$100/door debate-sell me on it

James W. · 2018-04-04T12:14:33-07:00

I see a lot of discussion with people saying they want at least $100/door but I don't really understand how it can be a good metric unless there would be a big value add opportunity with a big cash out (limiting the investment) and/or a reliance on appreciation (which I don’t like).I think there is agreement that $100/door is not a good metric for a limited number of doors, but I struggle to see how it is reasonable even at 100 doors.I would be interested in hearing from people who agree with the $100/door and those who do not agree with the metric. For those that do agree with the $100/door metric:1. Have you been investing since before the last recession? 2. If so, how did that work out? 3. If you have not been investing that long, what do you have in place to protect you if we run into another recession like the last?Below are some of the reasons I do not agree with the $100/door metric and why it is not attractive for me. I would like some good discussion on how I should be open to it as it is easy I can be missing something in my analysis. For the purposes of the discussion, we will assume 100 doors and that the $100/door factors in PITI, all expenses, property management and a reasonable level of Cap Ex for the property. That is $10,000/mo coming in after expenses and reserves.Some of the limitations I see with it on the surface are below:Limited investment returns without relying on appreciation or a big value add$100/door is only $1,200/yr per unit. If we assume $100/mo in principal pay down per unit as well, that would get the total return to $2,400 per unit per year. Assuming an investor would be ok with a 10% return (I wouldn't invest in this personally), the price per unit would need to be $24,000 which usually means you would be in a warzone or more of a rural area. Even if we assume principal pay down on the high side of $300/mo per unit ($30,000/mo) a 10% return would be $48,000/unit which is still low.At $100/door, you need to assume minimal equity as the total return would be even lower if the borrower had any significant amount of money down. At $100/door, this needs to account for a worst-case scenarioUnexpected changes in expenses, vacancy and Cap Ex can have a significant impact and any expense increases need to be passed along to tenants to maintain the $100/door metric. This might not always be possible if the units are already at market rents or are at above market rents. If the units are below market rents, increases can and likely will lead to additional vacancy when rents are increased. You would need an experienced property management team in place as well since there is not much room for error.Limited ability to withstand changes in the economic cycle100 doors at $100/door is a return of $10k/mo. If we say the average market rent is $1,000 (a little low for where I am at in MN) and market vacancy is 4% (lower in some areas now) that already factors in 4 units vacant at a given time. With 4% vacancy, the actual profit/door is really $104.16 to make up for the 4 units vacant at a give time but to make things easy we will assume $100/door. If we enter a recession, we could see higher levels of vacancy and rents declining. The $10,000/mo income relates to additional vacancy of 10 doors to get to break even (86% occupied) or a rent decrease of $104/mo across the board. It seems feasible that either if not both could happen in a recession which means this investment at $100/door could easily cost money every month for as long as the recession lasts. If both happened, the investor will need to have deep pockets to cover $10,000/mo out of their own pocket. $120k/yr is a lot of money to put up for an investment that is losing money. I surely hope the investor would be diversified or has a large outside income source because if their sole source of income is rental real estate in a local area, income from multiple properties will likely drop at the same time limiting the investor’s ability to cover a property that is not performing. Selling it likely will not be feasible either unless the borrower has a lot of equity. If the rent/unit is greater than $1,000/mo, the investor would have less flexibility in withstanding vacancy and changes in rents than a building with rents lower than $1,000/mo as each additional unit of vacancy will have a larger hit to the investor’s profit. Investing in lower class areas with lower rents would seem to be much more attractive in weathering changes in the economic cycle, as lower rent units are less likely to have large fluctuations in rent as well. At the same time, these investments may take more work to manage too but we can assume you have a strong management company.Scalability options seem limitedIn order to scale, you will need to be able to maintain a minimum DSCR of 1.25. If you have minimal cash equity in the deal above to get a decent Cash on Cash return, it may be difficult to find deals that will meet this metric in the current climate where most deals are overpriced for the level of income they generate. Absent a good value add opportunity with private pre-funding and a cash out, it seems like it might be hard to find many deals in strong areas that could provide a good return at $100/door and would meet the minimum DSCR requirements.There is more to this and several variables to consider (unit count, avg rents…), but in a situation of 100 units at $1,000 or more a door avg rent, it seems tough for me to call $100/mo per door a great investment unless this a pre value add or is a worst case scenario number that factors in the performance in a declining economic cycle. SummaryI would be curious to see the thoughts from others whether they agree or disagree as my primary purpose in posting this is to understand how this metric can be a good metric (in any situation) to base an investment decision on. I understand metrics are what they are and cannot be used in every situation, but I fail to understand how this metric can be a good one to use at all and want to clear things up in my mind as I see it being brought up every day on the forums-likely by people who have never even used it, let alone investors that have weathered an economic cycle.Thinking this through more makes me start to side more with @Jay Hinrichs on his philosophy that wealth is the accumulation of free and clear properties not a bunch of high debt properties providing monthly cash flow as these are the ones susceptible to big problems in the downturn. I do not think the properties need to be owned free and clear, but they need enough equity and strong cash flow to protect against the next downturn. $100/door would be a poor investment return in a deal with a lot of equity and does not lead to a strong level of cash flow in some situations.

Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

8y

@James W. At $80k/unit ($8,000,000) which is less than they can be had for in a decent part of our area with 25% equity, that is a loan of $6,000,000 and a payment of $36k/mo at 5.5% on a 25 year amort. After all expenses, debt service and cap ex reserves, if you still pull away $100/door=$10k/mo ($120k/yr). If we look at the return over 5 years, this would be $600,000 in profit and $643k in principal amort=$1,243,000/5= $249k/yr total return=12% total return. This might meet the goals for some people, but the numbers would need to be solid to the point where $100/door will always be achieved in a stressed environment as well. Vacancy estimates would need to take into consideration a worst case scenario and rents would need to remain feasible in a down economy.

One thing to think about when you are moving lots of money around is how hard it is to get large chunks of money to get high returns without undue risk. Working with your overall scenario: what are your alternatives to 2 M?

Its not insured if you leave it in the bank at absurdly low interest rates that lose to inflation, stocks have volatility (though certainly you would be invested in them to some extent) and many fewer tax advantages. If you have real estate expertise and favorable financing, your control over your investment can be high and your risk of macro shocks can be lower--though never non existent.

Not saying the idea you are sketching out is the best deal in the world, but someone could see the situation you describe as "$100 a door that will always be achieved in a stressed environment" as a VERY good way to put money safely to work. We think about the benefits of scale being income, but it has its benefits for risk reduction too. A voice in my head is whispering "Sharpe's ratio"* right now. 12% with a high ratio might very well beat 16% with a low one.

And even us less well capitalized spread buyers (i.e paying interest at 4-5% and getting the building to generate income at a TRUE 7%) can do well (although personally I think you need 8% in that scenario).

2% of 1000 isn't much but 2% of even 2M is $40,000--or 10K above the individual median income for the country ($31099 in 2016).

* For the finance nerds and wannabe's-like-me out there: Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. A portfolio with a higher Sharpe ratio is considered superior relative to its peers.

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Rachel H.

San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes

8y

@James W. That's kind of the reality of the situation. It becomes more appealing when you have more units. Though the more units you acquire, the more management involved. That's the trade off. Most either wait until there's enough equity to sell and exchange, or hold on for the long term and deal with the deferred maintenance costs. If you eliminate the mortgage, your cash flow should go up. So buying in cash is an option. This is why I made the switch from single-family homes to mobile homes. Not having a mortgage has freed up cash and has increased cash flow. :)

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Jonathan R McLaughlin

Thanks for the response.

Not that I have the problem, but I understand it can be difficult to get large sums of money placed into investments. A 12% return might look good for some, but for a 12% return, I see a bit of risk in this scenario if we were to enter a recession.

I would think a building renting at $1,000/mo would be in a safer area but not a high class area from an investment standpoint. This differs greatly given the area, but $1,000/mo is still a little bit low in my area. We usually hear that there is less risk in investing in higher classes of assets, but from the standpoint of an asset that throws of a low amount of cash flow, the risk appears to be greater in a higher class of asset than it would be in a lower class with a lower monthly rent.

In a recession, I see it feasible that vacancy could increase 10% which would put the above property at break even. I don't think 86% vacancy (or somewhere around there) is something that could not be expected in a stressed environment. At the same time, I see it possible that rents could decline as well. One if not both of these items could turn this into an investment that has a poor return or could cost the investor money each month.

I know there are many on here that are not as concerned with cash flow, but a property with high cash flow appears that it will weather a recession better than a property providing a low return back to the investor.

Personally, If I had the money, I would not invest in the scenario above at $80k/unit even if I have solid numbers for the other variables such as maintenance, cap ex, expenses, and my vacancy is in line with market as I would want better cash flow to protect me in the event that the property has to withstand a recession or two in my ownership. I do better than 12% with my 401k at this time and it sure is easier to pull it back into something safe if things take a turn in the economy. It would be harder to unload a property in a stressed environment. The only reason I look to invest in real estate is to try and beat the market and to have a better control over my assets.

I'm curious to see if anyone will jump on to post about how their properties performed during the last recession or in the late 80s. I would be curious to see if an additional 10% in vacancy or a 10% decrease in rents is outside the norm. I think one if not both would be reasonable, but I did not live through them as an investor either.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

@James W. all I know is the folks I know that have limited to little debt in the cash flow game I would call truly wealthy.

also for me personally its not even a consideration unless I wanted to super size and be in the landlording business..

to me to make 10k a month at 100 a month and leverage it and take on that amount of debt.. I just would never do that.. simply because I have other vehicles and ways to earn a living that that amount of leverage would make me FAR more than 100 a month.. or 10k a month with 4 or 5 million of exposure. But for others I can see this making sense as this is their goal to be life long landlords.. that is not my goal or desire.. And this is a predominantly landlord site..

However for the average investor this is by far the easiest concepts to understand and execute on.. what I do ( Development) you just don't wake up one day and say hey I am going to be a developer.. One you need the equity and you need experience to get loans..

you can buy rentals with limited equity ( ergo the attraction to the masses) and at least as it relates to your first 10 loan slots its pretty much a fico and income thing..

Fico and income have very little bearing on getting development and vertical construction loans and financing.. I mean you need to have a fico.. but its much more equity and experience driven than credit.

I hear it all the time HEY I have a 800 fico and can't get a local bank to give me credit.. FICO does not repay loans.

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

8y

1980s would hardly be applicable any more - you're talking about 35 years ago. That is a lifetime when it comes to economic investments. Look at just the Dow from 1987 to now - there's 12 companies still on it from then till now. The entire economy has been reincorporated from manufacturing to technology & service.

The recession era of 2008-2010 would have some valid comparisons, although a lot of the causes and fundamentals were one-offs.

To answer your question on vacancy & rent reductions - 10% is not at all unreasonable in an economic downturn. If you can't withstand a 10% reduction in anything you are treading on some seriously thin ice. Getting back on your thread, if $100/door is your metric, with leverage, you need to have a large economy of scale to absorb any kind of shock to the system. If you are doing $100/door on 5 or 6 leveraged doors you better start figuring out how to scale up or reduce leverage. With 100% leverage, your return is theoretically infinite, since you have no cash in the deal, but your risk exposure is enormous (assuming you're not a walk-off type of guy, and even then you might have exposure).

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

8y

Also you need enough independent income to get you to the point of profitability - I've been working with developers, new and old, 9 figure and shoestring guys, for a long time, and a lot of the new entrants don't understand you don't make 5 cents until 90-95% of the project is complete; until then all you do is stroke checks. No one pays you for water & sewer lines, roads, underground utilities, surveying, marketing, and all the rest of it that goes with turning ground into structure. At one time in 2009/2010 I could drive around to 20 abandoned projects in my area where the developer went bust. Most of the guys that went bust didn't understand the concept of phases. The guys that survived by me were the ones that had structures up/going up before it went bust, and could piecemeal lot sales out until the economy recovered.

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Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

8y

@James W. to be clear, just engaging with the premise...like Ben L. said I don't think the metric makes much sense, and in the way we have all seen it used commonly on the site, awfully, awfully thin and likely to fail.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @JD Martin:

Also you need enough independent income to get you to the point of profitability - I've been working with developers, new and old, 9 figure and shoestring guys, for a long time, and a lot of the new entrants don't understand you don't make 5 cents until 90-95% of the project is complete; until then all you do is stroke checks. No one pays you for water & sewer lines, roads, underground utilities, surveying, marketing, and all the rest of it that goes with turning ground into structure. At one time in 2009/2010 I could drive around to 20 abandoned projects in my area where the developer went bust. Most of the guys that went bust didn't understand the concept of phases. The guys that survived by me were the ones that had structures up/going up before it went bust, and could piecemeal lot sales out until the economy recovered.

make hey while the sun shines.. at one point in our market if you owned development dirt you were a rock star.. then 08 comes along and now your just DIRT LOL..

my latest 23 home project will be 30 months start to finish but its will make about 2 mil on 500k of cash.. so not bad.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Jay Hinrichs My brother and I are somewhat interested in the development side of things, but more from the standpoint of developing more affordable rentals in a few areas where there is a shortage.

We do not have any experience in it which is somewhat limiting though. Even if we could get the capital, there would be a learning curve involved with vetting out various contractors and figuring out other things we do not know.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

8y

Originally posted by @Joe Villeneuve:

I wouldn't wake up for $100/door

Agreed. Especially $100 per house. Are you telling me you'll warranty all and babysit renters and their neighbors in the hopes of a hundred bucks a month? Oops! Need a new drive, gutters, roof and fence and sewer line. Plus the dog next door wont shut up. There goes 18 years of cashflow and my blood pressure LOL

A lot of my best IRR investments have been break-even to slightly neg on the sfr cf front. B bouse. B area. Appreciated like crazy but the cash flow blew. Who cares if your IRR was 40%+.

I get multis for cf, singles for appreciation potential and a store of value. But I don't play in a market where homes sell for 1/4 of what it costed to build. I may get a large apt community there, but not houses at a hun or 2 per month.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@JD Martin Even at 100 doors, it does not seem like there is too much room for error, which is why it is somewhat concerning to me that so many people on this site have a goal of $100 a door, talk about it as a reasonable goal, and recommend it to new investors as a reasonable metric.

$100/door is scary for me to think about, especially at a low scale!

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Jonathan R McLaughlin I think it is likely to fail for new investors as well, which is the reason I created this post in the first place.

In all reality, I probably should have use examples of 5-10 units for the new investor, but things would look much worse from that scenario.

The 100 unit example is to assume there is some scale and see how it looks from that standpoint. It does not look that attractive to me as a simple buy and hold which is what most new investors look at. I understand most experienced people want to find a value add opportunity so it does not apply to them as much, but it does possibly apply more to someone looking at a property that was a recently completed value add that is renovated correctly and rents at market rates.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Steve Vaughan I can assume your best IRR investments on the SFRs that operated at break even were purchased between 2008 and 2011 correct? It is safe to say everyone who invested did well just after the last recession.

Timing the sale is important when there is reliance on appreciation but if held a little long, can do what happened to everyone purchasing from 2003-2007 that held their homes a little too long and lost up to half of their equity in some places.

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Jameson Sullivan

Real Estate Broker · Tacoma, WA · Member since 2016 · 545 posts · 252 votes

8y

I don't think the argument is "Shoot for $100/door and you will get rich" it's more "If you're under $100/door, run because you're doing something wrong"

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Henri Meli

Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes

8y

Great discussion, which started from Dustin Burke thread here.

@James W. . To me, what makes a difference is whether it is a value-add or not. Most of the time, least experience investors are looking to purchase the property simply for monthly cash flow, because they are not yet experienced enough at performing full analysis and raising NOIs. As mentioned above by

@Bill F. One MUST always look at the full picture through the life of the investment. (IRR, CoC, DCF, MIRR, ...) cashflow per door is just too dry of a number for me as it doesn't tell me anything about potential. As a value-add investor, I want to know the potential.

The following deal was recently closed in my market. I got outbid. I'm curious if you (James) would have made that deal: 16 units (all 2BR/1BA, built 1986, 850 sf each), 3 units were down and needed full rehab. Closed at $625k (around $40k/unit). T-12 showed rents averaging $550/unit. Average rents in the neighborhood: $650. PM told me she could see rents around $700 in 2-3 years due to high growth in the area. Previous owner was out of state investor and claimed the property was operating at 6.25 cap. B-/C+ area of town.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Jameson Sullivan After thinking the $100/door scenario through, I think I would run even if it was only a little over $100/door as I do not have anywhere near the scale to get any sort of efficiencies myself. In my market, at $100/door and rents at or above $1,000/door it only leads to a 10% variance in vacancy or rents becoming a break even situation which I think is a possibly situation in a recession.

In my mind, the $100/door rule, might make more sense to be looked at as a 20% or 25% of gross income rule as far as the amount of cash flow needed to go back to the investor after debt service and cap ex. This would seem like a safer number and using a percentage would take into consideration the differences in the rental market of geographic locations.

As it is now, $100/door in cash flow is completely different in downtown Seattle as it would be in Aberdeen, WA, or other cheaper areas. If we look at it as a 20% rule instead of $100/door, it would add a lot more cushion for an investor to weather a storm or handle the unexpected.

It could play out as follows:

High demand USA rent $1,500/mo

$100/door cushion=6.6% of rents go back as cash flow-not much cushion against changes in vacancy or rents.

$300/door=20% cushion. This is 3X the cushion offered to protect in a recession as compared with $100/door.

Standard area USA rent $1,000/mo

$100/door cushion= 10% of rents go back as cash flow. As looked at previously in this thread, it only leads to $100/mo in stressed rents to get to break even or 10% more rents than anticipated.

$200/door=20% cushion. This is double the protection and would allow the investor to withstand up to 20% more vacancy than initially planned or up to $200/mo in rental. It would also allow the investor to withstand both to a lesser extent (10% each) as well.

Lower cost USA rent $650/mo

$100/door cushion= 15.3% of rents going back as cash flow.

$130/door cushion= 20% of rents going back as cash flow. This is not as big of a difference with $100/door so it is possible $100/door could work assuming there is no major employer that drives an area and could lead to a major issue. It seems reasonable to think that a lower cost/unit might have less fluctuation in price than a higher cost area but it might be about the same as a percentage.

Some might look at me as too conservative related to this, but the reality is that the investor needs deep pockets or needs excess cash flow to protect against changes in the economic cycle if they are looking at investing in a safe area with only $100/door in cash flow. There is more protection in $100/door if investing in cheaper areas, but odds are that all of us are not investing in these areas and $100/door might not offer much protection as a "rule of thumb" when looking at average rents across the US.

I hope this thread continues to get traction and that some longer term investors can chime in with how their assets performed in the last decline. In the $1,000/mo scenario, I don't think cash flow coming back at $100/mo (10%) is enough to weather a storm, but I don't have the experience to suggest that it will have an impact of >10% of vacancy or 10% in rents either.

If any of the current posters were investing in rentals since the early 2000s, I would be curious to see how your portfolio fared.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Henri Meli

I concede that a value add situation is completely different and can be looked at as feasible if the $100/door is a starting point and not where it is at the end of the value add.

What I am getting at is what you hit on, which relates to new investors getting into the game. Many do not have the knowledge, time, resources, financing, or ability to start into real estate with a value add so many simply look for a property that will cash flow from the beginning. At the same time, their numbers are not solid but I am taking that out of the picture all together by starting at the $100/door without any expected variances coming up from the pre deal analysis.

The comments on Dustin's post is what led me to start this post but it isn't new. I have invested in Minnesota RE for 10 years off and on part time, but have not been on this site long. In the last several months, I have seen many people providing the guidance of $100/door to new investors.

I don't understand the $100/door, do not see it as enough cash flow to scale into additional properties and do not think it provides enough cushion looking at rents in an average market. I didn't want to hijack his post by asking everyone directly how they arrive at $100/door and thought it might be a good discussion to bring up separately in case there is something I am missing myself.

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Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

I think you're too focused on dollars per door. You can make cash flow just about anything you want. If I have a property with rent of $1000/mo, my reserves will be $300 - $400 per month. that gives me all the cushion needed in a downturn. If I do all that, and then have $100 - $200 cashflow, that's good investment, considering that I have $0 of my own cash in it. If you want more cashflow, increase your down payment, you can buy all of the cashflow you need to be comfortable.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

8y

Originally posted by @James W.:

@Steve Vaughan I can assume your best IRR investments on the SFRs that operated at break even were purchased between 2008 and 2011 correct? It is safe to say everyone who invested did well just after the last recession.

Timing the sale is important when there is reliance on appreciation but if held a little long, can do what happened to everyone purchasing from 2003-2007 that held their homes a little too long and lost up to half of their equity in some places.

At those prices at least, yes. Not agenting up and paying retail on the mls that's for sure. Not TK either. LOL

They all called me and were don't wanners. A couple examples: long-time LLs wife screams to the heavens that she will never again pick up another renter's dog poop. Call that guy! The guy calls me. A break even value play at 80% with terms. Another guy bought for his adult daughter. Divorced and moving away, the house makes the owners wife cry every time she thinks about it. We had Christmas here last year. Call that guy! Another great value with terms. Cf is meh on both, but principal paydown is a few hundred each per month and they are decent and in nicer areas. My future buyer is an owner occ, hence the massive IRR.

I don't hunt much anymore, but you have to be in the right place at the right time. Best way to do that is by being in your market all the time. Cheers!

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Jason D. Personally, I am not as focused on dollars/door as much as what I need to withstand a stressed environment. That will depend on the property. Cash flow/door is what is getting recommended to new investors. I brought it up to better understand how people are arriving on this metric as I do not understand what $100/door represents or how it can get looked at universally as a "rule of thumb" across all markets let along a given market.

I don't want to rely on beating my estimates or foregoing maintenance/Cap Ex in order to meet my debt service in a stressed environment. Who is to say the recession won't happen when you need to put a new roof on a building?

My analysis of $100/door assumes all variables are accurate and do not have any additional cushion above what would be needed for a property. It is good that you sock away your cap/ex in a separate account but the reality is that it is taxed as income in the given year and many investors do not specifically put it away for a rainy day.

I don't think it is reasonable to assume a new investor will beat their maintenance/Cap Ex so I am not sure it should be looked at as a consideration when recommending $100/door after all expenses to someone who is new.

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James W.

OP

Minneapolis, MN · Member since 2017 · 353 posts · 223 votes

8y

@Steve Vaughan I agree there can be room in a portfolio for a little speculation and lower cash flow for the right investor.

I just don't think it is a great play for someone new getting into the game when RE is at an all time high in some areas.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

8y

Originally posted by @James W.:

@Steve Vaughan I agree there can be room in a portfolio for a little speculation and lower cash flow for the right investor.

I just don't think it is a great play for someone new getting into the game when RE is at an all time high in some areas.

I hear you, especially if paying retail or worse just because the market is 'cheap'. New investors sinking most of their nest egg or savings into an OOS hood house 'for the cashflow' is speculating to me. Now you have property, distance, unknown tenant and bad PM risk. But that's an ok way to go on BP.

As far as 'speculating on appreciation', I could have turned around and sold, assigned or wholetailed any of my sfr purchases immediately for profit. I wouldn't do that to the sellers nor do I like one-time paydays at high tax rates.

New investors do need cashflow. I started that way too with 5 bedroom houses that I could allow animals in. That was a niche that got me 30% higher rents than a no pet 3/2. But....it's okay and far more profitable to invest for value. Getting a nice place that owner occs will later druel over at 80% that breaks even (not counting amort or tax bennies) is far better to me than even my 5 bed monsters that have been rentals forever. Speculation takes many forms!

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Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

8y

@James W., nice to see some rational thought being applied to this industry, as there has been so much "over exuberance" of late and, imho, a lot of mistakes have been made lately, probably due to the 10 years of artificially low rates that have been imposed on us. The fred website has some good historical data; 2009 vacancy rates were 11%!

The other concern for me, historically low cap rates means buying high and selling low, say 10 years from now.

Seems cap rates have fluctuated around 2% over the last 30 years, not a whole lot, but buy @5 cap and sell @ 7cap and you just gave away a ton of "cash flow"

Anyone else see a correlation,... the housing boom was caused by cheap money(loans to anyone who could fog a mirror)

The multi boom also supported by cheap money (artificially low interest rates) and the lack of returns in all other sectors.

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Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

@James Woodrich of a main concern of yours is withstanding market drop, you need to be buying value add properties under market value. If you're paying retail, your margins are going to be too thin to withstand a market drop, and you'll be underwater. Rents don't drop like property value does, so if you're in for the long haul, reserve correctly and $100/door will get you through it 99% of the time. If you are trying to buy and avoid all risk, you'll have a hard time getting going. About the reserves and taxes, you're right, any unused reserves are taxed, but that also adds to my cashflow (capex excluded).

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Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

8y

Originally posted by @Will G.:

@James W., nice to see some rational thought being applied to this industry, as there has been so much "over exuberance" of late and, imho, a lot of mistakes have been made lately, probably due to the 10 years of artificially low rates that have been imposed on us. The fred website has some good historical data; 2009 vacancy rates were 11%!

The other concern for me, historically low cap rates means buying high and selling low, say 10 years from now.

Seems cap rates have fluctuated around 2% over the last 30 years, not a whole lot, but buy @5 cap and sell @ 7cap and you just gave away a ton of "cash flow"

Anyone else see a correlation,... the housing boom was caused by cheap money(loans to anyone who could fog a mirror)

The multi boom also supported by cheap money (artificially low interest rates) and the lack of returns in all other sectors.

Well said Will. Many investors are adding value to hedge the risk and also not banking on continued market rent appreciation. It's a challenging time to model the future right now.

Regarding a different reply, prudent investing in a predictable value play is not speculation. People who blindly buy value plays in hot markets are not on BP posting and researching how to properly invest. I don't know why the cash flow vs value investing debate rages on BP...most of the value investors on BP know what they are doing and are very careful now (and always). Buying both high and low GRM properties can be profitable predictable strategies.

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$100/door debate-sell me on it

$100/door debate-sell me on it

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