60k Prop or 100k Prop? Cash flow vs. Value

36 Replies

Seems to me when I look into buying a 60k house it comes with issues it's potentially on its last leg in a neighborhood that is consistent with the same issues in the same price point.

When going up to 100k you are getting basically turnkey and not much to fix up.

What do you think an investor should do? I'm after cash flow not appreciation.

@Michael P. For what it's worth, you can get a conventional mortgage on that $100K property. With the $60K property, you'll struggle to make a $50K -> $75K many financiers have as a minimum loan amount. Not to mention that costs like an appraisal, county transfer tax, title search, etc. (all of those closing costs) are largely similar regardless of if the loan is $50K vs. $80K vs. $200K. Basically, your cost-of-capital isn't equal.

Make money on the buy side. How about buying a 50k property, putting 25k into it, and ending up with a 100k rental?

Best I've done is buying a 4K property, putting 25k into it, and ending up with a 70k property that rents for $795/month.

Second best is buying a 22.5k property, putting 25k into it, and ending up with a 85k property that rents for $725/month

Account Closed Those are some great numbers. How much time would you say you personally put into each deal? Is this your main job or side job?

When it comes to Turnkey the key is to find a great team! Ideally you would find a company that has everything under one roof. Acquisitions team, renovation crews (fully licensed and insured), Property Management, and a Real Estate Investment Brokerage in case you ever decide to sell.

By teaming up with a solid firm you can mitigate your risk and have some "boots on the ground" that have your best interest in mind.

@Mark Hart

Deal #1 I bought last November and "did rehab" remotely from Denver with a property manager in place (her team manages another property I own). It was painful but it worked out. Property is up the road from you in Indiana.

Deal #2 I closed on last September (Friday before labor day weekend) and did the work myself here in Colorado.  It rented out in January.  I spent every Saturday & Sunday + 1 week of "vacation" working on the house (with the exception of a week I took off in November to go to Indiana).

This is a part time thing for me - investing through an LLC that is not registered to do business in Tennessee. I've seen a lot of opportunities in your area, but I really like the property manager and her team I have in place in Indiana and I've gotten together a pretty good list of who to see for what for future projects in that area.

Here in Colorado it's tough....it's either outbidding asking prices on homes in the Denver metro area, wishing I could put together capital to purchase a $1.2 million empty 43 spot mobile home park with a TON of opportunity, or investing in areas where houses are selling for $3,000 - $5,000 more than they were 10 years ago (not a very good proposition).

Strategy for the rest of the year is to close on two deals (I'm about 45 days away per the attorney) in Arizona, let things season, and see what I can drum up in Indiana or Ohio this Fall.

Account Closed Thanks for the information! I actually spent 2010-2017 in Denver studying at DU then working and the appreciation around my area was absurd! I'm shooting myself in the foot for not buying a place.

You have to understand that cash flow is not constant ... it changes over time. In markets, neighborhoods, and properties on their last leg, cash flow may start out very high but go down over time as prices and rents don't keep up with inflation so that eventually CapEx eats it all ... CapEx always seems to keep up with inflation, even though prices and rents do not always.

On the other hand, in a vibrant and growing community cash flow may start out lower, but is will go up over time as prices and rents exceed inflation, or at the very least stay steady as they keep up with inflation. 

So, even if you are in it for only cash flow, you still should care about and consider growth and appreciation ... those can be negative too. If properties are regularly selling turnkey on the open market for well below replacement cost (~$150 SF), then right off the bat you know you are dealing with a neighborhood with negative appreciation. Food for thought ...

@Michael P. , you ask a great question. There's a loan product out there that will enable you to purchase a distressed product for cash, do the necessary rehab to bring in up to a habitable/lendable level, and immediately pull cash back out of the property BEFORE you sell it.  

You'll find that this product is perfect for cash flow (and/or appreciation) depending on what you're looking to do.

@Michael P.  

You need to figure out your goals and your risk tolerance... You could do flips or rentals. You could go Single family, or multifamily. You could go low income or bread and butter... 

I own a property management company here in Indianapolis. I designed our systems around finding good tenants for low income houses. I manage rentals from $450 - $1900 a month. I have just as many bad tenants in high income houses as I do the low end ones. High end tenants are so whiney. "My LEFT shower door doesn't work.. Come fix it!"  "I pay a lot of money to have a shower door that works, so you get your butt out here to fix it.. NOW..."  Recently had a guy complain because there was three wire brad-sized nail holes above the fireplace...  Seriously?!?

As others have said you will have a hard time cash out refi'ing the lower income stuff. 

Just really depends on what you want to do. I prefer to have 2-3 lower end rentals to the 1 bread and butter, but that's just me. 

Originally posted by @Krista Walker :

@Ed E. I'm curious where you invested in Arizona?

I have tax liens in Pinal County (Eloy).  I am working on foreclosing on two liens this year.  It also looks like I will have 5 more to foreclose on next year if it works out.

Originally posted by @Michael P. :

Seems to me when I look into buying a 60k house it comes with issues it's potentially on its last leg in a neighborhood that is consistent with the same issues in the same price point.

When going up to 100k you are getting basically turnkey and not much to fix up.

What do you think an investor should do? I'm after cash flow not appreciation.

 How about a $85k prop? Problem solved

if you go for a low income tenant, pm becomes crucial. You won't make the pro forma on that investment, and lending is hard. In short, 100k is cash-flow, 60k is trashflow. Both may work well, see what works for you.

Michael,

You are right that in some markets a 60k does come with more challenges in clientele, others not as much. Most of the Midwest markets that we are in (OKC, Kansas City, Philadelphia etc.) appreciate 1-4 % annually but are very stable markets. I just got back last week from a routine meeting with our developers on the ground in Oklahoma City and saw many opportunities in the the 100k range. At this price point, you are in decent working class neighborhoods, and are able to cash flow on average $300-350 per/mo after "The Big 6" (mortgage, taxes, insurance, vacancy, maintenance, management) are fully paid. On average your'e seeing 12-15% cash on cash returns. You can also maximize your returns by placing yourself into a duplex or triplex in these areas. One of the other considerations that our investors appreciate and that we require for turnkeys is having all services in-house. Meaning our developers acquire the properties, have their own contractors for rehab, and manage the properties in-house. This allows a much higher level of customer service.

Kody, we do the SFH turnkey here is Tulsa and get 15-18% ROI. Buying the right house in the right neighborhood is key. And then not over-paying for that house. Got to be picky.

Your choices will depend on your goals and level of ambition to succeeded. The greater the risk always leads to the potential of the greater reward.

Simply a matter of choosing your most suitable option. Turn key or greater potential reward.

Hey Michael. You're basically right. But even more to the point...you can buy $60k fully-turnkey'ed properties, just as you can $100k. But in my experience, the $60k turnkey will absolutely come with more hiccups. I started buying turnkeys 6 years ago and have been working with turnkey buyers ever since, so I hear all of their experiences first-hand, and $60k properties definitely do come with more drama.

That is, of course, dependent usually on the market you are talking about. Right now, $60k in just about any [turnkey] market will have more drama. 6 years ago when I bought, for example, $60k was an expensive turnkey in a lot of markets. So it can all be relative based on where and when you buy, but you are correct in your assumption.

Where are you looking to buy?

As I've always stated, it all depends on your goals and objectives.  Mine is long-term cash flow for retirement.  Interestingly, I just reviewed the market values of all of my properties.  Yes, they have all appreciated nicely.  But, so what?  I do NOT want to sell them as they are golden eggs.  So, I don't care one whit what the appreciation is.  What I do care about is the ability to produce consistent and increasing cash flow (property that is desirable in a market/neighborhood where rents will increase over time).  Know your goals and stick to your knitting!

There are some decent properties in Philly in the $60-70k range actually. The ones I work with are now cash-only deals, no financing, but at least they are there so I know they are out there. Just depends on what you are looking for.