How you making any money at that price?!
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
How you making any money at that price?!
Most Popular Reply
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7yFor 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."
District Invest Group545 Reviews
96 Replies
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes7y
My two cents is people just buy buy buy buy buy and buy. Few stop to consider if they are purchasing a good value or not. Investors are more savvy and less susceptible to the madness, but they too are far from immune. Read through BP for proof of that. Prices have been increasing since the crash and are finally past what they were and continue to climb. Eventually, the bubbles will burst. The dummies or ill-timed will loss their fanny and the smart players will remain, and further cash-in on the foibles of the dummies and ill-timed.
When does this happen? Eventually, the price of property will exceed the people's ability to pay for it. That's when the bubble is near the burst. Are we there??? I dunno. Maybe. Maybe not.
I am sticking to my guns and will be fine no matter what happens.
- Member since 2018 · 10 posts · 3 votes7y
IMHO folks are buying as if the market will keep going up with no end in sight. When I see prices across the country at the levels they are, I’m thinking we are near or at the top of the bubble this cycle. It’s like musical chairs at this point. Don’t be the last guy to get out when the music stops.
@Anthony Wick
Good questions. They’re buying appreciation. Market values for <4 units aren’t about cash flow.
You’re either gonna have to pony up and pay more, be patient and wait for something more distressed, or find another market.
I feel your pain. I also stick to 1% in my market. It’s gets harder to hit every year.
As a former stockbroker here in NY, I will lend you a bit of advice my mentor told me 20 years ago.
"You can buy at any price with an established market or holding. The only time investors lose money is when they get afraid and sell below what they paid"
Real estate, like stocks, are an investment vehicle. This is true especially in buy and hold markets. All markets have a bubble. But in history, bubbles burst and in time that bubble will be blown again.
Unlike the stock market, people will always need shelter, a place to live. In a downtrodden economy (After Burst), people will still need a place to live. In an upswing economy (People will still need a place to live.) However, the ONLY difference is that in an upswing, people are doing better (wages, etc) and can afford to buy the homes instead of rent (unless credit is trashed out long term).
No matter what the economy holds or where it's at, Real Estate will always have a place. You just got to know where you need to be. Cliche, but no matter where you are at, you win with REI
- 7yShawn AckermanPro MemberReal Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
@Anthony Wick Where are you finding these opportunities? Sound like the MLS or some other site where multiple people have access to the same deal. You have to hit the "secondary" market man. Go off market and find the sellers that you can craft a deal that works for you and you only. Sounds like your in a competitive market. When they zig you have to zag. Persist and you will WIN!!!!!
- Rental Property Investor · NC · Member since 2018 · 776 posts · 777 votes7y
@Anthony Wick I tend to agree with you man. People are just spending way too much on these properties. I am placing offers for my top dollar from the jump to hear that the property is under contract at over asking.
Some markets are better at off market listings than others but I have not had luck on the MLS for over a year now. Plenty of off market deals are coming through my inbox but it seems like even those are hit and miss at times. Lots of competition.
- Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes7y
Robert Shiller won a nobel prize in economics for essentially saying that the value of a house over the long run, will track the rate of inflation. This makes sense because if it outpaced inflation long enough nobody could afford a house, and if it was under the inflation rate long enough houses would be so cheap that everyone would be able to afford one.
If we assume an average inflation rate of 3%, that means a 100k house will be worth 103k next year, and 106,900 the year after. Obviously prices don't increase uniformly each year, some years the price may go up, some years it may go down, but if we track the prices long enough, by definition the price will trend to the average unless there are outside factors involved (Detroit collapsing, or the shifting demographics away from the midwest and towards the coastal and southern regions). Since we often talk about owning real estate for multiple decades, it is relatively safe to say that the end price will likely be relatively close to it's predicted value.
Similarly a casino isn't going to let someone walk up to the roulette table and bet $10 million on black because the risk is way too high, but they are more than happy to let you place ten million different bets of $1. The more often an event occurs the more its outcome tracks to the average. The more years we track our home value, the closer that value will come to it's anticipated value.
Therefore if we take our 100k home with a 20% downpayment, in a perfect world it would be worth 103k next year and we would owe roughly 79k on it. This is 4k spread which is a 20% return on investment. This, combined with tax advantages is a pretty decent return on investment even if our cashflow is strictly breaking even.
Furthermore, it can be assumed that if inflation is 3%, that annual rent rates will also rise at roughly 3% per year. This turns a break even 1k/month rental into a place that cashflows +100 after 3 or 4 years.
While I would never advocate purchasing a strictly cashflow neutral home as you can probably find a better deal out there somewhere, the fact remains that even a property that 'breaks even', will still make you a lot of money if you give it enough time. I would buy an unlimited number of cashflow neutral homes if I could get them each for a 0% down payment since given a long enough timespan each of those neutral homes will make me money. However 0% down is incredibly difficult to obtain, and financing for down payments is limited so you should use that money wisely and find a home that is better than just neutral.
Some people say that banking on appreciation or rent increases is speculating, which is true but only if you view it in the short term. Just like the case of the casino it is only speculation if you look at any particular bet, or any particular annual price increase of your home. If however you do not limit yourself by being short sighted, and look at the big picture over the course of multiple decades I will bet on appreciation all day long because I am confident on a positive inflation rate over the course of those same decades.
People pay different prices for a variety of reasons.
- Different Return metrics
- Different costs of capital
- Different Assumptions
- Repair assumptions
- Rental/Flip Price Assumptions
- Stupidity
I've seen all of the above.
Some people are paying cash, and make 10% on their money on a flip. For me that's not worth my time. For other people it is. They'll do 1 house a year and are happy doing that on the side.
- Lewisville, TX · Member since 2015 · 344 posts · 264 votes7y
@Anthony Wick
It’s so much worse in Dallas area. With 3% property tax a 1/2% rule is considered good!
- Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes7y
Not everyone is investing for cash flow or at least immediate cash flow. They might over pay in your opinion, however, in the end they’re probably going to win.
- Rental Property Investor · Chubbuck, ID · Member since 2018 · 532 posts · 466 votes7y
The economy is strong and there is a lot of money that has been made the past several years. Cap rates are shrinking as interest rates are still really low. Investors would rather make 5% in re than 1% at a bank. This is making the market very tough for first time and small investors. Deals do still come around so be patient and keep looking.
- Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes7y
I imagine they are making money on appreciation and added value of their investment. Yeah, as we know, "appreciation is the icing on the cake", but sometimes the icing on the cake is so thick investors go for it. It is a very competitive environment on duplexes and above, these often go for only cash. I would imagine they are sold before even making the open market (aka MLS, etc), depends on the location and city. If you are looking at open market, you may have a hard time finding a good deal for duplexes and above.
- 7yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
@Anthony Wick Yeah I have been wondering why folks are seemingly OK with overpaying for properties. Personally I am not interested in compromising what I need to get out of a deal. However there really are two sets of numbers: what I can buy it at and what can I change to get better utilization.
Is there room to raise rents to market, how much and by when. Can the expenses be cut how much and by when. What will I need to spend to get better utilization. In my case the tenants are MTM. I did flooring and paint at turnover time-cost 2500-3500, and raised rent 100-150/ mo. I also raised rents on the remainder by 4-5%; so over a twelve month period I increased income by 16%. The building was doing well when I bought it but it is doing better today; and there is more room for additional improvement.
So my due diligence analysis has changed.
- GA · Member since 2018 · 38 posts · 19 votes7y
Stick to the numbers and your script. You never know what another investor is thinking or their experience in the market. When people overpay they will usually be looking to sell. At that time you will be able to capitalize on the mistake they made and have the property at a lesser price. Its a marathon and not a sprint. You will be laughing to the bank in the long run as those who overspent will be learning valuable lessons. Numbers never lie
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes7y
I buy in NYC, Brooklyn Specifically, and have been buying for 21 years. All of the properties I bought were 5% Cap or under.
Today, similarly like @Russell Brazil , as an example, when a property I bought for $140k, $28k down payment and Closing Costs about 19 yeas ago, is worth over $1.1 Million, profiting over $1 Million, and cash flows over $3k per month, all from an initial investment of $28k.... you start to understand that some calculation of Initial Cash Flow is not the best calculation.
Think of it this way. Suppose you did buy that GREAT 1%er as most here want and it gives you $200 per month of Cash Flow and it has a Cap of 10%.
Let's say you had to sell it next year. That means you collected $200 x 12 months of cash flow = $2,400. BUT, if you had to pay seller's closing costs of $3,000..... did you really do good?! NO... you lost $600 after the sale.
Really, if you don't take into account the initial investment, the cash flows and the eventual sales proceeds, you haven't done enough analysis.
You THINK you have a good property because of it's initial cash flow, but really, you have not taken into consideration EVERY cash flow, including any loss or profit from the sale.
Now, here is an easy calculation.
Let's say you bought a property that broke even on cash flow and had $1 Million Mortgage, 30 year fixed.
How rich would you be after 30 years?! $1 Million.
How much did you make every year? $1 Million / 30 years = $33,333 per year.
Did you make your 1% rule?! NO.
Did I depend on Cash flow? NO.
Did I depend on Apprecation? NO.
All I depended was for the Mortgage to disappear in 30 years. That's just Math. It is GUARANTEED to happen.
How many here would buy this property? Not many because it doesn't conform to the 1% rule.
Now... imagine you bought 10 of these properties with $1 Million Mortgages.
Instead of making an average of $33,333 per year you are making $333,333 per year.
Can you live with $333,333 per year in equity building up and breaking even on your cash flow?!
Is that really so bad?
Others would say that breaking even on cash flow is too big of a risk. But in NYC, if in year 1 you are breaking even, by year 10 you are killing it with cash flow.
So I buy properties at low Cap Rates and break even cash flows. When the property begins to cash flow and does not need my support at all, I look for the 2nd property.
Repeating this strategy until I built up a nice portfolio of 10 properties.
This is Real Estate Investing made easy. Very hard to lose and almost a guarantee to be a multi-millionaire in a few decades.
- 7yWill KennerPro MemberRental Property Investor · Seattle · Member since 2018 · 134 posts · 100 votes
@Anthony Wick There are a lot of great comments from the Professionals regarding your concerns, and although I can't speak with the industry experience they can, I share in your frustration with my own experiences. Being in the Seattle and Greater Puget Sound area's hot market, it's commonplace to see 3-4% Cap rate valuations trading like they're on sale. Prices are very much at a premium wherever you turn and it seems nearly impossible to find a property that even remotely makes sense after some hacking and value-add. The import take-home message though, is to stick your numbers and what works for you. It's certainly tempting to simply buy a property at whatever the cost. But in the end, are you doing it just for the sake of buying a property, or to invest in a property? It seems that your intention is the latter, so the deal has to make sense to you.
With the strong performance of real estate in the last 7-8 years, a lot of people are sitting on gains. Perhaps many of the competing buyers you're encountering are aggressively bidding because they need to complete an exchange. Paying up is cheaper than their potential tax liability. Or maybe they have enough cash in reserves from other properties that they can justify inflated prices that don't cash flow.
Just a few things to consider IMHO.......
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes7y
I brokered 10 million last year of these 2-4 units. Below is a perfect example of how they profit (real life example)....
3XXX N Elston, Chicago IL - Solid B class area. 2017 sold $435,000 and was rented $3266. Doesn't seem that great? But being in a major city and in one of the neighborhoods seeing genrification rents were able to be increased by 2019 to $5340 a month and it is being sold now for $650,000.
There also are a lot of people who buy these 2-4 units to live in. So instead of paying $1800 for rent they can live in a similar unit for $1000 out of pocket and then if you calculate the amortization of mortgage it's often paying down around $1000 a month so they are in many ways living 100% free. That is assuming 0 appreciation or growth live free after mortgage paydown.
- Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes7yAhmad H. The suggested 3% appreciation could also just be interpreted as 3% inflation. Maybe 2% sounds better? Either way, leveraged at 5:1 it is still a 10% ROI on your 20% down payment. This is already better than an 8% ROI on an index fund, which doesn’t even factor in capital gains tax. Selling the property down the road is only one of the many exit strategies. How about seller financing or a 1031 exchange to reduce transaction costs and pass along the tax benefits? A positive cashflowing property can easily be 3x the ROI of an index fund even with your suggested % reductions on the simple ROI calculation.
A lot of people in this business are not making money and they scrape by on bad deals that they have to pull money from their day job to support their real estate. Good deals are not as common as people like to think.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes7y
For smaller properties, you may be competing with people who are owner occupants. They can be putting down 5%.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Members are mixing strategies here. The thesis in the OP is <1% properties with no value add or appreciation potential. The members on this post did not get rich following that strategy. They purchased properties in growing areas with predictable long-term appreciation. I am in the camp that you get wealthy from following that exact strategy BUT that is not the strategy that Anthony is discussing. This is not the cash flow vs appreciation debate that rages on BP...there is no appreciation here. We are discussing the no cash flow, no appreciation, no value add, active real estate investing strategy.
- Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 360 posts · 213 votes7y
I guess, the Best way to approach, instead of seen the problem, maybe the solution could be reaching out to them after a few months and double check on how they are doing with their investment, and check the stuff they make the deal work if not, It proves you are right.
Another thing it can be, foreign money as well, linked to turnkey Investment firms. promising them 5 to 8 % Return.
And lastly , Maybe consider partnering up with local wholesalers and consider 18% return before rehab( and yes those can still be found) , and find a hard money lender that might lend you 80% and 100% Rehab, . 1 year lend and then refinance and get Regular loan , I know you might have to pay the Interest and might take a cut, but is the name of the game, and luckily you might get to 10 to 12%..
Regards
- Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes7y
@Anthony Wick they are not ., now anyway. It would seem they are buying for a low cap but hoping for appreciation . I typically pay all in 60k- 75k for a 4 unit with net of 14, - 16k, Heck I just got a 4 unit two days ago, for 65k, no repairs needed, will end up being about 30k gross 18ksih net
Good luck to you
Join the conversationCreate a free account to reply, vote on answers and follow this thread.