How you making any money at that price?!

96 Replies

More duplexes for sale. More 4 plexes for sale. More properties I’m getting outbid on. My numbers tell me what to bid, but what are these other people’s numbers telling them?!

I’m a standard 20% down, 5% interest, 25 year amortization on my loans right now. I do need at least 1% rents to purchase to make money. My reserves aren’t even that big. 5% capex, 5% maintenance, 3% vacancy, 7% management expense (all dependent on what property condition is of course).

How are these people paying $300k with $2,600 rents; $150k with $1,300 rents, etc!! In order to cash flow you’re basically putting more money down (i.e. Buying your cash flow). And, many of these properties are not in an area that’s appreciating much either.

I’m a patient one, but I may be on the sidelines for quite a while during these times.

Hi Anthony,

First, you need to run your numbers with 30% down not 20%.  30%, in my opinion, is the gold standard for evaluation.  Commercial lenders usually require buyers to put 30% down investors for smaller 2-4 units should do the same. 

Those buyers could be self-managing or not putting in capex it's tough to say but I would say those are usually the reasons.  Quite possible they have no idea what they are doing.  In my area, I am seeing people buy 2-4 units at crazy prices that make so sense not even at 50% down.  Those people to me are amateurs and will get exposed. 

At some point, you do have to adjust your game plan to reflect on the competition.  This is a thin line because you really need to know why the prices are what they are.  

Are rent rates really that low in  Ankeny?  If so, let the other folks take the risk and only buy at prices that make sense.  Sounds frustrating, but better to stick with the numbers that work than to lose $$$ right?

@Anthony Wick I often ask myself the same thing.  My first thought would be that you are probably smarter than they are, but everyone has a different financial situation so what do I know.  I'm sure you lose to some first timers who are just trying to get in the game.  I'm sure some are overpaying and not really knowing the realities of the day to day and the costs associated.  Maybe some are buying in cash and therefore looking at it differently than you.  Some are probably house hackers as well, which really changes the numbers and allows people to pay much more than you.  

We haven't purchased on market deals for quite awhile now as well.  It can be frustrating, but there isn't that much that I can do about it so I try not to focus too much on what I can't control.  Good luck.

It could be cash buyers looking for 6 to 8% cap rate, but also figuring in the massive advantage of owning real estate with the new tax bill.  @Frank Wong nailed it. "At some point, you do have to adjust your game plan to reflect on the competition."  I would say if you are just buying for cash on cash return, then it could be very hard to compete with the buyer who figures that 6 to 8% return is really 15% with the blended return (tax savings, appreciation, equity gain through tenant paying down mortgage and hedge against inflation).

@Anthony Wick

Tough market. Stand by your process and stick to running numbers with 20% down. Turning more of your cash into equity (i.e. 30% vs 20% down) at the front end of the deal only makes sense if you are getting much more favorable financing. Remember, you get zero return on equity in a property. A dollar is not a dollar is not a dollar.

I would agree that calculating your ROI could look a little different with the competition today. Cash on cash ROI is important for those only investing for cashflow, but there is more.

Example income property ROI calculation: 7% cashflow + 3% market appreciation + 5% tax savings & benefits + 4% loan paydown by tenant + 3% inflation-profiting / debt erosion = 22% ROI

Compare this to a mutual fund ROI with dividend in a taxable account: 7% capital gains + 2% dividend - 1% expense ratio - 1% - 1% cash drag = 6% ROI

It still makes more sense to invest in positive cash flowing real estate, especially with bonus depreciation in the tax code for the next few years.

@Anthony Wick

Revised:

Example income property ROI calculation with 20% down:

7% cashflow + 15% (3% at 5:1 leveraged) market appreciation + 5% tax savings & benefits + 4% loan paydown by tenant + 3% inflation-profiting / debt erosion = 34% ROI

Compare this to a mutual fund ROI with dividend in a taxable account:

7% capital gains + 2% dividend - 1% expense ratio - 1% transaction cost - 1% cash drag = 6% ROI

For the past decade, Ive constantly heard you cant make money buying at the prices I do. A decade later, Im a multimillionaire.  

Instead of looking at a spreadsheet, look at what successful investors in your market are doing, and copy it, even if it doesnt "work."

@Kris L.

These particular examples were not in Ankeny. Ankeny rents are some of the highest in the area. But there isn’t anything for sale in Ankeny right now so I have been branching out. And in Des Moines then you have to factor in utilities paid by landlord too.

@Alex Craig

Ya, I get that. I just don’t like it. Real estate is my side gig. Don’t “have to have it”, but it’s a nice addition to my portfolio. But I’m not putting 30% down or paying cash to fake cash flow.

@Russell Brazil

Hey, I’m still buying and investing, but it’s a legitimate question on how some of these people are making money. I suspect the answer is; they are not. If the other answer is; through appreciation and mortgage pay down, then that seems like thin margins and speculation. My area is not California or East Coast. Speculating and hoping on just appreciation doesn’t seem like a good idea to me. At least here.

Originally posted by @Anthony Wick :

More duplexes for sale. More 4 plexes for sale. More properties I’m getting outbid on. My numbers tell me what to bid, but what are these other people’s numbers telling them?!

I’m a standard 20% down, 5% interest, 25 year amortization on my loans right now. I do need at least 1% rents to purchase to make money. My reserves aren’t even that big. 5% capex, 5% maintenance, 3% vacancy, 7% management expense (all dependent on what property condition is of course).

How are these people paying $300k with $2,600 rents; $150k with $1,300 rents, etc!! In order to cash flow you’re basically putting more money down (i.e. Buying your cash flow). And, many of these properties are not in an area that’s appreciating much either.

I’m a patient one, but I may be on the sidelines for quite a while during these times.

 This is why I don't mess with 2-4 units anymore. There is too much competition and there is more what I call "dumb money". Newbie investors, speculators, owner occupants...

Go bigger. The work is not that hard, in fact, I can argue in some sense, it's actually easier than 2-4 units. You can hire a full time property manager and full time maintenance manager when you have a building with 50 units and up.

Now having said that what do you do with all these competition and dumb money?

Then don't go for what everyone wants. Go for 2-4 units that need work that owner occupants don't want to mess with. Then buy at a discount because the owner is more motivated to get rid of it, add value through renovation, increase the rent and increase the cashflow significantly.

If you do what 99% of real estate investors do, you'll get the results that 99% of real estate investors get.

I think with 1,000 apartment units under my belt, I can modestly say I belong to the other 1% :-)

@Eric Schultz This seems wishful & biased. 

Even if you got 3% appreciation, you would need to pay 8% just to buy and sell the property, besides the 2-3% to get the financing. 5% tax savings from depreciation, but don't forget recapture taxes upon sale. Your ROI calculation is extremely simplified, and frankly, inaccurate. For RE, you're better off doing IRR calculations to take into consideration the costs I mentioned.

Low-cost index funds from Vanguard that trace the S&P 500, have an expense ratio of less than 0.1% and if you have over a certain amount, you pay 0 for buying/selling and automatic reinvestment of dividend payouts. ROI from a low-cost index fund is 8% on average.

Hi Anthony,

Depending on the deal, some investors may be calculating more of their return to come from appreciation than cash flow. This would be especially true for properties with opportunity to add value - renovation potential, below market rents, vacancy issues, etc.  If the property is stabilized and there isn't a value-add play then what a lot of the other contributors are saying is likely true - buyers may be over paying or it is a competitive marketplace where demand for investments is high and returns are squeezed as a result. If you are interested in investing in properties with higher cash flow yields you could look into investing in another market area that has a different profile.  Perhaps you already have experience investing outside of your local area. If not David Greene's Long Distance Investing book and his features on the BP podcast are great starting points if you haven't invested outside of your local market before.  

Best of luck to you!

Cheers,

Cameron

@Anthony Wick , it's possible that your investment strategy doesn't match the economic realities of the area you're looking. You're being outbid by either 1) other investors who are more focused on appreciation than cash flow or 2) retail buyers who are using way more emotion than fiscal analysis.

Two things to consider:

  1. Look in other areas where there's a better relation between rents and price.
  2. Consider 5+ properties where the value is driven by income.

@Anthony Wick great question. This is the arena I play in. So I’ll try to answer.

The hardest part for me is hearing about people who hit the 1% rule. It hurts my brain to think how happy I would be if that ever happened with a duplex for me.

I have three duplexes and a SFH. Each duplex was purchased for close to 300. One more. One less.

Rents are 2200-2400 per duplex. So my numbers are worse than your bad example numbers.

My mortgages are around 1600 so the cash flow is 600-800. Factoring in 10% for repairs I see positive cash flow of 200-400 a month per duplex. I don’t set aside for vacancy currently since in WA one craigslist add nets over 20 applicants in a few hours.

I’m not comfortable investing out of state. Google Morris invest and read up to see why. I’m sure there are good businesses out there where this works but I feel this would better suit someone where the money was a small percent of their investing funds. For me rentals are 100% of my investing funds.

So I can have the money I save sit in a bank earning negative returns or sitting in some duplexes earning a few hundred a month each.

Yes, people make killings when they time the market. I am not counting on appreciation and I will not make millions in a few years. However with principal paydown, saving for more units each year, I will reach my goals in time. I have also learned what a great deal would look like since I’ve made some mediocre deals already.

I have eliminated my rent, have principal paydown and make 2k in cash flow a month. I have a ways to go still but it is starting to snowball.

Hope this helps. Thanks.

first, why are you assuming they are making money?

second, why would you assume they have the same strategy or deal stips as you?  

@Alexander Felice  That's the bit! People are paying too much. But if somebody is reading this and was the one buying these multi-families and making money, tell me how you're doing it!!

Originally posted by @Anthony Wick :

@Alexander Felice  That's the bit! People are paying too much. But if somebody is reading this and was the one buying these multi-families and making money, tell me how you're doing it!!

 Anthony, I'm definitely not one of those people buying at those prices and making money. As Michael Ealy pointed out, you're going to find all kinds of stupid money these days in 2-4 unit multifamilies. But as Michael also pointed out, nobody's buying beat-up 2-4s that need a lot of work. OOS people in your area and mine quickly realize the deck is stacked against them for picking places in passable neighborhoods and carrying out long-distance rehabs.

If small multifamily is what you want, you can keep looking for your unicorns, or you can figure out a different business strategy.

@Anthony Wick so many unknowns here but likely they’re just paying cash. You do that, your biggest expense (mortgage) doesn’t exist. Now just about anything will “cash flow”.

I was at a meetup a few weeks ago and multiple people there were talking about large 3000 square foot homes that cost 300-400k (out of state) that they own that gets maybe 2300 in rent. Or 2600 tops if I’m remembering correctly.

One of these investors went out of their way to buy a rental as described above because they had a specific tenant for that type of property. Think about that. Buy a house specifically for one tenant in mind and then give them a 5 year lease st the same rent for the entire time. I wouldn’t do that but my point is more then one way to make money in this arena

@Dion McNeeley Whoa whoa whoa whoa whoa. Let's break this down a little bit here. Rents $2,300 (I split your difference). Mortgage $1,600 (PITI? Would need 25% down ($75K), 25 years, 5% interest, $90 insurance, $275 property tax). Property tax I guessed, but actually seems quite low on this if you're paying $300k for a duplex. $230 for repairs. You obviously self manage, and will have to in the future as well. And there is no such thing as 0% vacancy. There simply isn't. At some point you will have at least 1 month of vacancy, if for nothing else but to make a repair.

Now, I imagine your area appreciates quite well, and it will probably have to. You're only setting aside about $2,760 for repairs per year. Your margins seem awfully thin to me. But I did make some assumptions and do not know your mortgage terms or your property taxes (your PITI can't really be $1,600 unless you put about 40% down).

Here's what my numbers would look like on something similar, because I bought a duplex for $285k in December... 

Purchase $285k. 20% down ($57k). Finance $228k, 5% interest, 25 years, 7 year balloon. 

P&I: $1,332, $92 insurance per month, $543 month taxes (they are high here). So holding cost of $1,967 month.

Reserves/Expenses: 3% vacancy off rents of $2,750 month is $82.50, 5% capex $137.50, 5% maintenance $137.50, 7% management $192.50. 

Current net = $233, or $116.50 a unit. Now, this duplex was turn key and had numerous upgrades such as flooring, painting, hot water heaters, roof. Furnaces 12 years old. So I am not "expecting" a lot of maintenance and capex right now (also came with a 12 month home owners warranty). 

I wrote all this to show how tight the margins can be. My margins are tight without paying any utilities, which my tenants pay. No lawn care, no snow removal, and no garbage expense either for me. But no way I can buy a $300k duplex, get rents of $2,200-2,400, and make any money, unless I have zero vacancy ever, and no maintenance, ever. 

@Caleb Heimsoth  $300k purchase for cash. $2,300 rents. Without taxes and insurance it takes 10 years to get your layout back. I'll say it again......people must be banking heavily on appreciation. And I get that people keep telling me; "adjust your strategy, people make money all the time", etc. Ok. But my original question was; "How are you making any money at that price?" It wasn't a question of; should I invest in real estate or not. I'm investing. And it wasn't a completely rhetorical question, but it kind of was. 

.08% rents to purchase price. Or, as 1 guy said, he's buying at $300k and getting $2,300 rents (.076% rents to purchase price). Doesn't seem like a winning formula to me, unless you are subsidizing/buying cash flow and waiting on that appreciation. 

You are probably viewing the market through the filter of how it was, not how it is or how it will be in the future. You are underestimating the time value of real estate. Think of the deals you passed up on 5 years ago and I bet ANY of those deals would look great today.

The other mistake is people believe only rents drive property value, but it works both ways. Higher property values drive rents higher. 

Let me explain. When all the duplex in a certain market start selling for higher prices, the investors don't all just "lose money". They raise rents. Just like any of us raise rents to cover costs. The only thing that prevents this is if supply outpaces demand. Supply only increases through new construction. Demand is only decreased by population loss. 

I am speaking general here. If your local economy has bad population growth or bad future prospects, then it is risky to pay higher prices. If you have a good market and are playing a long game, then a mediocre deal today looks amazing five years from now.

For a long time I didn't get into real estate because I also looked at it like "It takes X years to get your layout back". I then I realized the money is still there it is just not in cash. My loan info is 25% down and 30 year fixed. 4.6% So yes I did pay more than 20% but I feel it is the safest place for me to put my money. 

I am also looking at value adds. One of the duplexes that is a 2-1 / 2-1 has a den on each side. I am adding walls and doors to make them 3-1's This will raise the rent some. Rents in the area are also going up because the base here raised the BAH for E5's from 1400 and change to over 1800. One rental is also close to a mushroom farm that has a strong smell, but the farm is being relocated. This will let the rents grow.

So in a few years with higher BAH and no smell and adding rooms I am seeing high probability of making more money. I am a firm believer in "making a deal" if you can't find a deal. Just my opinion but it is safer than gambling in stocks, I call it gambling because I do not have the time nor the drive to learn anything about them. I am sure it isn't gambling for people who ave an interest in that world.

There are probably a few hundred ways to do this better that I have. I just know this is working for me.

It's not going to end well for investors buying <1% properties with no value or long-term appreciation potential.

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