Cash-flow in North Atlanta area - "Too low - don't get that!" ??

47 Replies

Thank you so much again to all those who were so kind to answer our question on the 15 vs. 30 year mortgage. 

We would like to ask one other question - this time regarding cash flow .

We've been searching for 2-3 months unsuccessfully, having lost a couple of properties to other buyers who managed to snatch them quicker. We are now trying to figure out whether we should change our strategy in any way. 

Our question is: what cash-flow level should we consider too low for North Atlanta area and - therefore skip the property?

Some background information:

- We are beginners, looking for a first-time rental. 

- Two busy professionals with full-time careers and children - NOT LOOKING to do this for living, at least for a while.

- Not spring chickens (mid 40's and early 50's respectively). 

- Upper limit budget for our first rental: 150,000

- We can put up to 60,000 cash down payment.

- We have been cautious with properties in areas that are clearly not so ..."A"...because we feel more comfortable investing in a place that looks like it would attract responsible, reliable, financially solvent tenants. This beginner-type apprehension has made us look mainly at 1 BR 1Bath condos (small) in nicer communities. Trouble with these is that they have high HOA-s which eat into our earnings.

- We've looked at some B properties too (townhouses included)...but whatever passes for B around here still doesn't feel really comfortable to us.  I've seen some B-s that made me say "I'd hate to see what a C looks like." Maybe it's an Atlanta thing, I don't know.

- When we run numbers carefully, including all expenses (which include a property management fee!), it looks like we will be lucky to make a 100-150 cash-flow with a 15 year mortgage, and 200-250 on a 30 year mortgage. Is that OK for a 50,000-60,000 investment?

This may appear rather small to other investors but we are trying to minimize risk. 

Our expenses include a property management fee because we are really busy with careers and children and we'd rather have help with our first rental. Once we see how this is going, and if it's going well, we may consider taking over the management later and increase the cash-flow. 

Given the above factors, what would be the threshold where you would say "your cash-flow is too low - don't get that property!".

Thank you so much!

@Cristina S. , $2,400 net cash flow per year ($200/m) on a $60,000 outlay, equals exactly 4%. Are you getting better than that already? (My guess is: no). So, depending on how "A" your investment location and condition is, that might be considered an ok investment. Or, not.

If you decide "not", and others decide "ok" - then it'll be situation normal: you'll miss out again! The thing is: others should not be making your decision for you.

Just know that every "A" property you look at, you're not only competing against "4% is ok" Investors, you're also competing against: owner-occupiers, who care even less about %! My 2c...

My husband says we should also take into account the mortgage being paid off. We're not doing this just for cash flow. Besides, we have that money in a savings account right now which the bank insults with less than 1%. 

So I guess a 4% cash-flow + paying off a mortgage should be "a deal"; or else, as you said.. others will be just fine with this because it looks like most of these MLS listings fly off the shelf.

When we started this a few months ago, we didn't expect to find such a SELLER'S market. It' way more "seller's" than we thought! 

In fact, it makes me mad when I see how these listings now fly off the shelf in a matter of hours...and we went through H*ll when we were trying to sell our townhouse in 2009...for two years in a row, only to end up with major losses.

It would be nice if we could find ourselves, at least for once, on the right side of the divide. 

@Cristina S. , arguably, it's super-conservative Investors such as yourselves that help to worsen the divide between neighborhood gradings. Your (collective) decision to only look for super-safe "A" properties means that "C" neighborhoods don't even get a look in, which then becomes a self-perpetuating cycle of: less-money-for-C-areas, = less-money-for-upgrades, = lower street appeal, = lower-income Tenants, and before you know it, it's suddenly a "D" neighborhood!

Then, it takes a brave series of Investors to take a closer look, and try to start re-gentrification. At the end of the day: they are the ones who deserve to make it big in Real Estate! 

So yes, 2017 is a (relatively) terrible time to be entering into "A" Investing, expecting to be able to buy low, sell high. Who still succeeds? Seasoned Flippers, who have the time, money and skills to buy the worst houses in the best streets. You know that mantra, right?  Anyway, good luck. 

So you would suggest that we change our strategy and get a bit bolder by looking at B, even C strategies?

It is not a "less-than-perfect" looking building that puts us off - that can be fixed. It is a sketchy neighborhood that seems to include individuals who could easily pull one on you; also one that over time, would go down and become an actual slum...with anybody decent moving out.

How do you navigate THOSE waters? Do you just take the risk?

Originally posted by @Cristina S. :

So you would suggest that we change our strategy and get a bit bolder by looking at B, even C strategies?

It is not a "less-than-perfect" looking building that puts us off - that can be fixed. It is a sketchy neighborhood that seems to include individuals who could easily pull one on you; also one that over time, would go down and become an actual slum...with anybody decent moving out.

How do you navigate THOSE waters? Do you just take the risk?

 I'm not going to enter that debate. You are the one who must decide Risk vs reward!

But for light reading, BP is full of threads debating cash-flow vs appreciation.

It's most common for BP responders to say: I must go for good cash flow, but I also want increasing value.

But then they seem surprised when it's not so simple to decide: invest here, but not there.

So then they ask BP: Help, should I invest in this spot? And BP replies: No, but 1 block over is wonderful!

But, why is that block is so expensive, and this block so cheap? 

Well, apparently it falls just outside a particular school zone, or, has been taken over by a gang. Or...

So, if local investors find it hard navigating, spare a thought for all those out-of-state Investors!

Who's going to tell them the low down? Trouble is: everyone has their own agenda. Buyers, Sellers, Agents...

Also, you said " expecting to buy low and sell high in an A neighborhood".

We don't expect that because we wouldn't want to sell any time soon. This would be for "buy and hold" which we feel it is better than getting less than 1% from the bank when kept in savings or from the stock/mutual funds/REIT-s/ whatever market. Someone said - "park the cash".

I agree that bold investors who go into C-D neighborhoods deserve all the extra money they make because...yeah, as old Southerners say...bless their hearts.

But that kind of stuff is done for a living. This is what those people DO.

With our 2 full-time careers and 2 kids - we'd rather not battle it out in C-D neighborhoods. 

But we still want to add a little something to our assets over time instead of just EXCLUSIVELY relying on employer pay (and their pats on the back).

Just looking for a sweet spot...and we wonder whether this can still somehow be done via a non-aggressive approach with an agent and the MLS.

I keep trying to educate myself on how people get "deals" off-MLS but it is a fuzzy maze. Court auctions, findings "leads" (what in the world is THAT?), driving for dollars, befriending attorneys, finding wholesalers (where are these guys??, attending meetings), etc.

It sounds like a mystery career that you dedicate most of your time to and we just can't do that with our our current careers which are not quite that horrible that we would want to run away from.

We almost gave it up altogether last evening when my husband said I am insane to think that we could get anything more than a 200-250 cash-flow (on a 30 year mortgage).

I told him people here say it's risky and very low cash-flow but he says we don't have time to find the deals of a lifetime by "driving for dollars" etc.

Question is - is 200 cash-flow too risky on a 50,000-60,000 investment and a 100,000-130,000 property?

Thank you so all much again!

@Cristina S. , instead of "expecting to buy low and sell high", I could have said "expecting to buy low in an arguably over-heated 2017 market".

Aah, yes, finding "the sweet spot"! We all need good luck with that! Cheers...

We would be willing to pay the asking price - so we wouldn't exactly expect the seller to give us a low price straight off of MLS just because we're special.

Trouble is we'been told here on BP that a 200$/mo cash flow on a 30 year mortgage is officially bad because everything in the house and its mother will break and then we might even go in the negative.

My husband says this is not true and that we should be fine with a 200$ cash-flow... and I don't know what to believe. 

This is the conundrum. :-)

Originally posted by @Brent Coombs :

But then they seem surprised when it's not so simple to decide: invest here, but not there.

So then they ask BP: Help, should I invest in this spot? And BP replies: No, but 1 block over is wonderful!

But, why is that block is so expensive, and this block so cheap? 

Well, apparently it falls just outside a particular school zone, or, has been taken over by a gang. Or...

So, if local investors find it hard navigating, spare a thought for all those out-of-state Investors!

Who's going to tell them the low down? Trouble is: everyone has their own agenda. Buyers, Sellers, Agents...

Oh, that is so true! 

We went through a situation like this recently. We had seen a property in an apparently good community a while ago and lost it to a quicker buyer. Then something else came up just one block up, same type of buildings based  on pictures - spot on. Son we wanted to make an offer site unseen but listing agent said "no, see first".

 And sure enough...it was a very different vibe that what we thought we were going to find. It was not like the first community we had seen.

I WILL spare a thought for out-of-state investors but goodness, this is hard even being a local and THINKING you know the area (you don't). 

Why would anyone want to do out-of-state...by themselves?

With 50-60k you might want to consider buying a fixer upper and building some equity with the renovation. You’ll need a hard money loan of course. Your exit strategy #1 is to flip the house and learn a lot about a new neighborhood. Exit strategy #2 is to refinance into conventional loan and cash flow, while having built in equity.
Lots of factors in all of this but no better way to build some experience. I own properties all over Atlanta and it will be tough for you to compete on screaming deals with conventional financing on listed properties.

Another option would be to contact some turnkey companies and agree to buy the property once tenant is placed and turn key. You’ll basically pay retail but for an investor that is already flipping the home it’s a win win. They find a buyer and you find a great house.
Couple of 2/1 in and around parts of Smyrna that would work well. Appx 150k purchase with $1300-1400 rent.

Originally posted by @Brad Campbell :

Another option would be to contact some turnkey companies and agree to buy the property once tenant is placed and turn key. You’ll basically pay retail but for an investor that is already flipping the home it’s a win win. They find a buyer and you find a great house.
Couple of 2/1 in and around parts of Smyrna that would work well. Appx 150k purchase with $1300-1400 rent.

Brad,

Would it be possible for me to PM you?

Investing 60k and getting a return of 4 percent is generally considered a poor return. Even when being conservative you should be looking for 8 to 10 percent, ideally 15 percent and beyond.

There’s nothing wrong with investing in A neighborhoods but to simply not even consider anything else is probably not a good idea. “A” neighborhoods are good in theory because you think the tenants will be better, which is generally true, but it’s not without other “issues”. In A rentals your tenant base could often be homeowners and will likely eventually leave to become homeowners. Also your tenant pool will be smaller since your rent will be higher.

Personally if I was paying 1200 (or whatever your rent would be) I’d leave pretty quickly to go buy my own house since my mortgage would likely be substantially less than that.

There are still plenty of areas sub 200k that can be decent investments in B neighborhoods.  Gwinnett County has good options for townhouses that don't necessarily have rental caps and Smyrna & Marietta have areas where single family homes can be had for decent rental returns.  I have one off market at the moment but it is $175k.

Originally posted by @Caleb Heimsoth :

Investing 60k and getting a return of 4 percent is generally considered a poor return. Even when being conservative you should be looking for 8 to 10 percent, ideally 15 percent and beyond.

There’s nothing wrong with investing in A neighborhoods but to simply not even consider anything else is probably not a good idea. “A” neighborhoods are good in theory because you think the tenants will be better, which is generally true, but it’s not without other “issues”. In A rentals your tenant base could often be homeowners and will likely eventually leave to become homeowners. Also your tenant pool will be smaller since your rent will be higher.

Personally if I was paying 1200 (or whatever your rent would be) I’d leave pretty quickly to go buy my own house since my mortgage would likely be substantially less than that.

Caleb,

We have been looking for 2 months on MLS with an agent and there is NOTHING that could bring us remotely close to a 10-15% return on investment - if you consider the monthly cash-flow the ONLY return on investment there is.

No matter how carefully we run the numbers, we can't' seem to get more than 250$ cash-flow after all expenses are paid (including mortgage!).

Husband says I look at this all wrong because we also get to have our tenant pay off the mortgage - and this is part of our return on investment, not just the cash flow. When it's paid off - we'll have a lot more cash-flow. So with that, the return would be significantly more. 

Is he correct? 

When BP people talk about "return on investment", do they mean just the monthly cash-flow or the cash-flow PLUS the money that goes into paying off the mortgage (principal)?

I am confused - and when  talk to BP posters or my husband, we  may not be on the same page with the terms used.

As for property types...no, we didn't limit ourselves to A-s. In all honesty, I think my perception of A  and what my agent says it's an A/B/C etc...is rather different.

Based on what I have seen, true A communities can hardly be invested in because they have huge HOA fees, renting restrictions, and overall, they look like picture perfect, sparkling little gems. We haven't really looked at any such communities. You;re right that no one in their right mind would continue to pay such high rents as soon as they can become home owners. And they always do - because mommy and daddy, at the very least, step in.

But I have looked at some that my agent was calling an A when I saw those as clearly B-s and some B-s that I thought were clearly C-s.

These labels appear to be very subjective. 

I seem to have some personal bias going...as I remember reading a comment on a forum about the very neighborhood we live in. Someone called this community "an upper class" community - and my very first thought was "if this is upper class, then I'd hate to see the middle". The poster answered that the housewives of this neighborhood would be offended to hear they are not perceived as "'upper class". Ha, ha! Looks like not by me, at least. :-))

Typically I believe when someone says Cash on Cash return they simply mean net cash flow divided by total cash invested. Your “true” return would be higher if you also include tax savings and mortgage pay down.

From what you said your first issue is probably looking on the MLS only. Does your agent work with investors or are they mostly a residential agent? If they don’t work with investors that could be an issue. You may also want to look into networking or trying to find off market deals.

If you don’t want to do those things, you could always invest out of state. I knew I lived in a competitive market and didn’t want to deal with that so I went to cheaper markets that weren’t as competitive. Of course this enters other challenges.

Also to be clear 250 a month cash flow (assuming SFR) isn’t that bad. That’s pretty close to what I get on mine. The difference between your situation and mine is your amount of cash invested to get that would be much more than mine, hence why your cash on cash return would be lower.

60k when leveraged in other parts of the country will buy you a lot of property.

Caleb,

Thank you so much for clarifying. I am so sorry, I am a bit of a pathetic rookie and I am still learning the lingo.  "Cash-flow" is different from overall return on investment. So then, that would be more than 4%.

That would be more like 650 a month + tax savings for a 50,000 investment.
  

We would really want to start with a property around here and not leverage TOO much. That's North Atlanta which means not so cheap. 

This is why we would like to put 50,000 down. Leverage only 60,000 or so. Pay it off faster, get feet wet, see how this business works. 

Get 250$ or so cash-flow for a 30 year mortgage and hope things won't break at the rate of 3000/year. 

In the meantime, save some more - and in a couple of years or so perhaps get more aggressive and buy several at once. 

We have zero networks - other than our agent and our lender. 

She was recommended to us by the lender to buy an investment property. 

Not sure how to get to anything wholesale.

  

Cristina,

i am probably looking in the same area right now and i absolutely agree with you on the returns (they are low). i have been re investing for 10 years and i have seen the rents go up by 50% in some areas and so as the property values. since A areas are your priority (i assume Roswell or nearby like Sandy Springs) and long term is your goal as you are not looking to retire on your current investment now, then future appreciation and increase in future rent will probably be your main focus in todays market. there is nothing wrong with that. Everyone has different goals Make a plan and stick with it and you will be fine.

I hope that winter will slow down some of the demand and you will find  good one.

Thank you so much, Roman. 

I appreciate your encouragement because we almost gave up. 

We got so frustrated last evening because we felt like we are doing something wrong with such low cash-flow; but we still don't feel comfortable with throwing in these extra savings into our current retirement plans. 

We're putting enough in that fuzzy market I have no understanding of - as is. 

I also don't want to just "buy ice-cream" with it. I assume many women could quickly do away with 50,000$.  Between designer clothes and a shiny new car, the problem could be easily solved. But I hate shopping - both for clothes (they never fit well) and for cars (I don't get the appeal). :-) 

And now I am discovering I hate shopping for houses too! 

I just wish I could have SO MUCH money that I didn't have to shop for anything! Others would do it for me and would do it well.

The 50,000-60,000 (in addition to emergency fund) just sit in the savings. 

We want to do something with it instead of giving it to the bank to pay us less than 1% on it. 

So we thought that if we got a small property, leveraged some and paid it off with the help of a tenant, we could end up having a little thing that keeps on giving later on. And maybe add 4-5 more until we retire. 

This was the initial thought - but then I came on BP and discovered this mystery world of large cash-flows, and "deals of a lifetime" acquired in millions of ways just NOT MLS, etc.

And things got really fuzzy. :) 

Yes, we are looking at Marietta, Smyrna, Roswell, maybe Sandy Springs - but the latter is not heading anywhere good, I can tell you that. Are you calling all of these "A areas"? What about B-C neighborhoods in A areas?  

I have seen Buckhead and Dunwoody decline over the years under my own eyes - now Sandy Springs seems to be "turning" too.  So I am not sure about appreciation and rent increase. We're not even counting on those. We're terrified of depreciation, if anything.

So we're thinking to expand further north into Ackworth, Woodstock, even Cartersville. Roswell and Alpharetta barely turn anything under 150,000.

This may or may not be a good idea. But...at least you've confirmed we're  not complete dupes when it comes to the cash-flow.

 

I suggest that you get a 30 yr mortgage instead of 15yrs so your monthly payments are lower and it will not affect your financing of the next property so much and it won't kill your cash flow if there vacancy or a major repair.  You can always pay more towards principal per month depending on the performance of the property.

Yes, we plan on going with the 30 year.

If you are only interested in A properties and want to keep your leverage low you might as well not invest in real estate at all. You can easily get a 8-10% return on a REIT or most any mutual fund. Investing in real  estate is more work than it is worth based on the returns you are seeing in your target market.

Ideally you should be targeting B class properties, minimum DP, 30 year mortgage with a estimated minimum $200/month positive cash flow based on hypothetical 100% leverage.

Equity will kill any possible cash flow on a property. Obtaining max return on investment requires maximum leverage.

With your conservative approach to real estate investing your hobby will cost you a great deal in lost potential returns that could be achieved by simply putting your money in a REIT.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.