Buying house with a possible break even or negative CF

Buying & Selling Real Estate

Buying house with a possible break even or negative CF

Graham, WA · Member since 2017 · 33 posts · 10 votes

Hello, I am looking at one of the last options in my price range of a duplex in Auburn, WA. List price is 235,000. But rents are only 1390 a month. We are shooting for offering 215 and counting on raising rents to at least 1490 (one renter is M2M, other is term so I can't until term is up.)

Expenses

Prop tax 3171 annual

Insurance 400

Maintenance 10%

Vacancy 5%

Loan payment 871/mo

I'm getting nervous because by some calculations I will have a small positive cash flow of 20 to 100 but if I add anything else like utilities cost or if repairs are more than 10%, I end up in the red monthly.

This will be my first rental, but I will be doing the property managing too. Mainly because I could not afford a property manager with such a razor thin profit margin but also because I stay home with my 1 year old and want to help with income in some way.

Our real estate agent has brought up the point that we will be gaining equity. Also that we may be priced out of the market soon. Which looks very possible.

Any advice appreciated.

I'm trying to schedule with a financial advisor at my bank now

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Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes

9y

Here is the best piece advice I can give you. The math either works or it doesn't. If you try to flub the numbers you are only hurting yourself.

You ran the numbers with capex and maintence and were in the red. Full stop.

See this reply in the discussion

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Daniel Hughes
Oklahoma City · Member since 2016 · 26 posts · 7 votes
9y
Auburn, WA Duplex
List price: $235,000
////////////////////////////////////////////////////////////////////
INCOME
Gross Rental Income UNIT A: $695
Gross Rental Income UNIT B: $695
TOTAL INCOME: $1390
EXPENSES
Prop tax: $264.25 ($3171 annual)
Insurance: $400
Maintenance (10%): $139
Vacancy (10%): $139
TOTAL EXPENSES: $942.25
NET OPERATING INCOME (NOI): $447.75
DEBT SERVICE
Loan Payment: $871
TOTAL DEBT SERVICE: $871
CASH FLOW: -423.25
////////////////////////////////////////////////////////////////////
@Jayme Jahns
That negative cash flow is sketchy. @Jayme Jahns, I'm curious as to how you calculated a positive cash flow of $20-100?
0 Reply
Robert Hudson
Crossville, TN · Member since 2017 · 121 posts · 168 votes
9y
Jayme, please dont take this as a personal knock or anything like that. I know you are trying to educate yourself and make a good investment. Your approach and motivation to buy is a classic sign of a market about to implode. When people have an urgency to invest because they don't want to miss out and are willing to overlook negative cash flow, that's when the pros sit down and wait.
3 Reply
Brian Haase
Enola, PA · Member since 2017 · 12 posts · 3 votes
9y
Like they say, no deal is always better than a bad deal.
1 Reply
David Clinton III
Real Estate Coach · Coeur D Alene, ID · Member since 2013 · 458 posts · 295 votes
9y
@Jayme Jahns, you don't need to go out of state per se, but out of area your numbers could be a lot better.
Over here in Spokane, for $235k, I could wholesale you two separate duplexes from my portfolio, with total market rents of $2800. You'd be in a way better position with the cash flow.
3 Reply
Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
9y
Hi @Jayme Jahns,
This post is in response to your question about what is a 1031 Exchange transaction. The 1031 Exchange allows you to sell your current property and defer the payment of your capital gain and depreciation recapture taxes while avoiding the Medicare surcharge (Obama care tax) by acquiring one or more replacement investment properties.
Essentially, it allows you to defer the payment of taxes because you have remained fully invested by acquiring other rental property. This means that you can keep all of your money working for you instead of paying Federal and state income taxes.
It is a great strategy to get out of underperforming investments and repositioning your capital into other assets that you feel will perform better without getting hit with capital gain, depreciation recapture and the/or Obama care taxes.
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0 Reply
Kealoha Lee
Flipper · Juneau , AK · Member since 2017 · 18 posts · 6 votes
9y
I see quite a few DEALS being given thumbs up here. All i see is mediocre to darnright SUKKY deals being done.
Ex. a $300,000 duplex that bring in $2,300 a month with NO appreciationn potential is being HIGH FIVED to no end......................................lol.
0 Reply
Jayme Jahns
OP
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Daniel Hughes,
The insurance isn't 400 a month but none the less someone corrected me that 400 a year is wrong. It's 800 a year which would be 66 a month.
Here is how I calculated
Income 1,390.00
Expenses
Insurance 70.00
Mortgage w/ prop tax 1,033.00
10% vac 27.80
15% repairs 209.00
Total expenses: 1,339.00
1,390 - 1,339 = 50.00 (gain)
To change my estimation, I am planning on raising rent to 1490
Which would make gain at 150.00
But, I could be wrong in my math.
Either way I'm not feeling comfortable with this deal in case repairs up higher.
0 Reply
Jayme Jahns
OP
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Robert, it's not my approach. It's what my real estate agent said. But also true, we will likely be priced out. In which case I was considering out of state or nothing.
I wasn't overlooking negative cash flow. As my post indicates, by my math I presumed it could be break even or gain barely. But I was afraid, repairs could exceed my estimate.
Also, Washington state market may be different than your area as well unless you also buy out if state and are familiar with our area.
I think the real pros don't have to say they are pros imo.
4 Reply
Jayme Jahns
OP
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
David Clinton, I could be off base here but are you taking advantage of my newness to real estate investing?
I know that eastern Washington houses can have a hard time renting out and typically don't cost as much in general.
Either way, sounds kind of sketchy.
I didn't think advertising was allowed in these forums. Just advice.
But thank you, anyways.
0 Reply
Kealoha Lee
Flipper · Juneau , AK · Member since 2017 · 18 posts · 6 votes
9y
Sit back and look at your numbers. Your numbers dont cut it! WO appreciation potential you are buying a low return property with big downside risk.
0 Reply
Richard Elvin
Investor · Cleveland, TN · Member since 2016 · 279 posts · 187 votes
9y
@Jayme Jahns I agree with what most are telling you, personally I would walk. I would also question a realtor that's telling you "you'll get priced out of the market soon". It sounds, just my opinion, like they may be more interested in a sale than in what's best for you.
If the numbers don't work, the numbers don't work. As some have already pointed out, when the market is this tight it *may* be the sign the bubble is about to burst. For any investing, vs speculating, you need to think long term; ie, if the market lost 20% tomorrow how will you weather that storm? If the numbers don't make sense now they definitely won't make sense if the market has a correction.
Trust your gut, you aren't in "analysis paralysis", this just isn't a good deal per the numbers. Just my opinion, take it for what it's worth. :)
0 Reply
David Clinton III
Real Estate Coach · Coeur D Alene, ID · Member since 2013 · 458 posts · 295 votes
9y
Originally posted by @Jayme Jahns:
David Clinton, I could be off base here but are you taking advantage of my newness to real estate investing?
I know that eastern Washington houses can have a hard time renting out and typically don't cost as much in general.
Either way, sounds kind of sketchy.
I didn't think advertising was allowed in these forums. Just advice.
But thank you, anyways.
I'm absolutely not trying to take advantage. The market over here is just entirely different and I want to give you a true picture of how the numbers are. I hold ~60 doors here, and am happy to keep them; I didn't expect you to take me up on the offer. I'm just using it is an example of how much further them same money can go in different markets (if you're comfortable going outside of your area).
Personally, I'm not yet comfortable investing in areas I cannot drive to quickly, or I would be eyeing the mid-west for even better returns. But if that is something that sounds like it fits your goals, then this sort of thing could work for you.
I'm not sure where the idea comes from that eastern Washington houses are harder to rent out...? Our vacancy rate has gone from 1.6% last year to an absurd 0.8% this year. We can't hardly keep rentals empty.
In short, I'm not advertising my wholesales; I'm trying to be helpful by giving you a good and real picture of what is possible. You said you are running out of options in your area with the budget you have. My goal is to show you that you have many options when you begin to think about the problem differently.
9 Reply
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Jayme Jahns , I didn't see anything about your current financial situation. @Ana Marie B. bought one, but can withstand the negative months with her income. How would you be able to handle a vacancy of two months? If this would ruin you financially, then it isn't a good play.
What if the furnace, water heater and AC all broke in the same month?
Do you have reserves available?
Also, don't count on online estimates, they can be wildly inaccurate.
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Aaron NelsonBusiness Member
Real Estate Agent · Seattle, WA · Member since 2016 · 307 posts · 191 votes
9y
@Jayme Jahns
You don't necessarily need to go out of state. It depends on your criteria. I was just able to find a new investor a duplex that meets his goals and provides better returns than what you're getting here. My wife and I are closing on another duplex that provides very good returns in about a week. I do not say this brag, only to educate, encourage you to keep looking and get creative or partner with someone who knows how. Maybe you can expand your search area a little but that doesn't necessarily mean gong out of state.
I encourage new investors to invest in-state (or at least within a couple hour drive) for their first deal, if they can! There are certain skill sets needed to be a successful buy and hold investor. One is knowing how to manage renovations. Another is knowing how to build a team of compentant individuals. And the most important is knowing how to be an effective landlord, or if nothing else, how to manage/oversee a property manager and hold them accountable. Both of the later are tough to do if you not within driving distance.
Anyways, keep looking! You can do it!
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1 Reply
Aaron Christensen
Investor · Puyallup, WA · Member since 2017 · 16 posts · 11 votes
9y
I would be extremely nervous about buying on such thin margins. If you can't cash flow properly, it is not the right deal. Appreciation is great, but it won't pay the bills each month. If I were you, I would find a mentor to help you research and find a good deal. Your agent is doing you no favors there either. They are clearly more interested in their commission than they are in your financial well being. You might want to keep searching for a better deal
1 Reply
Travis Dawson
Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes
9y
Originally posted by @Jayme Jahns:

I know that eastern Washington houses can have a hard time renting out and typically don't cost as much in general.
Eastern Washington is a big area to make such a wide sweeping claim. In a small farm town sure. It could be hard to rent out a property. But Spokane is a city with a strong rental market.
0 Reply
Joe J.
Investor · Los Angeles, CA · Member since 2017 · 95 posts · 52 votes
9y
@Jayme Jahns I intend to buy more rentals in the future hat will most likely provide little-to-no cash flow. I don't look at cash flow as much as I look at total ROIC (return on invested capital). You won't find many 2% deals in high cost areas even when prices are "low". It is true that nobody really can predict what will happen but I plan on buying more rentals in a high cost/low-to-no cash flow area because of appreciation. I live in Los Angeles where there has been a pretty long history of strong longterm appreciation in both prices and rents. The rent appreciation will improve your cash flow over time and the price appreciation is what really generates that ROIC. Obviously market timing can become a significant influence on the short-term returns, but I'm betting that the long-term returns will be strong.
It's just a different strategy than just looking at current cash flows. NOBODY invests in places like San Fran, Los Angeles, Seattle etc for cash flow. Personally, I want higher total returns more than higher cash flow. Different strokes for different folks. Best of luck.
2 Reply
Travis Dawson
Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes
9y
Originally posted by @Jayme Jahns:

it's an older place, haven't gotten to see inside yet or do inspection. Zillow estimated 245,000 I think but probably not a reliable estimate since I'm looking at buying it now, knowing it's not a good investment even at it's list price of 235 being the rent would only being in 1390 total which is why I was gonna offer 215.
So, I wouldn't think it would be an easy flip at this moment if renting didn't work out. Also considering we paid closing fees and have to pay the heloc from the DP.
Sorry to invade this thread again but I just saw this.

You should be very, very, careful about using a HELOC for a downpayment. When people use a HELOC they are usually looking to purchase a whole house (or sometimes money for repairs after a purchase). Fix up the house, sell it, then pay back the HELOC in full.

By using a HELOC for the down payment you have no way of quickly paying that money back and will basically have two mortgage payments on your investment property that are both due every month.

I also believe you will have a very hard time closing on a conventional loan this way. Banks won't let you use borrowed money for the down payment (make no mistake, a HELOC is borrowed money). You could try to get around this by taking a HELOC and letting the money season in your account for a couple of months, but then your DTI will likely be beyond acceptable.
0 Reply
Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
9y
Just a note on financial advisers in general. If they are not a fiduciary they are not your friend. Fiduciaries are obligated to have your best interests in mind while other "financial advisers" for the most part are trying to sell you something that they will earn a commission on. Just something to be aware of.
0 Reply
Ike Hobbs
Investor · Wichita, KS · Member since 2016 · 133 posts · 63 votes
9y
Just a note on the location. That duplex is in a "bad" part of Auburn that is not trending anywhere good. Tacoma does have a poor history and still has "bad" parts of the city but all in all we're seeing a lot of improvement. Do some research into specific crime rates at the current time, not just an average of over 10 years or hearsay. Auburn has some really rough spots, even compared to Tacoma.
0 Reply
Heather Hearsey
Real Estate Agent · Seattle, WA · Member since 2016 · 34 posts · 5 votes
9y
I concur with the idea of looking at Tacoma and Olympia. I'm from Seattle and have family in Auburn and know that it is one of the slowest growing markets, there are actually still a lot of foreclosures that have been on market for over 500 days which is a bad sign in our hot market. Tacoma has made vast improvements in livability and reducing crime thus a lot of people have moved there to escape the high costs of Seattle (I know at least 4 families who have moved in the last year). I moved to Shoreline 3 years ago because of the prices and anything close to the new rail line is going to become even more desirable (my home has appreciated about 75%), look at places where there are major improvements coming down the pike, you may not make much right now but in a few years it will probably increase quite a bit. Good luck!
0 Reply
Robert Hudson
Crossville, TN · Member since 2017 · 121 posts · 168 votes
9y
if a property can't cash flow and you are buying it on anticipation of increasing value, you might as well buy stocks or lottery tickets.
2 Reply
Robert Plumpe
Wholesaler · Eastpointe, MI · Member since 2017 · 39 posts · 13 votes
9y
Try thinking of the deal this way...
If the numbers don't work for me, will they work for somebody else?
What would I have to do to get the numbers to work for somebody else?
According to your numbers, the property is only bringing 7.1% of it's purchase price per year in GROSS rentals.
Could you raise the rent? Good chance maybe? How much higher could the new rents be? 20%? Then revenue goes to 8.5% of the purchase price?
Everything on this property is banking on price appreciation of the property...but that is largely assuming that a potential new owner is going to accept a LOWER cap rate than the current one! OR that rents are going to up substantially in the future.
I know it is frustrating trying to get into your first deal...but be patient...it is FAR better to sit on the sidelines, waiting, WATCHING, LEARNING than to make a huge mistake, especially on your first deal using a tremendous amount of leverage. Don't do a deal just to make a deal.
If you think you have to move on a deal now because the market is going to "price you out"....that is what happened just before the big crash in 08. I would argue that is an indication we are getting near a market top.
I would pass on this deal. Bide your time and make a better deal.
0 Reply
Diogo Marques
Financial Advisor · Cascais, Lisboa · Member since 2015 · 199 posts · 83 votes
9y
This is a bas idea. Walk away and look for another one
0 Reply
Jayme Jahns
OP
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Travis, I get what you are saying and we didn't know that it could be so difficult to use our heloc as a down payment. Was it a bad idea to have paid off our home rather than investing all that money? We were told it was smart in saving us so much interest but now we no longer have liquid money unless we use our approved amount in our heloc. We have not taken it out yet, just have been approved.
Maybe there is another, more worthy investment we can look into. For now, I'm gonna back away from real estate.
Thank you for being honest and saying it in a polite way.
In general, this whole ordeal has made me lose faith in humanity, except for most of you on this forum who have given honest advice with nothing to gain.
We have had far too many people we have tried to get advice from that either have something to gain, and give bad advice or have nothing to gain so refuse to advise.
Aaron,
Thanks for clarifying on "financial advisors". I honestly didn't know who was or was not one I could trust. So, at least I will know for future reference.
I'm assuming that is someone I need to hire seperately? I'm going to look into the cost.
Isaac,
I appreciate your input on the area. My real estate agent said it was not bad but not good. I wasn't completely sure since we rarely go there. But the fact that it was described that way had me questioning it.
Heather,
I definitely didn't know that auburn was the slowest growing market and that is great advice to check how many and how long foreclosures have been sitting on the market.
Thanks to everyone for all the info and advice. And I appreciate the encouragement Aaron. Unfortunately this whole situation has been stressful and it's been very difficult to determine who I can trust in getting any true advice. My spirits are down in any hopes of continuing pursuing this.
I've had so many trying to profit from my potential loss, even had a family member that may have given me not necessarily good advice to potentially make money from me whether I lose or not.
Anyway, Take care everyone.
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