Is anybody cashflowing right now???

Atlanta, GA · Member since 2021 · 163 posts · 58 votes

With home prices still very high and interest rates now high too, is anyone actually cashflowing on newly acquired property? Even the 1% rule doesn’t seem to work anymore

Example: assuming 20% down

Purchase price: 250k

Rent: 2500/mo

Expenses: 1375/mo (45% expenses)

Debt service: 1350/mo (200k at 7% fixed 30 am)

Cashflow: -$225

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

Why would you have $1375 a month in expenses on a $2500 a month rental? That is $16,500 per year. That would be like replacing the roof, waterheater, hvac, and some other repairs, every single year!

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Collin Wallace
Homeowner · Joshua Tree, CA · Member since 2022 · 69 posts · 30 votes
3y
Quote from @Caroline Widjaja:

In your case, don't buy. Mine is still cash flowing on my newly acquired property. I used BRRRR method.
Your newly purchased property is located in LA county?
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Steven Barr
OP
Atlanta, GA · Member since 2021 · 163 posts · 58 votes
3y
Quote from @Eliott Elias:

I am, in Killeen Texas. Few hundred bucks off my BRRRR's

@Eliott Elias do you mind sharing your numbers?
(I also just realized I pressed wrong number on my calculator for expenses. Should have been $1125. So my example is actually more break even. Still not great and no cashflow)

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Marc Stevenson
Real Estate Agent · Dallas-Fort Worth, TX · Member since 2021 · 117 posts · 69 votes
3y
Quote from @Caroline Widjaja:

In your case, don't buy. Mine is still cash flowing on my newly acquired property. I used BRRRR method.

@Caroline Widjaja Hi Caroline! Just curious as I'm getting ready to refi out of a hard money loan on one of my BRRRR properties...what are you seeing the ARV that your lendors are allowing when refinancing?
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Oleksandr IvanovskiyPro Member
Rental Property Investor · Member since 2019 · 124 posts · 38 votes
3y
@Steven Barr
Yes on all my properties , except the one I did a big value add/capital expense.
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @Fernando Figueroa:

All the houses in my area sell very quick, in cash. Miami. Different markets all over the US. We cannot generalize.

Agreed on generalizing. Miami is an insane market. I have open cash offers on my unit way, way, way over what I bought in Feb 2020.

Miami, same like Hawaii, is a very special market, they should not be used as comparison because of their unique status.
They really tilt the average metric that's out there.
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Brad HuntonPro Member
Rental Property Investor · Granbury, TX · Member since 2020 · 87 posts · 70 votes
3y
@Carlos Ptriawan
This isn't necessarily true. Closed on a property yesterday with 15% down. Not cash flowing a lot but still enough cash flow to justify the expense. It is all about the deal itself not generalizations.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @Brad Hunton:

@Carlos Ptriawan
This isn't necessarily true. Closed on a property yesterday with 15% down. Not cash flowing a lot but still enough cash flow to justify the expense. It is all about the deal itself not generalizations.
That's 'general comment'.

This is what I mean in more detail, every city has its own default cap rate. So at this time to invest for cash flow
we need to find city the default cap rate > interest rate.
There're only 5-6 state that could yield this number. So we need to find a city that's having cap rate greater than 8.
With 3% rate and 25% down, my investment in that 8-10 cap city is giving me 3.0x gross income ratio to mortgage. If I buy with 7%
rate, the return ratio would be 1.6-7x only.

So if one has to invest in city/state that has a lower cap rate than the interest rate, then you have to buy down the interest, basically increasing the down.

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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @Fernando Figueroa:

All the houses in my area sell very quick, in cash. Miami. Different markets all over the US. We cannot generalize.

Agreed on generalizing. Miami is an insane market. I have open cash offers on my unit way, way, way over what I bought in Feb 2020.

Miami, same like Hawaii, is a very special market, they should not be used as comparison because of their unique status.
They really tilt the average metric that's out there.

Yeah, this is the same case like those 2 mil. dollar home. If we include it in the statistic, everyone says oooh we have 20% crash in real estate market. But if 2 mil. dollar house is not included, then we say the home price is flat even if there's a recession.
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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
So what's the solution to cash flow right? Off-market is one, but I don't think you get extremely discounted even there. Distressed is one, you'll get the discount but you're paying for the revival. So you're not really getting a net discount, until you re-fi but then you're charting into new territories and there's no guarantees. Seller's can pay for temporary buy downs & closing costs, but that's not going to really going to make it intrinsic. It'll help, for sure.

Is the simple solution, making a competitive offer for the house but less than list price and putting more money down? Rather than 20-25% put 30-40% down. Then holding the option to re-fi back down later to less equity, more cash at hand. Or keep trucking as is.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y

This is what I've been saying, the time of 15-20% down is over, if cap rate is higher than the interest rate then we have to control the financing cost by buying down the rate.Even large syndication is doing the same. For example If the cap rate is 5 with interest rate of 6, they have to buy down the mortgage by two points to make the deal happen,otherwise, it's guaranteed negative return.
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Carlos Ptriawan:

This is what I've been saying, the time of 15-20% down is over, if cap rate is higher than the interest rate then we have to control the financing cost by buying down the rate.Even large syndication is doing the same. For example If the cap rate is 5 with interest rate of 6, they have to buy down the mortgage by two points to make the deal happen,otherwise, it's guaranteed negative return.
You are correct. You actually have been saying that. But then follow up question, buy down the points or put more down? There's pros and con's to the both.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
3y
Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

This is what I've been saying, the time of 15-20% down is over, if cap rate is higher than the interest rate then we have to control the financing cost by buying down the rate.Even large syndication is doing the same. For example If the cap rate is 5 with interest rate of 6, they have to buy down the mortgage by two points to make the deal happen,otherwise, it's guaranteed negative return.
You are correct. You actually have been saying that. But then follow up question, buy down the points or put more down? There's pros and con's to the both.
Wow you are correct, have not thought about that.
In GP world from what I read, they buy down the point to make the interest rate lower by 2 points from the cap rate,
but for my own residential deal, I just increased the downpayment to match with 1:2 ratio.

in my own calculation, an interest rate after 4.5 to 6.0 doesn't have much difference anyway in term of amortization table. So while accepting 7% rate I just increase the principal monthly so my equity is growing faster.
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
3y

Where are you seeing 3/1 arms under 5? Feel free to PM

Quote from @Ben Zimmerman:

You can think about adjustable rate loans instead of fixed. I've seen recent 3/1 ARMS at 4.75% which shaves about $300 per month off your payment and would put you back into the positive cashflow.

While adjustable rates come with their own risks, I doubt there are many people that think rates will still be this high 3 years from now. The notion that 6-8% mortgage loans is 'historically average' ended decades ago when the US debt began to skyrocket. A mere 1% interest rate change on 31 trillion dollar debt is 310 billion annually. The US is already a top 10 most indebted country and the government will bankrupt itself if it is forced to pay higher interest rates for a prolonged period.

Prior to this year, interest rates had been steadily declining since the 1980s financial crash, this is not a coincidence since that is the same timeframe that our national debt levels began to spike.

US debt to GDP:  https://fred.stlouisfed.org/se...

30yr mortgage rates:  https://fred.stlouisfed.org/se...

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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Quote from @Carlos Ptriawan:

Quote from @V.G Jason:

Quote from @Carlos Ptriawan:

This is what I've been saying, the time of 15-20% down is over, if cap rate is higher than the interest rate then we have to control the financing cost by buying down the rate.Even large syndication is doing the same. For example If the cap rate is 5 with interest rate of 6, they have to buy down the mortgage by two points to make the deal happen,otherwise, it's guaranteed negative return.
You are correct. You actually have been saying that. But then follow up question, buy down the points or put more down? There's pros and con's to the both.
Wow you are correct, have not thought about that.
In GP world from what I read, they buy down the point to make the interest rate lower by 2 points from the cap rate,
but for my own residential deal, I just increased the downpayment to match with 1:2 ratio.

in my own calculation, an interest rate after 4.5 to 6.0 doesn't have much difference anyway in term of amortization table. So while accepting 7% rate I just increase the principal monthly so my equity is growing faster.

Well, the reason I ask is cause of appreciation vs. cash flow. You could do both.

I would think on a higher appreciation, less cash flow property--I would put more money down. Reason being, if I put say 37% down on a higher appreciation property as opposed to 25%. I did two things-- one I made it cash flow(say -$150 to +150), and two I actually decreased the rate I probably got from the lender by putting that much more down(say 7% to 5.75%). I'm really riding the wave on appreciation, cause I own 37% at current basis. By not re-financing and/or selling until 15 years +, I'm really locking in huge gains versus having 25% at current basis and that time period. In the event I need to sell for some reason earlier, the curve of 37%(at 5.75%) versus 25%(at 7%) is gaining me more equity. Equity is key in high appreciation markets, but you still must cash flow.

I would think on lesser appreciation, higher cash flow markets you put less down. You can afford to do 25-28%. Higher would get your rate down, without having to buy it. It impacts Cash on Cash, but you're locking in a better cash flow day 1. May take you 40-70 months to recoup. Just investor preference.
1 Reply
Adam Wigdorski
Rental Property Investor · NY · Member since 2017 · 132 posts · 90 votes
3y
@Steven Barr
Forget the whole 1% rule. Do the true math
And with todays interest rate you can still cashflow. Easy answer- put more down or buy at a lower cost
0 Reply
Account Closed
Property Manager · Winston Salem, NC · Member since 2016 · 63 posts · 27 votes
3y
No, not because I can’t rent but because I did major repairs to 5 properties this year and I just bought another one. I’ve raised rents for the new tenants and the old but I’m below market prices anyway, so they couldn’t argue with the
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Anibal Mijangos
Specialist · Los Angeles, CA · Member since 2020 · 91 posts · 53 votes
3y
If anything, times like these are telling us to get creative with our financing. Seems like the people who are doing the best are using some form of creative financing like BRRR or in an area where the market is still doing well.

It's a great time to build up cash reserves, network, and study up on new markets. (At least for me)
0 Reply
Robert Ruschak
Real Estate Broker · IN · Member since 2017 · 70 posts · 12 votes
3y
It is easy to cash flow! It depends on your location, acquisition price, hold period and due diligence! My investor clients and myself are producing solid cash on cash returns in Indiana!
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Josh Saladino
Real Estate Agent · Member since 2020 · 13 posts · 5 votes
3y
I just went UC and prob wont cashflow much positive right now. Ive been telling my clients and myself that when interest rates are at decades highs its hard to cashflow in many markets but if you can refi in a year or so your cash flow will return plus you may be able to take advantage of the 100% or 80% bonus depreciation in the meantime.
1 Reply
Nicholas Burch
Real Estate Agent · orlando, FL · Member since 2021 · 106 posts · 30 votes
3y
@Steven Barr refinance?
0 Reply
Tricia O'Brien
Investor · Anchorage, AK · Member since 2015 · 267 posts · 76 votes
3y
@ John Morgan
When you rent out one of your houses by the room how do you handle utilities?
Are the tenants all single adults without children?
Thanks!
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Daniel DiGiacomo
Rental Property Investor · Baltimore, MD · Member since 2011 · 83 posts · 35 votes
3y
In some markets absolutely. I stay in the first-time homebuyer/workforce housing markets and tend to do okay when the environment is unfavorable.
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Sam McCormackBusiness Member
Real Estate Agent · Cincinnati, OH/NKY · Member since 2021 · 1k+ posts · 834 votes
3y
I don't find conventional financing to work with the 1% rule, I would say now it is like 1.25%. I have resorted to creative financing. With not as much demand, people are much willing to accept creative financing now, plus it provides a better return
[email protected]859-443-4952
Sam McCormack Realtor
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Kyle Baker
Real Estate Agent · Indianapolis IN · Member since 2022 · 51 posts · 24 votes
3y
I think you can still find cash-flowing properties you just need to think a little more creatively. Its not so much the purchase price as much as it is the interest rate that is hurting your potential deals. I would look for options where the seller or yourself (or both) buys down the rate. An even better option in my opinion would be a 2-1 or even a 3-2-1 buy-down. This type of buy-down has to come from the seller. The seller does a temporary buy-down the first 2-3 years at which time the interest rates have hopefully come back down to a cash-flowing number.
In your example the loan would be for 200k (80% LTV) and the first year your interest rate would be 5%. Second year would be at 6% and the third would go back to the original 7% but again buy that time the ideal scenario is the rates have dropped back down again and you refinance at that lower rate.
3-2-1 scenario is the same although it would be 4% first year, 5% second, 6% third and back to the 7% on the fourth. If rates drop before that time period you can keep that unused money as it was essentially pre paid interest payments sitting in an escrow account waiting to be dispersed. If you would like to see more specific numbers and how much it would cost I can do that for you.
I am a Realtor in Indianapolis IN. If you ever wanted to how far your money can go in the midwest feel free to shoot me a message! Cheers
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Steven Barr
OP
Atlanta, GA · Member since 2021 · 163 posts · 58 votes
3y
Quote from @Sam McCormack:

I don't find conventional financing to work with the 1% rule, I would say now it is like 1.25%. I have resorted to creative financing. With not as much demand, people are much willing to accept creative financing now, plus it provides a better return

@Sam McCormack can you provide an example of a creatively financed deal and how it would provide better cashflow than 20% conventional?

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