$200 cash flow but cash roi is only 2%

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$200 cash flow but cash roi is only 2%

Jason MalabuteBusiness Member
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes

Looking at a duplex. It is in a good school district and good neighborhood. The asking price is $247k. My realtor said it is not unreasonable to offer $230k. Judging from videos property is in good condition. No major repairs are needed. I will be putting down 40%. I will cash flow $200, but the cash ROI is only 2%.

Is there any circumstance where 2% cash ROI is acceptable? Thank you.

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Andrew B.
Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
7y

You can open a high yield savings account and get the same 2%. This account is FDIC insured, guaranteed to be there when you need it, and will not ever send you a bill.

Sounds like this would be a poor choice for an investment unless your investing strategy heavily favors appreciation and debt paydown. Its very likely that there are better investments out there though.

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  • Seth Lipper
    Member since 2018 · 24 posts · 13 votes
    7y

    @Jason Malabute

    It really depends on what you are looking to do. You'll have people on here that won't touch a property unless it rents for 1% or 2% of what you pay for it. Clearly, this property is only cashflowing due to the amount of money you are putting down. If you want a safe investment that give you more than 2%, find a nice bond. If you have plenty of money and your're looking to diversify into real estate, it can be a viable option.

    At the end of the day, it really depends on what you are trying to achieve. If you want a better ROI, you may be better off looking in other areas.

    2Reply
  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    You can open a high yield savings account and get the same 2%. This account is FDIC insured, guaranteed to be there when you need it, and will not ever send you a bill.

    Sounds like this would be a poor choice for an investment unless your investing strategy heavily favors appreciation and debt paydown. Its very likely that there are better investments out there though.

    8Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    7y

    Ally savings account has 2.2% and zero risk.

    if the property only cash flows at 40% down then you're really spending a lot of money to buy out the negative cash flow leverage would create. Maybe this is a high appreciation area, or you can raise rents, but with the information you've given the deal sounds lackluster. Sounds like you're buying a retail property. 

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  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes
    7y

    Thank you

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  • Account Closed
    Member since 2018 · 175 posts · 103 votes
    7y

    Do not "buy" cashflow! That's how I see it anyway. When I analyze deals I make sure they cash flow at zero down. Putting 40% down on a duplex is IMO not a smart use of money.

    0Reply
  • Julie N.
    Real Estate Investor · Unionville, CT · Member since 2016 · 260 posts · 167 votes
    7y

    @Jason Ma I would find a cheaper house and put 20-25% down that cash flows the same or better. Save the liquid for another house or improvements/repairs.

    1Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    7y

    @Jason Malabute If I’m understanding your numbers then you are putting down $92,000 (40% of 230k) to cash flow $200 a month? Is there something really special about this particular property?  Is it that you really want to invest in state?

    That is a really low return and if you haven’t accounted for turnover, vacancy, or repairs right, then the property could really be negatively cash flowing.

    With what I know about real estate investing, I would not buy that property unless I was walking into tons of equity where I could just flip it. But I wouldn’t keep it as a rental.

    With 90k you could lend privately and make $600 - $900 cash flow a month passively.

    Is your goal to maximize cash flow or just get into the investing game?

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    7y

    I've got money in a C/D making 5%. Not worth your time and trapped money in the down payment. Everyone has a ROI goal but it comes at a price; we call that risk tolerance. I would look for another property that cash flows better.

    1Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    7y

    I see numbers like that in my market fairly regularly. Depends on your goals- typically if you are in a market or property with lower cash flow, it's likely because that market is appreciating. The upside is that if you can hold on, you can leverage that equity in a couple years and scale. That said, especially for beginners with "normal" W2 income, they need the cash flow in the beginning. Totally depends on where you are in your investing career and your personal financial position. Personally, I don't mind a couple hundred dollars cash flow if I am confident I'll see some good appreciation, especially if I can structure a deal so that I end up without having to leave any of my own cash in it. 

    Good luck!

    1Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Jason Malabute

    You had mentioned the condition of the property was through video.  Take a look at the property or have someone who has expertise in that area.  Just like photos, when we visit a property the really bad stuff is never shown (I completely understand why). I think 2% return is not a good use of your money.  

    I would rather you find a distressed property and force the appreciation by rehabbing it and refinancing your money back out. Then you can have a return of infinite. If you can use the BRRRR strategy properly, it can still cash flow.

    I have completed a number of BRRRR projects. This does work Todays market is tight but you need to find the right deal.

    Good Luck.      

    0Reply
  • Eric Schultz
    Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
    7y
    Jason Ma That’s expensive cashflow. I’d pass... You could invest that $92k into something like AHP Servicing (notes) and make 10% preferred return while still being able to access your original investment back in about 30 days if a better deal comes along.
    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    @Jason Malabute  Yikes! That does not sound good. What are the current rents? Will you pay any utilities? My duplexes average 1% or so rents to purchase price. The only reason these are good deals is because the tenants pay 100% of utilities, and my units are in a B class city with newish type properties and pretty new roofs and HVAC's. I'm looking for a 4 plex right now, which means I'll be paying some utilities, so even a 1% rents to purchase price isn't good enough. 

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  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Jason,

    The deal only makes sense if the rents are depressed and you can immediately raise them or the property is in a prime location and will be in high demand in the future.  Like everyone else, I don't think its a good deal.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Jason Malabute as others mentioned, FDIC insured accounts yield over 2% currently. However, cash flow is not the only income stream from rental properties.

    - Mortgage pay down / equity gain

    - Appreciation 

    - Tax write off

    On the surface not a great return, but if you tell me the property is in California in a quickly appreciating location, it may make sense. If the deal is out of state in cash flow only markets, then probably not a wise idea. 

    Also remember the $200 cash flow per door is because of 40% down. Change that to 25% and your cash flow drops. Change it to an all cash purchase and your cash flow increases greatly. My point is dollars per door is all relative to equity invested. ROI is a better metric for actual return.

    1Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Jason Malabute:

    Looking at a duplex. It is in a good school district and good neighborhood. The asking price is $247k. My realtor said it is not unreasonable to offer $230k. Judging from videos property is in good condition. No major repairs are needed. I will be putting down 40%. I will cash flow $200, but the cash ROI is only 2%.

    Is there any circumstance where 2% cash ROI is acceptable? Thank you.

     2% is way too small Jason. And by the way, that's your Cash on Cash Return.

    The ROI of the investment is equal to the Cashflow + Profit when you sell.

    There are only ways 2% CCR makes sense:

    1. You can increase the rent and therefore increase the cashflow; and/or
    2. If you're sure that the property will appreciate quickly, example: you learned before the public knows that there's an approved manufacturing development nearby that will boost the property values. If the appreciation is 10% or more and you can exit in 2-3 years, that will put your ROI at a good rate
    0Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    7y

    40% down for a $230K duplex and total cash flow $200/month seems low. I would not mind put down 30-40% on a SFR in a great location, high demand, and at least 4%-yearly appreciation history on the last 10-years. Right now I'm putting an offer on a SFR with 25% down, cash flow with conservative numbers is $150, but I know is in a great location and if I need a Plan A/B, is there for me to get out fast if needed and still get at least 12% ROI in my 2nd year.

    0Reply
  • Bryan Beal
    Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes
    7y

    @Jason Ma take a look at the cap rate - typically the best metric for real estate investing. Take the NOI on the property and divide it by the value of the home. There are varying opinions on what a "good" cap rate is but it truly depends on many factors (for example - is it in a high appreciating market or are you only investing in this for cash flow?). I try to always be above 7.5% and with all of the investments I've made to date, they are all strong cash flow positive.

    0Reply
  • Account Closed
    Lender · Pensacola, FL · Member since 2017 · 658 posts · 626 votes
    7y

    If you're willing to settle for a 2% cash-on-cash return, consider investing the money in a cherry-picked portfolio of Dividend Aristocrats. If I set up my account today, my immediate cash-on-cash return would be 2.4%. But since I set it up years ago and the dividends have increased on average by 9% a year, my historical cash-on-cash return is now 6.3%. The Dividend Aristocrats are S&P 500 companies and most earn their income from businesses they run all over the world, a good income diversifying to rental income earned on a local basis.

    The better news is the ROT ("return on time") or ROE ("return on effort"). Although it took me awhile to figure out how to do this approach, it only takes me 4 hours a year to manage the account. I update my spreadsheet once a year after reviewing each company's Morningstar and S&P 500 (rebranded as CFRA) reports I have available through my online brokerage. It might take me more than 4 hours if one or more of my companies needed to be replaced, but I haven't had to do this yet. Overall, I follow a couple dozen companies (about 20 of them are Dividend Aristocrats and the rest are Dividend Achievers).

    Let's say you invested $40,000 this way. At a 2.5% dividend yield, the portfolio generates $1,000 a year in income, or $250 an hour for your 4 hours of annual effort. Let's say the dividends increase 7% a year on average, which means the income doubles every 10 years according to the Rule of 72. A decade from now, the portfolio generates $2,000 a year, or $500 an hour for your 4 hours of annual effort.

    Let's say you want to bring your children into your real estate business and they are too young to negotiate contracts, but are willing to shovel snow, mow lawns, and walk dogs. Starting a Roth IRA in their name and funding it from their earned income means they can become millionaires by the time they retire and have a supplemental income stream to the income stream they receive from their rental properties.

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  • Sami Gren
    Rental Property Investor · NJ · Member since 2019 · 442 posts · 40 votes
    7y
    Originally posted by @Jason Malabute:

    Looking at a duplex. It is in a good school district and good neighborhood. The asking price is $247k. My realtor said it is not unreasonable to offer $230k. Judging from videos property is in good condition. No major repairs are needed. I will be putting down 40%. I will cash flow $200, but the cash ROI is only 2%.

    Is there any circumstance where 2% cash ROI is acceptable? Thank you.

     I see you already got some good advice, 

    It is true thst 2% is extremely low, YOU also need to take in consideration that maintaining a property can sometimes be costly, LET'S say you need to replace a roof, that can suck up a year or even a few years of your cash flow. ..

    BUT the point that a few of our fellow BP colleagues brought out that you can put in savings account bonds etc. I respectfully disagree with in Your situation.

    Because lets say you use your cash flow for day to day expenses, and your capital you put in to the savings account was $100,000, in 30 years you will still have the same $100,000. 

    But in real estate, there no doubt that the property will be worth much much more, in addition that your mortgage will already be paid off by then and your cash flow will be much more, so that argument of a savings account is Just like saying, dont do real estate

    RECAP: I think 2% is very low , I don't know your area, but I'm NY- NJ areas you can find from 5% in hot areas up to 18% in suborbs

    .

    GOOD LUCK

    0Reply
  • Sami Gren
    Rental Property Investor · NJ · Member since 2019 · 442 posts · 40 votes
    7y
    Originally posted by @Jason Malabute:

    Looking at a duplex. It is in a good school district and good neighborhood. The asking price is $247k. My realtor said it is not unreasonable to offer $230k. Judging from videos property is in good condition. No major repairs are needed. I will be putting down 40%. I will cash flow $200, but the cash ROI is only 2%.

    Is there any circumstance where 2% cash ROI is acceptable? Thank you.

     I see you already got some good advice, 

    It is true thst 2% is extremely low, YOU also need to take in consideration that maintaining a property can sometimes be costly, LET'S say you need to replace a roof, that can suck up a year or even a few years of your cash flow. ..

    BUT the point that a few of our fellow BP colleagues brought out that you can put in the money in a savings account bonds etc. I respectfully disagree with in Your situation.

    Because lets say you use your cash flow for day to day expenses, and your capital you put in to the savings account was $100,000, in 30 years you will still have the same $100,000. 

    But in real estate, there no doubt that the property will be worth much much more, in addition that your mortgage will already be paid off by then and your cash flow will be much more, so that argument of a savings account is Just like saying, dont do real estate

    RECAP: I think 2% is very low , I don't know your area, but In NY- NJ areas you can find from 5% in hot areas up to 18% in suborbs

    .

    GOOD LUCK

    0Reply
  • Joseph A.
    New Rochelle, NY · Member since 2018 · 235 posts · 151 votes
    7y

    @Jason Ma I wouldn't do it, many investors have told me to invest where the numbers make sense. For a down payment that large to only make $200 in cash flow per month doesn't make sense to me. Like many of the other posters have said, there are much better uses of your money for better returns. You can essentially be the bank for an investor in a different market and get better returns on your money.

    0Reply
  • Christina Linn
    Investor · Member since 2017 · 83 posts · 46 votes
    7y

    @Jason Ma in my opinion it’s acceptable when you’re putting 40% down and cash flowing. It’s better than lots of other investments, but there is certainly the possibility of doing better. Have you considered putting down 30% and also investing in something else?

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    I did something very similar to this. Bought a SFH two years ago for 225k. Put 90k down on it. Cash flowing only $200/month on a 15 year loan. No regrets, but I could have found a higher cash flowing property for sure. I like this place and the location. I invest in RE for fun. It's not all about making a killing in profit for me. I think it'll appreciate just fine and when it's paid off I'll be cash flowing $1,200/month. I can live with that.

    0Reply
  • Jason MalabuteBusiness Member
    OP
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes
    7y
    Originally posted by @Kenneth Garrett:

    @Jason Malabute

    You had mentioned the condition of the property was through video.  Take a look at the property or have someone who has expertise in that area.  Just like photos, when we visit a property the really bad stuff is never shown (I completely understand why). I think 2% return is not a good use of your money.  

    I would rather you find a distressed property and force the appreciation by rehabbing it and refinancing your money back out. Then you can have a return of infinite. If you can use the BRRRR strategy properly, it can still cash flow.

    I have completed a number of BRRRR projects. This does work Todays market is tight but you need to find the right deal.

    Good Luck.      

     When you are managing a long distance rehab project how do you know you are paying right price for rehab and you're not being taken advantage of?

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  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Jason Malabute 

    When your investing in long distance Real Estate you need boots on the ground.  You will need someone to oversee your project.  This could be a property manager, general contractor, home inspector, your real estate broker if any etc.  You are going to need someone who is protecting you.

    Good Luck.

    0Reply
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