My go-to turnkey company sent me an interesting offer last night. A 55k house cash flowing just over $200/month in a rougher area of town. The realtor doesn't expect there to be much appreciation as all the revitalization is going on in a different part of town. I can't force much equity into the propt since it's turn key and most things have already been done. Would you buy based off the high cap rate and solid cash flow knowing you won't gain much appreciation?

Originally posted by @Ron Todd :

My go-to turnkey company sent me an interesting offer last night. A 55k house cash flowing just over $200/month in a rougher area of town. The realtor doesn't expect there to be much appreciation as all the revitalization is going on in a different part of town. I can't force much equity into the propt since it's turn key and most things have already been done. Would you buy based off the high cap rate and solid cash flow knowing you won't gain much appreciation?

 Your comment: "in a rougher area of town"

At $200 a month that is $2400 a year minus 10% vacancy rate, minus an occasional trashed house, minus a broken water heater, minus etc etc etc. Things happen with houses and they need periodic repairs.

I dunno, what do you think?

Thanks for the reply Mike. Is there a Target cash flow you would look for in a situation like this or just avoid completely? The $200 cash flow is after taking in considerations for maintenance, vacancy, property management etc. Based off local trends.

How confident are you with your PM? They had better have a lot of experience in low class neighborhoods..... those are a whole different animal.

Personally $200/month cash flow to deal with the risks of a D class neighborhood isn't worth it. That margin is just too tight for me.

When you have to figure out there is a good chance there will never be any appreciation, you have to be careful on your exit plan..... you are gonna eat $$ when you sell it eventually...... fix to get sale ready......closing costs...agent commission....all those years of "cash flowing" may be gone real quick once those expenses are paid off.

With more risk there has to be more reward...... $200/month with something that will never appreciate isn't much reward for that risk..... for me at least....

Thanks Ned. I think my exit plan strategy is lacking as I planned on holding onto the house, but realistically, I would be using it as a stepping stone to something better down the road.

@Ron Todd ....even if you plan to hold it forever, always think about an exit plan.... stuff happens and your plan to hold it forever may not play out the way you think. Lots of stuff can change where you want or need to sell it off.

When analyzing a property always have some other contingency plans in mind.

I've learned through BP that the lack of appreciation on a lot of these TK properties in the Midwest that are cash flowing now is going to be the smack in the face for investors when it comes time to sell them off. The TK house that you paid market for at 60k is going to be worth 60K in 10 years and its not going to be "brand new" anymore..... so now you have to put 10k into it to get it back to the market price of 60k.

So with no or very little appreciation, that cash flow for all those years isn't as sweat as you thought it was......

Originally posted by @Ron Todd :

Thanks for the reply Mike. Is there a Target cash flow you would look for in a situation like this or just avoid completely? The $200 cash flow is after taking in considerations for maintenance, vacancy, property management etc. Based off local trends.

 I get $500 to a $1000 positive cash flow on each of my properties but they are bought Subject To and sold on Lease Option to Tenant Buyers who take care of the repairs, so it is a bit different than what you are doing. The amount you are spending on the property would pay for a Turnkey that does what I am describing, but the Turnkeys are in Phoenix and a long walk from NJ. LOL If I was doing things the traditional way, using cash to buy a $55,000 house in a rougher neighborhood in NJ, I might be okay with $200 after all expenses and reserves for future repairs. But, I would also look for a better deal. It isn't an exciting deal but it's "okay". Here is what I consider to be an acceptable deal at the link below: You might want to see if this can be done in your neck of the woods. I'd rather cash flow $600 on a $200,000 house in a decent neighborhood than have 3 houses in a rougher neighborhood each putting off $200. That is 3x the headaches for the same amount of money.

Average Turnkey Cash Flow Per Door In Phoenix Metro Area No Bank Financing Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

Rule #1 - Don't buy $50k homes in bad locations with no value add and 3rd party management.

Seems like the results are in. Thanks for the help!

@Ron Todd Who's the go-to company?

Table investments in OKC.

I may buy something in the northwest area. Del City Midwest city to risky 4me.

They have properties all over the city, this was the first one they sent me that raised flags.

@Ron Todd

I agree with Mike :)

Good sound advice!

@Ron Todd . Would you be buying in cash?

Most banks won’t finance a home under 60K.

I personally would not buy this property. Too much risk, too little reward.

If you we’re planning on paying cash I would definitely not buy this property. You can buy bigger and better properties with better cash flow and appreciation

@Ron Todd cashflow should be much higher in a C/D class for that price with risks you are taking. What market is this? I actually deal with turnkey DAILY and you should have more cashflow. Are you using high maintenance %? I can’t see your numbers.... but happy to take a look at it for you.

@Ron Todd that’s less than a 5% cap rate man. If you want 5% on your money, buy some municipal bonds, at least those are tax free. If you want a better return without management, partnering with any experienced investor on this forum would get you around twice that.

Originally posted by @Justin Hammond :

@Ron Todd that’s less than a 5% cap rate man. If you want 5% on your money, buy some municipal bonds, at least those are tax free. If you want a better return without management, partnering with any experienced investor on this forum would get you around twice that.

 5 cap doesn't mean 5% return. A leveraged return with financing may be much higher than assuming one bought all cash

@justin Hammond I think I may have confused people with my definition of cash flow? If you don't account for the mortgage payment, I'm calculating a cap rate of 10.1%. 465/month noi Into the 55k. I just included the mortgage payment in my analysis so it would end up being just over 200 all said and done. Let me know if I'm way off the mark here, I passed on the property but I'm learning a great deal from the great people of BP!

@Bill Goodland yeah sorry, it sounded like @Ron Todd was paying cash for the property, I misread some posts