Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
When purchasing real estate as a rental. Most of us will spend a considerable amount of time to insure that it cash flows. Not so many years ago I ran into investors that paid much less attention to cash flow and their big consideration was appreciation.
In my opinion cash flow is important but other issues must be considered as well. You might be able to find a property that could cash flow very well for a couple of years and because of local market conditions become nearly worthless.
Seems to me their is more to consider than cash flow. Any thoughts?
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Cheryl,
Ah, that makes sense. No wonder I feel tired working so hard. This is unfair, CA investors get the nice weather and not have to work their butt off..hahaha
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
15y
btw cheryl, the 50% rule debate and the 'cashflow vs apprecation' debate are 2 different things to me...you can buy for apprecation as long as you can handle the losing months.i don't argue that at all....however, i wno't budge onthe 50% rule..over the long term, studies have shown expenses will average out to around 50% of your gross rents, no matter what your strategy is
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Originally posted by Bryan Hancock:
NAA Income And Expense Study:
NAA Study
So on page 1 on this report, under "Regions Used in Survey", it lists all the states except IL. Does this mean the 50% rule doesn't apply to properties in IL? :mrgreen:
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Sharad M.:
Couldn't an investor just buy 8 of the $25k properties in Cleveland and have the same absolute dollar return? What am I missing here?
Depends on the financing. That $200k property can be yours with about $40k down. Those 8 Cleveland beauties will probably cost $200k, all in cash, unless you can buy a package of them from another investor or find a lender to write several $20k mortgages. If you can, well... great. The only difference then will be what Cheryl mentioned, managing 8 headaches vice one. :-)
Carlsbad, CA · Member since 2010 · 1k+ posts · 1k+ votes
15y
Mitch, i agree with you on the financing part, but i would like to point out one thing that amount of headache is not always related with the price an investor pays for a property or the market value of the property.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Originally posted by Sharad M.:
I started a thread some time ago and I wrote this, and I think it applies here also:
From what I understand there are four ways to make money from a rental property:
1) Cash flow - Pretty straightforward. Total money you receive as income is more than total expenses.
2) Appreciation - Increase in the value of your property over the rate of inflation.
3) Equity buildup - This comes from paying off your mortgage principal balance each month. The lower the rate of interest on your loan, the more money you have going towards your principal, the better your equity build up will be.
4) Tax write off - You get to write off expenses for tax purposes like operating expenses, depreciation, etc. Tax write off is something that every rental property investor benefits from.
In my market, I am not relying much on appreciation. Though properties are a lot cheaper than they were a few years ago, but I am not being too optimistic for some decent appreciation. I plan to make my money from cash flow, equity buildup and tax write offs.
Each investor has individual goals and there is no right or wrong way to make money as long as we make money.
Actually, there is another aspect to your Appreciation element, saying above inflation is restricting the lion's share of making a property more valuable.
You can improve what's there as rehabbers do an you can change the use of a property and sometime never touch it.
Simply changing a residential property to a mixed use or commercial use within a short time can provide quick profits.
Another way is to add preceived value to the public or any others that might have an interest in a property. I have told the story on BP before about an upscale hotel being built in a recreation area that was zoned agriclutural. An inquiry to purchase a property not far away from the hotel but the developer thought the asking price was too much. After moving pigs on that property, the original asking price was gladly paid plus costs to remove the ag. operation. This is a negative influence or a forced external obsolesence to a higher valued property.
Another instance I have mentioned was buying several homes and cabins palted on one property. I bought the whole place and simply did a minor subdivision, setting out new property lines for each dwelling. Doing so made each property marketable for individual sales and increased the values more than significantly. Out of 6 properties, only one was rented.....an obvious situation where cash flow was never a consideration.
I think it is a mistake for investors to get caught up in defining a good deal by cash flow! That's just wrong IMO!
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Originally posted by Bryan Hancock:
"Buying for cash flow" generally will be traded off with investing "speculatively" on appreciation. I don't know many equity speculators that buy on margin with no hedge that get berated for being simpletons.
LOL, not sure the examples I gave qualify there, but whatever.
Speculation is entering into a transaction where the outcome can not be controlled, where the speculator has a potential to profit, but that potential is determined by uncontrollable events. Buying property where you expect to put a railroad, but it's not up to the property owner where that railroad actually is placed.
Investing is all about controlling an expected outcome through management, capital and entrepreneurship! (Sound familiar?)
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Speculation in real estate can be hedged, but it does not change the definition (or scope) of a proposed or actual transaction from still being speculative.
You could certainly financially hedge agaisnt loss in say, buying that farm, but if the train is moved as originally planned, you don't have the potential profit expected.
If you take it a step further and find someone to assing the contract, we'll say, at a profit, that degree of speculation has decreased to an assignment flip, and thereby limiting your profit to the assigned contract. Depending on the strength of the buyer to perform, it may no longer be speculative at all.
It's the example I gave when I taught RE to the college kids.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I guess the degree of speculation is in the eye of the beholder. Everything absent a hedge is speculative to a degree IMO. The risk may be lower, but it is still speculating nonetheless.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
Mitch touched on an element that is often true not only in Southern California but the greater Seattle area. An appreciating property might start out with a small negative cash flow per the 50% rule it does generally stay negative though in the Seattle area.
Rents often increase faster than expenses. I'm sure the property my wife purchased in 1980 for 50,000 has way more than paid for itself and has yielded a nice return for many years now. The property has two homes on it that now rent for 1,800/mo. Better still the property is walking distance to downtown Seattle and we constantly get letters from developers trying to buy it. Even now in this market. Conservatively the land is worth 500K but I wouldn't dream of selling it for that price. The homes on it are older and in okay condition. In time we will tear these homes down and build an apartment complex. My wife paid full retail for this property in 1980.
Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
15y
I only look at the "perceived" cash flow for resell purposes. I would only buy at a sexy enough price to have an immediate upside! forget waiting for appreciation, those days are done for a while!
For example, if I can buy a home for 10k and have 3k into it, I can rent it for 800 per month, there is a good chance I will pop it on a quick sell for 20k. That is my strategy if I did not own it free and clear and have massive cash flow!.