Loveland, CO · Member since 2020 · 22 posts · 12 votes
Hey all,
I have 2 long term rentals in Colorado that I got for appreciation purposes - don’t cash flow much.
Now, I want to focus on cash (rental income, flips, etc.) If you were me, where would you start?
I’ve considered investing out of state in better cash flow markets and looking for small MF or dipping my toes into flipping… Both seem risky and scary to me as I’m still a rookie but I know I need a new strategy for cash.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
grass is not always greener.. nothing wrong with owning super stable valuable assets that just pay your mortgage.. the little bit of cash flow you might make wont make up for the risk by swapping your basically risk free stablized assets in one of the strongest markets in the country.
Now flipping is another story but again very risky to do this in an area that is much more than an hour or so from you base.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
grass is not always greener.. nothing wrong with owning super stable valuable assets that just pay your mortgage.. the little bit of cash flow you might make wont make up for the risk by swapping your basically risk free stablized assets in one of the strongest markets in the country.
Now flipping is another story but again very risky to do this in an area that is much more than an hour or so from you base.
Property Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
3y
@Sara Mickelson it's a very broad question but I'll give it my best..
Every investor is different but for me in regards to cashflow vs. appreciation you definitely should aim to have a mix of BOTH in your portfolio... a little caveat to this however is that I almost always purchase only cash flowing properties or properties that I know I can make cashflow so, that applies to even properties that are more high quality and more on the appreciation side. The number one rule is that you 'shouldn't' count on appreciation as it is not completely controllable and I would agree with that, so at the end of the day whatever you are purchasing it needs to cash flow however much, so that you have that cushion built in.
In my experience cash flow and appreciative markets are usually on opposite ends -- for example: You can certainly attain a cash on cash ROI of 20-50% on certain properties but usually properties like that are not in desirable neighborhoods or are in blighted areas, which is why your ROI is so high (you paid less, because there is less desirability, unless you paid in cash) and such properties on paper may show an ROI of 20-50% but in reality it may not be so because such properties either 1)usually attract an unstable tenant base which translates into economic or physical vacancy and/or 2) such properties are usually neglected or older and thus your are spending much more $ on repairs/CapEx etc. AND such properties may cash flow and appreciate in high percentages BUT the real dollar value is minimal - For example: Lets project that - You purchase a property for $60K on 30yr financing and rents for $1,000/mo. - the ROI for this is @ 20.5% seems good until you realize that the cash flow - the real money - is only @ $232/mo. on a good day AND you are now in a dilapidated area and having to deal with the Tenant issues I mentioned -- your cash flow could easily go to $0 or negative - you could buy it in cash (which is what most do at this price) but then your ROI tanks. In addition to this lets say the property appreciates a whopping 25% (national average is 3-6%) that sounds great until you realize that is only $15K in real money... hardly life changing and hard to finance. Later down the road, you also have less exit and repositioning options available.
In regards high value properties in better locations, they tend to appreciate much better in regards to dollar value and their ROI might be less but their dollar value is typically more - For example: A $300K property with 30yr. financing at a rent of $2,650/mo. could have a much smaller ROI of only 8% BUT the cashflow is @ 534/mo. additionally your tenant base 'should' be better so less vacancy, less repairs, less headaches. -- Your appreciation may only be 6% BUT in real money that is $18K... still it's hardly life changing BUT because it is a desirable area it's value is more stable and because 6% is sustainable, it should, overtime, continue to increase.
In my opinion (every investor is different) you should aim to have both in your portfolio OR focus on middle ground properties type B properties in B neighborhoods (or type B in type A areas) which is my favorite strategy -- there is plenty of room for growth in rent when times are good and they don't cut back like type A's do when times are bad - they also avoid the problems associated with dilapidated areas and bad tenants that type D's encounter. These types of properties will always cash flow and appreciate on day 1 but are slow going initially but once they get going after 2-5 years or so you have way MORE exit and repositioning options i.e. you can cash out refinance, you can easily sell, you can easily increase rent, etc. etc.
A good strategy might be to: Target type B or C+ properties in B and A neighborhoods and look for value add i.e. minor cosmetic upgrades, minor (very minor) construction such as adding a bedroom - this will allow you to pay a lower price initially on purchase but then allow you to spend minimal $ later to increase rent and get maximum cash flow. Aim to negotiate and/or purchase (many ways) at least 10-15% below market on the ARV and then drive the rents . Then cash out refinance your down payment back out; in the example above of a $300K property considering you bought it 15% below market and an appreciation of 6%...... at @ 30 months you would be able to cash-out all of your down payment back out and at 36 months you would be able to cash-out all of your down payment + all or partial your repair costs. Then do it all again. I hope this helps.
Developer · Member since 2020 · 4k+ posts · 4k+ votes
3y
Depending on your lifestyle.
I would use the no tax on 2 out of 5 years rule and start living and selling you units and house. This is a guaranteed savings or earning. And then you could use the funds to invest elsewhere. Or pay down on the other units to get it to cash flow. Or set the funds and pay monthly so you don’t have to refi.
I have 2 long term rentals in Colorado that I got for appreciation purposes - don’t cash flow much.
Now, I want to focus on cash (rental income, flips, etc.) If you were me, where would you start?
I’ve considered investing out of state in better cash flow markets and looking for small MF or dipping my toes into flipping… Both seem risky and scary to me as I’m still a rookie but I know I need a new strategy for cash.
Appreciate everyone here!!
Sara
Message me about building a cash position and we can talk about how I did it. I still do random projects using that method as I enjoy doing it but I am retired from the hustle and do not hold any real estate as part of my portfolio for passive income. It makes no sense to use real estate as a long-term investment tool unless you do not understand money. I can explain this in messages. It is the fastest and easiest way to build wealth.
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Ricardo R. thank you for the detailed response!! You’ve given me lots to consider. I really like the advice on looking for c+ b- properties in B+ or A neighborhoods.
This was indeed a broad question and I think that’s why I feel like I’m struggling because I’m not sure what to focus on next. Really appreciate you outlining some examples.
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Jay Hinrichs great reminder. At this point I’m wondering… what’s the next best strategy to keep moving & growing while holding on to my two stable properties?
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Joe Villeneuve there have been days where I’ve seriously considered that but I’m set on keeping them long term and going with a private lender to move forward. Thanks for your input!
@Joe Villeneuve there have been days where I’ve seriously considered that but I’m set on keeping them long term and going with a private lender to move forward. Thanks for your input!
Why? Why with all the numbers against you, are you still wanting to keep them? Keeping a property long term that is costing you more money each year, is just a long term loss.
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Joe Villeneuve the numbers aren’t against me they just don’t have high cash flow. One is on a deed restriction so I have to hold it for 20 years or else I pay a percent back to the city. The other cash flows 300/m which in my area is actually pretty good.
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
Oh wow, you're switching?
You realize appreciation isn't in just the underlying land right? Your rents will increase too. You'll cash flow with high(er) end appreciation houses than not very soon. Don't let the short term mismanage your long term goals; you're going to miss the forest for the trees here.
Granted, don't get into a severely negative cash flow cause you'll NEED everything to go right. But temporarily underwater in a great area is gem in the long term. And if you're investing in the short term, then don't do physical REI unless you have certain backstops.
That switch will come on it's own, trust the process. Interestingly enough, every house I've bought, re-did, etc., that has hit the rental market actually is cash flowing with my original projections it being OTM. Demand for the best areas rarely suffer, and are more & more scarce. Literally, every house. This is over 20 right now that I've gotten into 2023 I've bought in good areas, of growing cities, have rented higher than I marked and are cash flowing. It's telling me exactly what I wanted to, just way earlier. Invest in primo.
@Joe Villeneuve the numbers aren’t against me they just don’t have high cash flow. One is on a deed restriction so I have to hold it for 20 years or else I pay a percent back to the city. The other cash flows 300/m which in my area is actually pretty good.
"Don't cash flow much", is the same thing as negative CF waiting to happen. Bad deals getting worse. How much will you lose over that 20 year period from that property and the potential deals you could have made that would be making you money? REI is a lot like playing poker, and not because they are both gambling. Done correctly, REI isn't gambling. The reason why they are a lot alike is because the trick to winning in both is the same. "Stay in the game". When playing Poker, you don't throw chips in on a bac hand, and you don't approach a hand you have already thrown chips into that goes bad with a need to continue to throw more in thinking you have to in order to not lose the chips already in the pot. Question: (Answer to follow). When you start at the table, and after the first 5 hands half of your stack of chips is gone. How much money have you lost? The more money you put into a losing property, just adds to the loses,...and reduces the amount of cash available to recover those loses. This also increases the amount of time needed to get back to even,...and profits only happen after you break even. Dumping a bad deal, accepting the accumulated costs as the end of the line, and start making money again, is the correct play. Staying pat, wishing/hoping for a future event you have no control over, isn't investing,...it's speculating, and full of risk,...unnecessary risk. Staying with bad hand, hoping to fix it with the next draw of cards, when the stack is against you, is the same thing. Answer: You haven't lost anything. Those chips are still on the table, just in different piles. You can always get them back, as long as you are still in the game.
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@V.G Jason It seems like it would be wise to diversify my portfolio and have some higher cash flow properties in more affordable markets. I see what you’re saying though with staying the course. The numbers just don’t work in my area anymore but I want to keep growing! Thanks for your reply.
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
3y
Something for you to consider before entering a market with good initial cash flow.
My view, and historically this has held true, higher appreciation areas produce the better cash flow for long term holds.
How? because there is a poor correlation between initial cash flow and actual cash flow over a long hold. This is not happenstance. The high initial cash flow have this high initial cash flow because their appreciation (including rent growth) is not expected to be good. Conversely, the low initial cash flow markets often have low initial cash flow because it is expected to have high appreciation (including rent growth).
In my market (San Diego) the average rent increase for 3BR SFH was just over $700/month in the last year (source Rentometer). The highest rent increase I did was $900/month (and even with this increase the rent is below market rent). https://rentometer-assets-prod...
The last couple of years had similar average rent increases.
This average rent increase improves cash flow quickly. Obviously the rent is not going to increase like this every year, but neighborhood scout has San Diego appreciation as 10 of 10 for this century and there is a correlation between property appreciation and rent growth.
Realtor · OK · Member since 2020 · 138 posts · 165 votes
3y
I know this sounds bold but try possibly looking into commercial real estate. A lot of people are hesitant with the outlook being bleak for certain areas of commercial RE like office space but you can make alot of money if you learn how to increase a properties Net Operating Income. I wont go to into the weeds but for the amount of work most people do to get into residential real estate deals you can apply that same effort to commercial and have a better payoff. Most investors will say you make your money on the buy so find those deals that have an upside others don't see. I know thats super broad advice but if you had to take one thing from this its - don't forget that commercial is an option!
@V.G Jason It seems like it would be wise to diversify my portfolio and have some higher cash flow properties in more affordable markets. I see what you’re saying though with staying the course. The numbers just don’t work in my area anymore but I want to keep growing! Thanks for your reply.
Not sure how that "diversifies" your portfolio. Not sure that's the right word for it.
If you're trying to find properties with a lower level of entry-- sure, but that's just diversifying location not quality of property.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
3y
@Sara Mickelson I vote on hanging on to quality as you propose and I would not encumber them to buy low quality. Cash flow usually looks good on paper but reality is that locals know the game and pick up the mistakes of "those out of towners".
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Kevin Pillow I’m so glad you mentioned this. I wasn’t even thinking of this as an option. Definitely something I’d like to learn more about as I know next to nothing about the commercial side of things.
Loveland, CO · Member since 2020 · 22 posts · 12 votes
3y
@Nicholas L. New strategy may have been the wrong descriptor. I want to expand my strategy to try some new things, like a flip. I have the desire to try one but would need to take a hard look and talk to people in my network about the reality of time demands.
Rental Property Investor · Scottsdale Arizona · Member since 2020 · 43 posts · 15 votes
3y
Yeah, Do you see flips being successful within a 30 minute drive of your home? If so have you looked into the spread of those. I think trying to get that extra income locally while looking locally and out of state to use the profits of that could help you grow. Also, If flipping is working in your neighborhood would a BRRRR as well to help accelerate your growth in this markets?
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
3y
@Sara Mickelson If you have solid rentals in a great market with good appreciation, I would hesitate before jumping over to a high cap rate market for some cashflow. Higher cap rate markets generally correlate with lower to no appreciation and if the cap rate of the markets are high enough (high single digits and double digits) then the market is likely depreciating. I actually ended up selling cashflowing Midwest properties a couple years ago and purchased more properties in San Diego that didn't even initally cashflow.
Cashflow is certainly an important consideration but should not be the only/main factor. Higher casfhlow/cap rate markets generally equal higher perceived risk.
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