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
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
That same value can be had by a GOOD investor friendly agent, but you're forgetting the person you're recommending go be an agent is just starting out. She needs to learn how to evaluate a deal before she considers being an agent to go find deals. Let alone paying 200/mo to get early access on deals (which she hasn't even implied she's looking to do multiple a year).
She might learn some stuff that will help her become an agent if she wanted as she learns about investing, but investing should be her focus, not becoming an agent.
That same value can be had by a GOOD investor friendly agent, but you're forgetting the person you're recommending go be an agent is just starting out. She needs to learn how to evaluate a deal before she considers being an agent to go find deals. Let alone paying 200/mo to get early access on deals (which she hasn't even implied she's looking to do multiple a year).
She might learn some stuff that will help her become an agent if she wanted as she learns about investing, but investing should be her focus, not becoming an agent.
Oh yes that too. I did have about roughly 6-7 months of evaluating deals everyday or every other day before I started taking classes. She should probably also wait a little while before she becomes an agent. Once that time period is over, there's no real right or wrong answer. Some agencies charge only $150 or even $125 if it's a small time company.
Drums, PA · Member since 2015 · 15 posts · 0 votes
9y
Probably the most basic reply. If I was renting and the landlord raised my rent by $100, I would be moving out. That increased rent is not a small amount, to me anyway.
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
9y
Me to has said
"How many properties can you buy with negative cash flow"
"Then, how many can you buy with positive cash flow"
If you have to force the numbers or guy says no, walk away. Cheaper to walk away now
There will be others
View 100, offer 10, buy 1
Keep going
Probably the most basic reply. If I was renting and the landlord raised my rent by $100, I would be moving out. That increased rent is not a small amount, to me anyway.
This is why I am incredulous about a lot of these "value add" deals. 99% of the time, if the value could've been added so easily, then why doesn't the current landlord just rent it out for a higher price then what he/she is charging now? Unless it's a distressed property that needs renovation and rehab, and would certainly justify a higher rental price after its fixed.
Raising rents by $100 or even $50 a unit is a big deal. Usually what happens is a realtor will tell an unwise investor "yeah you can raise the rent from $700 to $850 a month". Then when the new owner tries to do just that, the renters move out, and the property sits vacant for months because it turned out that $700 a month really what the market is willing to accept. Maybe $725, but not even $750
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
For the rent price, if it was increased by 100, and the renter wanted to move to a lower price place, they would likely find it is still the lowest price in that area. 695 was very low.
But on the flip side, I suppose it's possible that it could have been hard to keep it rented at the price.
My original thought on rent prices with current long term tenants has always been not to raise the rent and keep the long term tenants happy.
But that is not fully realistic long term. You would need to raise rent eventually depending on a number of rising costs over the years. Otherwise all rents would never change and we would still be paying 5 cents for a gallon of gas and 50 dollars a month for rent. Funny enough, median rent in 1950s was 600.
When costs increase, that does affect rent. If a renter doesn't agree with that, they are welcome to look elsewhere only to find rents are increasing everywhere.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
As for becoming a real estate agent, that might be practical one day if I'm rolling in the cash money for investing. Which I could validate the 200 a month cost versus cash flow I would gain in investing.
It sounds like a smart plan for someone that does have quite a bit experience and the funds to pull it off.
From my perspective, I have very little interest in representing clients or being a broker. I'm not a natural seller and dealing with people is not my thing. Which is why I would like to hire property managers if i have the cash flow for it. Which I will hold out for until I do.
I'm more of the hang back and work independently on my own, type of person. I'm creative and like just sitting at my PC and working on my CG/animation/digital art skills.
This whole real estate business is not a long term career goal but more of an investment goal. But even being that, I have to be educated in it enough that I know what to invest in and when. Which is why I've been devoting so many hours to studying the market recently. But, it's hard to learn some elements unless you have already been in the real estate investing game.
That's where you guys have helped me fill in the gap on that knowledge you gain from just being in the game.
As for becoming a real estate agent, that might be practical one day if I'm rolling in the cash money for investing. Which I could validate the 200 a month cost versus cash flow I would gain in investing.
It sounds like a smart plan for someone that does have quite a bit experience and the funds to pull it off.
From my perspective, I have very little interest in representing clients or being a broker. I'm not a natural seller and dealing with people is not my thing. Which is why I would like to hire property managers if i have the cash flow for it. Which I will hold out for until I do.
I'm more of the hang back and work independently on my own, type of person. I'm creative and like just sitting at my PC and working on my CG/animation/digital art skills.
This whole real estate business is not a long term career goal but more of an investment goal. But even being that, I have to be educated in it enough that I know what to invest in and when. Which is why I've been devoting so many hours to studying the market recently. But, it's hard to learn some elements unless you have already been in the real estate investing game.
That's where you guys have helped me fill in the gap on that knowledge you gain from just being in the game.
well heres the thing - you don't have to do any work at all as a real estate agent. you could pretty much never show up to the office and that's perfectly fine, as they get to collect their franchise fee each month. now some places, you can get in for just $150 a month or even less. and if you only want to stick with them for like a year, then youd only pay like $1,750 total for the year, and just quit the office and tell them you'll come back some other time (which theyll be ok with). the amount of knowledge youll gain from playing around with their sophisticated MLS program is really cool.
i really believe that becoming an agent for 18 months gave me a huge advantage, as the majority of people in Ocala are country bumpkin simpleton type of people, and the investors with money were commonly people from out of town or out of state. pick your battles and battlegrounds wisely.
as far as "networking" goes, i didn't really form any relationships in particular with anyone that i didnt already have. i had a manager who was actually silly, but smart. some offices have this snobby attitude from some of the agents who think they're all that because they are the #1 in the sales office, and some are laidback and cool. our manager was a cool and laidback guy who was willing to help with anything. there was also this funny older lady who would always be on the computer playing solitaire in the afternoon whenever i happened to arrive at the office. should you decide to join an office one day, be sure to take a few minutes to scout out the place and see if its got the right kind of environment for you. id avoid the cutthroat type of offices, but in the end it doesn't matter as much as you think cuz youll mostly be at home.
Real Estate Agent · Seattle, WA · Member since 2016 · 65 posts · 29 votes
9y
It is always a trade-off, isn't it? Buy a property in a nice area that you hope will appreciate, or buy a property that isn't in the greatest area, but gives you cashflow each month. Maybe you can get both? It might take some time, but it can be done.
On the deal you mention, the numbers look a little low to me. Have you used the BP rental calculator? Easy to use and gives you excellent analysis. I think you can do better. Some more cash flow helps when you have those unexpected repairs. It is always good to set aside some $ for capex. That being said, $235K is the price range you can afford, so Auburn may be the area you have to shop in. Nothing wrong with Tacoma, but the price will be generally higher. For instance, I evaluated a fourplex there (MLS #1156718) for $359K that could cashflow almost $500/mo. Again, that is more than you can afford right now, so looking lower in Auburn is a good strategy.
Stick to you price point and see if you can find something that is bringing in more cash each month.
Investor · Bangor, ME · Member since 2017 · 8 posts · 5 votes
9y
I agree with @Travis Dawson , if there is not a gap between your expected income and costs that you are comfortable with, then it would not be prudent to invest.
It is always a trade-off, isn't it? Buy a property in a nice area that you hope will appreciate, or buy a property that isn't in the greatest area, but gives you cashflow each month. Maybe you can get both? It might take some time, but it can be done.
On the deal you mention, the numbers look a little low to me. Have you used the BP rental calculator? Easy to use and gives you excellent analysis. I think you can do better. Some more cash flow helps when you have those unexpected repairs. It is always good to set aside some $ for capex. That being said, $235K is the price range you can afford, so Auburn may be the area you have to shop in. Nothing wrong with Tacoma, but the price will be generally higher. For instance, I evaluated a fourplex there (MLS #1156718) for $359K that could cashflow almost $500/mo. Again, that is more than you can afford right now, so looking lower in Auburn is a good strategy.
Stick to you price point and see if you can find something that is bringing in more cash each month.
The "both" places you're talking about, where you can get both appreciation and cash flow are the best for me and my kind of profile.
I feel like they only exist in certain, small, niche, particular markets in the US and there aren't a ton of them. Would highly recommend these places to a newbie investor because they offer the best of both worlds, and different exit strategies 3-5 years down the road when they might not want to hold for cash flow anymore.
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.
... snip...
@Jayme Jahns,
Good evening! I am reading this thread with rapt interest! Thank you for reaching out for advice. I find it very informative for myself. I am still reading, and haven't gotten to the more recent stuff (this post of yours is 3 days old), but I wanted to comment.
I am a newbie to real estate investing, but not to financial matters. I have a master's degree in finance, several years of financial management, and I am working on my cpa license.
This analogy might help you and others reading this thread. Cash flow real estate investing is like buying blue chip stocks that pay dividends. You want the dividend check, not necessarily the appreciation of the stock. If you leverage your investment (like getting a mortgage) then you are essentially using other people's money, paying them for the use of their money, and keeping the rest for yourself. This increases the return on your investment. Flipping is a different strategy. Instead of buying blue chip stocks, you go for the big play, and don't pay attention to dividends, since you won't hold the stocks for very long (think about Jim Cramer on Mad Money).
Of course, you can mix the 2 strategies together, but they are not the same thing. Your original post implies you are uncertain about which strategy to rely upon (cash flow or appreciation). The housing market has ups and downs, too -- just like the stock market. A lot of advice on here is centering on you choosing which strategy works for you. Remember 2008? Lehman Brothers -- a big hedge fund that used the big play strategy -- used other people's money (leverage) to bet on a big play. It went very badly for them. People on this thread are essentially pointing out that a big play (appreciation) could go very badly for you, especially given the fact that your leverage is tied to your home -- your HELOC.
Now, with that being said, my advice is not specific to the real estate market, since I'm a newbie to REI, but I hope it helps you understand your situation.
One final comment: it is my belief that you don't need to hire a financial advisor -- fiduciary or otherwise. By saying this, I've probably already offended a bunch of people, and I just joined the forum a few days ago! lol. But my point is, if you rely on someone else to tell you how to run a business, then who is really running the business?
The best thing for you to do is educate yourself, and I recommend you start with the small business development center in your area. here is a link to the Washington sbdc... http://wsbdc.org/training/
In my area, the sbdc has free training on cash flow analysis, tax, investing, financing, and tons of other stuff like this.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Thanks for your input Wes, I understand what you are saying. I know not to rely on appreciation now after talking to many investors. I guess my main issue with this property is I'm afraid my math will be off. If my cash flow is fairly low, would my repairs run over and put me in the red? The answer I got was more than likely yes, do not buy a place with such little cash flow that if your repair estimate is off, you can lose money. The only other issue being the prices in Washington state are very high so it is very hard to find a place with a CAP RATE of even 6 or 7. But, in response to that, I have been told to wait it out. There is no telling when prices will come down again, it could be 3, 5 or 10 years from now but I still have money I want to invest so I can make money during those years.
So, I'm doing two things right now, waiting out some of the higher priced places to drop in price that have been sitting on the market and looking out of state in Texas. Out of state, being more complicated. I'm trying to avoid it, but Texas prices and rents offer atleaast double the cash flow than here.
Anyone have any thoughts on these areas?
I'm looking at Austin, killian, and fort worth. Also San antonio, I hear is a good area for renters near military base. You always have renters.
Investor · Raleigh, NC · Member since 2016 · 28 posts · 3 votes
9y
@Jayme Jahns HI Jayme, without knowing anything abut your area and just going on the #s alone, I would not do this deal at all. First of all, cash flow on this property razor-thin. Also, since the property is listed you are most likely getting the property close to FMV. That means if there were a dip, you would have negative equity. The real estate market is at a high currently compared to what it has been, so you would have to rely on increased appreciation.
By leveraging the entire purchase, you mean borrowing, then yes. Technically
We decided on paying off our home to save interest rather than keeping our mortgage and investing elsewhere.
Then later, decided on pulling out money for an investment home.
Which means, you should NOT have paid out your mortgage after all! I hope you're letting that lesson sink in. While you were so busy putting every last dollar into getting out of "good" debt, all your LOCAL alternative investment opportunities have just kept getting more and more expensive.
BUT, that doesn't mean that you can guarantee extrapolating the appreciation of the last 7 years into the next 7 years!
Especially if leveraged at 100%! (Yes, I know that adding your primary and this ONE investment, it's <50%, but still)...
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Brent coombs,
Get off my discussion. Your not even correct or helpful. I talked to a financial advisor who told me there is nothing smarter than paying off your home and NOT paying the obscene interest over 30 years.
At least I have my house paid off at my age. That's more than I can say for most people my age.
Don't come on here to post bitter, useless comments.
Why don't you learn a hard lesson about being a internet troll on a professional forum.
And every other professional on here has said the market varies all the time so it's just as easy to wait it out until it drops again.
Rental Property Investor · Austin, TX · Member since 2016 · 361 posts · 394 votes
9y
To offer an alternative viewpoint - paying off your mortgage isn't a bad thing necessarily, but I see it as a recipe for average results. Consider the APR on your mortgage is 3, 4, maybe even 6%. I know I can beat 6% all day every day. By giving that cash back to the bank (de-leveraging), you no longer have it available to you. Now if you want to access it, you either have to refi, or open a HELOC, neither of which is as efficient as keeping the original debt would have been. Ultimately it's up to you to take the actions that move you closer to achieving your goals. Personally, I wouldn't pay down my mortgage early. My $.02.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
Please explain how it's not smarter to invest money if it out performs your debt?
You're young, this house probably won't be the home you live in forever. Paying it off early isn't good or bad but it changes the capital you have available. You could of done something different with that caital..but now you need new capital.
Probably the most basic reply. If I was renting and the landlord raised my rent by $100, I would be moving out. That increased rent is not a small amount, to me anyway.
It completely depends on the market rent relative to the rent you are paying and the supply and demand of rental properties in your market. If you are $200 below market and the landlord raised your rent by $100, then you would be foolish to move out. In a market where there is severely limited supply of rental housing relative to demand, if you have a nice place to rent that the landlord raises rent by $100 to the market rate, then you would not likely want to move out then either. If it is in a market with an abundance of rental housing to choose from and not as many folks looking to rent there, then yes I agree by all means move out and find another place if your landlord raises $100/mo.
I myself raise my rents each and every year of the last 15 years I've owned some of the properties by well over $100/mo, just to keep up with the market rental rates ... know how many tenants I've lost because of it? ZERO ... rental housing is in very tight supply relative to the demand in my market, which is one of the reasons I like to invest here.