurate do you find Zillow rent estimates?
2. It seems most of you are adamant about having positive cash flow, but this seems nearly impossible in my browsing on Zillow in many areas across the country. As a heuristic, I'm using the conservative 50% monthly expenses rule. From there, if I'm not mistake, the rent would have to be more than double the mortgage payment for positive cash flow to occur. I'm not seeing this to be the case pretty much anywhere. Are my assumptions wrong, or am I searching wrong?
3. I understand that positive cash flow affords many benefits such as scalability of a strategy, and some risk buffer. On the other hand, can't equity through mortgage paydown provide a solid ROI after, say, 10 years, even assuming no appreciation?
Thanks for your response!
-Nick
Seattle, WA
You are correct in using your 50% expense assumption for general searches.
Yes, you should have positive cash flow. Rental income depends on the type of area. If there are more renters than owner/occupants, then rents tend to be high and property values lower. If more people want to own, rents are rather suppressed and property values relatively higher.
In an area where values are high and rental income low, the rental income sometimes barely covers your interest and tax payments. So you aren't getting enough to build equity.
If you own a property long enough, you will be making major capital improvements such a roof, HVAC, bathrooms, kitchens. You need positive cash flow to pay for those things or else they tend to eat a hole in your personal money.
There are some strategies in low cash flow areas to hold for appreciation. But losing money every month for 30 years until you sell something isn't investing. That's just a tax shelter.
You also have to consider, if you put cash into a place and have a negative return, you'd be better off putting it in index stock funds and having a positive return on your money.
If you look at house prices right now, many are right where they were 10 years ago. In some cases, 20 years ago. So you can't bet on appreciation.
Thanks Christopher. 4 months later, countless iterations on my financial model, and after lots of research, your reply has become increasingly helpful.
Whatever property you're looking at on Zillow, remember that it got onto Zillow from the MLS, byowner.com or some other source. You CAN find distressed property that way, but it's not the easiest way. Off-market property is the better target.
You need to be looking for property which can be acquired BELOW market, yet still take needed repairs, holding costs, closing costs, other expenses and your desired profit into account. For buy-and-hold, the profit part is probably flexible.