Having trouble finding deals that 'pencil out'.

24 Replies

As you can tell, I'm a newbie - so if this is the wrong section or anything let me know.

My situation: I just sold a business, and have a decent amount of cash to invest. I'm fed up with the stock market, and don't want to own another retail business [ever :)]. So, here I am - getting into REI.

That being said, I'm having trouble finding properties that I can buy and rent with positive cash flow in my area. The average entry-level house here is about $225,000+ for 3br, 2ba - nothing special, average neighborhood. However, the average rents are around $1,100-$1,300/mo. Not enough unless I put a large amount down. I want to leverage the bank's money as much as possible, and I'm getting pretty good rates with 10-20% down. Should I not be looking at MLS to find properties? I've looked at the foreclosure auctions, and they don't seem to be that great, either.

I have spoken to 2 other landlords; they both told me that when they started they had negative cash flow and raised the rents over time until they flowed. They both said they contiuned to make money from the tax benefits, and even more when they sell properties, as this area has been enjoying some great appreciation. However, when I read most opinions here, it seems that the negative cash flow [or even breakeven] deals are losers, and should never be touched. Can anyone offer any advice on this?

Thanks in advance.

Your area is like many that will not cash flow without a serious down payment. I’m in Las Vegas and it is like that here too. That being said, there are deals out there that will cash flow but you have to work to find them. Another option is to invest in other parts of the country that do work. In this day and age that isn’t as hard as it once was. The key would be to have an honest and competent property manager to handle the properties. If that idea appeals to you then you should use the internet and begin searching, if not then just keep looking where you are until you find something.

8)

Originally posted by "Rehab702":
Your area is like many that will not cash flow without a serious down payment. I’m in Las Vegas and it is like that here too. That being said, there are deals out there that will cash flow but you have to work to find them. Another option is to invest in other parts of the country that do work. In this day and age that isn’t as hard as it once was. The key would be to have an honest and competent property manager to handle the properties. If that idea appeals to you then you should use the internet and begin searching, if not then just keep looking where you are until you find something.

8)

Thanks for the advice. I was pondering the idea that it would be better in different areas. I've still got a business in Texas, and know a lot of folks down there. I'll start checking out that market, as well.

A website that I visit all the time features Realtors around the country reporting about their market. The site is free and I find it interesting reading about other areas. The bulk of my investing is in towns a couple hundred miles from where I live but I still find it good to keep up on national trends.

Here is the site:

www.NARREIA.com

8)

You might also consider multi-family properties, too. Around Denver, single families don't even come close as rentals. Multi's aren't great, but better than SFR's. You'll pay a higher interest rate and need a bigger downpayment, but it sounds like you might have that.

As others will point out, the real trick is finding a distressed seller.

Originally posted by "BlackCobra":

I have spoken to 2 other landlords; they both told me that when they started they had negative cash flow and raised the rents over time until they flowed. They both said they contiuned to make money from the tax benefits, and even more when they sell properties, as this area has been enjoying some great appreciation. However, when I read most opinions here, it seems that the negative cash flow [or even breakeven] deals are losers, and should never be touched. Can anyone offer any advice on this?

I'm glad you've been reading up. If you buy a property with negative cash-flow or one that is break-even, you're just asking for trouble. Why would you want to buy a loser? It sounds like you're already smarter than all of the landlords you've spoken to, which bodes well for you! Buying rental property and hoping for appreciation is just that, a guessing game.

Stick to your smarts and be patient. Look for the properties that will make you money, not put you out of business.

I wanted to give a slightly different view on the break-even property idea than most on this site. First off, I have much, much less experience and only a passing interest in RE Investing vs making it a career so I'm no expert and have much less expertise and success in RE than many others on the forum. However, after having thought about this, I do have an opinion that I haven't really seen discussed here and that is the thought that if you're investing in SFR's, there might not be anything wrong with having a couple properties that don't perform so well *if* you have evidence that they are in an appreciating market. You can make more money with 1 property in a hot market in a couple year's time than you can renting dozens of properties with a couple hundred each of monthly cash flow. Buying and counting on a single property to appreciate is indeed dangerous but in my opinion, if you have other money makers and reason to believe you can play the appreciation game with a single property in your portfolio that isn't cash-flowing, I would posit that taking that informed investment risk with the hopes of a bigger payout is not a bad strategy. It's really no different than putting the bulk of your stock portfolio in conservative stocks while having the 10-20% in high-risk/high-reward investments. You may lose, you may win, you may break even but the possible upside is greater and I believe worth the risk. In fact, having done no research or reading on it (i.e. I have no data to back up my opinion), I'll bet you would find that many who have made their fortunes in RE made it from appreciation, not cash flow.

I'd love to hear thoughts on this and hopefully I qualified my comments enough to indicate that I don't believe on betting strictly on appreciation, especially if you can't support the property that you are buying with your reserves. I'm just saying that a little diversification can be good and I know in my own case, my luck with appreciation (and luck is what it was) has made me much more money than if I had bought and held a good cash-flowing property with minimal appreciation for many, many years.

I used to subscribe to that theory as well, until I did just that - held a property with lots of appreciation potential with zero cash flow. It sounds ok in theory, but landlording comes with it's headaches. To take on those headaches for absolutely no income or worse yet pay out every month for the pleasure of being a landlord - just not worth it.
I suppose I could've kept it up for the next real estate boom, but no thanks. I lasted 6 months before I sold. I was lucky to keep my shirt on in that sale, but at least I learned a good lesson - no cash flow just doesn't make sense, no matter how you justify it.
Besides, whose to say cash flowing property doesn't appreciate the same as a loser rental?
Why not get cash flow, while you appreciate?

This is the difference between investing and speculating. An investor is looking to get a return on the money invested plus mortgage pay-down. Any money that comes from appreciation is gravy. A speculator is making a bet on appreciation. We saw a lot of that here in Las Vegas, realtors were saying it was ok to have negative cash flow because you were really in it for the appreciation. I don’t speculate only invest. It’s ok to speculate as long as you do it with your eyes open and know that you are taking a much greater risk in hoping for that reward.

8)

Great discussion. T-bone77, you pretty much summarized my philosophy. This is what I intended to do, until I came to this site and saw such an aversion to this kind of strategy. I feel that I'm in a market that will continue to appreciate. If I leverage the banks money, I don't need a whole lot of appreciation to make 25-50% on my investment every year. It is certainly speculation or gambling, or whatever you want to call it. I do have the tolerance for some high-risk endeavors right now. I could withstand the blow if a couple of these didn't work out.

However, as Rehab702 and Minna stated, investors will get a return as cash flow and the appreciation benefit. So, I will be re-evaluating my approach to investing in real estate. I've pulled the trigger on one property already that is just slightly above breakeven month-to-month, but I have a tenant in there that will likely buy it from me in 3 years.

I may look at some commercial properties, as well. Muddy the water even more! :mrgreen:

Originally posted by "BlackCobra":
If I leverage the banks money, I don't need a whole lot of appreciation to make 25-50% on my investment every year.

Hmmm. Transaction costs on real estate are so huge you need 10% appreciation just to break even. Add in carrying costs, which can easily be 3-4%, and you need even more to break even. If you invest 10% for a down payment, and want to get 25% ROI after 1 year, you need appreciation of something like 14%, if you ignore carrying costs. Less that 11% or so and you're in the hole. Its better with a longer horizon. For five years, you'll break even if it appreciates 2.5% annually, and you'll get your 25% if it appreciates 6% per year. But, you better have a tenant paying those carrying costs. If there coming out of pocket, you need that much more appreciation to stay above water.

Be sure to look at this page if you really think real estate is going to continue to have significant appreciation going into the future Irrational Exuberance, the Real Estate Bubble and the Weakening of the US Economy
That sure looks a lot like the NASDAQ in March 2000.

John Talbott in "Sell Now" gives an even scarier picture and a comparison to Japan's housing situation. House prices there are falling, not rising. Don't recall if its this book on another, but one author is predicting very large price drops in the coming years. Like 50% on houses currently worth $500,000.

Hi BlackCorbra, I think you are very smart to come here and ask the questions NOW instead of AFTER getting into a deal. I too have been a long-term investor in areas other than income properties and am here to learn before I go too far.

From what little I know (and that is ALL I know in this area), I can't imagine how a place will cash flow given the numbers you supplied even with a large downpayment or do better than a regular MMF. I know that cash flow might not be your first objective. I have a feeling that Mike will chime in and tell you that cash flow is king and give you the news about 45-50 percent operating expenses. He and others know much more than me.

Just curious. Do you think you will have think you will rehab the properties you are considering?

Will surely learn a lot from this thread.

Originally posted by "Robert12":
Hi BlackCorbra, I think you are very smart to come here and ask the questions NOW instead of AFTER getting into a deal. I too have been a long-term investor in areas other than income properties and am here to learn before I go too far.

From what little I know (and that is ALL I know in this area), I can't imagine how a place will cash flow given the numbers you supplied even with a large downpayment or do better than a regular MMF. I know that cash flow might not be your first objective. I have a feeling that Mike will chime in and tell you that cash flow is king and give you the news about 45-50 percent operating expenses. He and others know much more than me.

Just curious. Do you think you will have think you will rehab the properties you are considering?

Will surely learn a lot from this thread.

Robert, so far the only properties I have looked at are new [or newer]. That does not mean that I am not considering older properties that need work. I'm just getting my feet wet so far. And, yes - these are not working out as rental prospects. I had considered a breakeven strategy relying on appreciation to leverage the bank's money, but as stated above - I'm rethinking this idea. After talking with some friends that are experienced in REI, I may look at commercial properties. Learning more and more every day.

Thumbs up for doing all the math before you get into it. The main reason I even jumped in is because I have seen newbies make some real scary :shock: deals and then ask questions later.

Keep up the due diligence and come come back often!!

Originally posted by "Robert12":
Thumbs up for doing all the math before you get into it. The main reason I even jumped in is because I have seen newbies make some real scary :shock: deals and then ask questions later.

Keep up the due diligence and come come back often!!

Cool - thanks, Robert. I actually did jump into it, but it's a deal that I don't expect to make a bunch of money on. I bought a house for my little sister and her fiance to live in. It is a breakeven deal [well, $100 cash flow], but she'll likely buy the property from me in 3 years or so. I'm fortunate to be in a position to do this and not worry about losing my whole nest egg. My plan is [was] to buy 20 single-family properties over the next 5 years. However, I've been having trouble finding the right deal at all so far, so I'm back to the drawing board - thinking about commercial at this point.

Cobra,

That could be one reason why you are not finding properties. How do you think you are going to get into the rental business looking at new properties? All of the rentals I look at were built between 1920 and 1950. This are the homes that you buy cheap and then rent the market. As long as they are sound homes and have been kept up, then you shouldn't see any major problems with the house. What's the worst that can happen? You missed a leak in a roof, need a new furnace, hot water heater? These are just operational expenses that come with owning a home. You need to look at old homes that have been maintained, if you want good rental cash flow. Like others say here, you are not living in the house. You are renting the house to people who cannot buy their own house.

Black Cobra,

A $197,000 house that has gross rents of $1,300 per month does not have a $100 positive cash flow! In the real world it loses about $660 per month! Also, in the real world, tenants (including relatives) almost never buy the property.

I never deal with relatives, friends, or friends of relatives. I think it's Bluemoon who always says "never deal with anyone you can't sue". It's sad, but he's exactly right.

Mike

Working with family and friends is a BAD idea. I've already had some very bad experiences working with friends and family on deals. Definitely something to avoid! I'm 100% with Mike on this one.

Originally posted by "MikeOH":
Black Cobra,

A $197,000 house that has gross rents of $1,300 per month does not have a $100 positive cash flow! In the real world it loses about $660 per month! Also, in the real world, tenants (including relatives) almost never buy the property.

I never deal with relatives, friends, or friends of relatives. I think it's Bluemoon who always says "never deal with anyone you can't sue". It's sad, but he's exactly right.

Mike

Mike,

It's interesting how you know so much about this deal. How much is the mortgage payment? How much did I put down? What's my interest rate? How did you come up with $660/month loss? What does my sister do for a living that will prevent her from buying it after she's married? What kind of savings plan did we come up with to afford her the means for a downpayment in 36 months?

You've made yourself perfectly clear:

* I know you're a savvy investor.
* I know you think I'm an idiot for doing this deal. [You've expressed that in 2 threads now]
* I get the picture.

Not sure if you're trying to be helpful, or just belittle the new kid, but my perception is the latter.

I don't think he's trying to belittle you. Mike uses a formula, like other experienced investors, to quickly calculate cash-flow on a property. What your sister does has nothing to do with your buying decisions (business-wise), and how she's going to come up with the money doesn't either.

What he's trying to get across is that you can't make decisions based on the criteria that you are presently using. Would you hold any other typical tenant to the same standard as your sister? Probably not, right? If that's the case, are you willing to hold your sister to the same line as you would any typical tenant? The questions about savngs plans and employment of your sister are important questions to ask because it sounds like she is not in the position to buy the property today. If that's the case, you have no way to prove she will be in 3 years, right? If that's the case, then you're taking just as much risk as buying a property for appreciation . . . you're not 100% sure.

Everyone wants to make it sound and look easy to invest, but it is not. Every investor must be aware of what they are getting into, and know the consequences of their decisions. People are losing their shirts every day because they make decisions based on bad criteria.

I hope you don't take this as a critique, but a lesson from someone who has seen families and friends torn apart from bad business (real estate) decisions, as well as from someone who has seen investors burned for making emotional decisions instead of business ones. Step back from your decision and look at it from an outsider's position.

biggerpo,

Understood - and, I agree. However, from my point of view, statements like:

At a purchase price of $197,000, this IS a loser with rents of $1,300 per month or $1,700 per month. OUCH!

Maybe you should have gotten your systems in place before you took a bath on this one!

are not productive, and to a new member [to the board, not just REI] it makes me question whether to continue to participate. I actually got an apologetic PM from another member because of it.

I've stated many times that this will not be the prototypical investment that I model my strategy after: It's a one-timer to do a deal with a family member. Sure, maybe I'm not the smartest guy for doing 'business' with family, but I did in this case. I would not have bought the same house, put that much down, or charged that much rent on any other property. The title of this thread says it all: I'm having difficulty finding deals.

Anyway - thanks, and I'll move on and continue to reap the benefits of your site! 8)

statements like:

Quote:
At a purchase price of $197,000, this IS a loser with rents of $1,300 per month or $1,700 per month. OUCH!

Maybe you should have gotten your systems in place before you took a bath on this one!

are not productive, and to a new member [to the board, not just REI] it makes me question whether to continue to participate.

BlackCobra,

Quite the contrary, I think that the reality of the situation is VERY important and productive. Rehab, Minna, TC, BiggerPro, and I all told you the reality of your "deal". Your insistence that this deal will cash flow is simply wrong and I don't think it's fair to the other newbies to leave that assertion unchallenged. Without a BIG downpayment, this property will lose money, which is fine with me (it's not my money). What's important here is that the facts are presented.

Also, you seem to have gotten quite upset by my post. Without a MUCH thicker skin than that, you will NOT survive in the rental business. That was nothing compared to the stuff you'll experience everyday with tenants.

BTW, I am not trying to badger you, only to give you the facts. I also don't think you're an idiot for buying this property - simply uninformed. As BiggerPro pointed out, the majority of newbies in this business fail in a short period of time. The number one reason for the failure is that they paid too much for their rentals and had a negative cash flow. The number two reason is that they don't know how to properly deal with tenants. You didn't do anything that the majority of investors haven't done. It's a common mistake.

Good Luck,

Mike