Rental Property Investing when they dont cashflow
OR · Member since 2018 · 33 posts · 8 votes
Rental Property Investing when they dont cashflow
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4yQuote from @Pascual Torres:
Hi, Im trying to invest in rental properties but the prices in my local area are so high that everything I look at doesnt cash flow (with traditional financing). Everything is flying off the shelves. I mean everything. Offering over asking price is the norm and necessary if you want to get the property. Buying for appreciation seems what people are doing but from what I read, that is not good strategy.
Should I stop trying to look for cash flowing properties and buy negative cash flowing properties just for the appreciation and loan paydown?
What strategies have you experienced investors deployed in such climate?
I think you already know the answer. We're in a peak market with prices that are unhinged from reality. It didn't make sense to buy properties with negative cash flow six years ago, two year ago, or last week.
Stick to the principles and exercise some patience. It may be a year - or even two - before we return to some sense of normalcy. Don't get caught up in the frenzy and make a mistake that may negatively impact the rest of your life.
The DIY Landlord Book4.7247 Reviews
21 Replies
- 4yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
Buying for appreciation is OK if you are in Silicon Valley etc. But you need a lot of money so you can afford to lose monthly until you are ready to sell. What happens if you don't have deep pockets is something expesive comes along.......maybe a tenant who does not pay and trashes the place, or a sewer pipe backs up and causes flooding. If you don't have enough access to capital you may be forced to sell and that can get really ugly. So choose a different market if you are looking for cash flow.
- Bay Area, CA · Member since 2021 · 6 posts · 5 votes4y
To add to this, what is driving people to be buying these properties where the numbers just simply don't make sense and it obviously doesn't cash flow? Are people hedging on inflation and appreciation?
- 4yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Try a different area. One of the areas where I bought properties about 7 years ago is now unaffordable due to increases in prices (house prices have more than doubled). Even when I bought them and prices were going up a bit and houses selling fast, they didn't cash flow at first. They just about broke even and I paid about $20-50/month out of pocket and I was fine with that. Rents went up and now they cash flow and I have a lot of equity in the home through paying down the mortgage (well the tenants did that) and appreciation. So buy what you are comfortable with and realize that 5 years down the road things may look very different.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Quote from @Pascual Torres:
Hi, Im trying to invest in rental properties but the prices in my local area are so high that everything I look at doesnt cash flow (with traditional financing). Everything is flying off the shelves. I mean everything. Offering over asking price is the norm and necessary if you want to get the property. Buying for appreciation seems what people are doing but from what I read, that is not good strategy.
Should I stop trying to look for cash flowing properties and buy negative cash flowing properties just for the appreciation and loan paydown?
What strategies have you experienced investors deployed in such climate?
I think you already know the answer. We're in a peak market with prices that are unhinged from reality. It didn't make sense to buy properties with negative cash flow six years ago, two year ago, or last week.
Stick to the principles and exercise some patience. It may be a year - or even two - before we return to some sense of normalcy. Don't get caught up in the frenzy and make a mistake that may negatively impact the rest of your life.
The DIY Landlord Book4.7247 Reviews - OR · Member since 2018 · 33 posts · 8 votes4y
Quote from @Aaron W Cary:
To add to this, what is driving people to be buying these properties where the numbers just simply don't make sense and it obviously doesn't cash flow? Are people hedging on inflation and appreciation?
There is not a lot of supply around here and it is a very desirable place to live. Lots of people from big cities are moving in and bringing their big equity with them. It's hard competing with owner occupied as in "investor".
I hear from local agents that some people are totally buying and holding regardless of cashflow just for the appreciation. A year ago a house would have been 80K cheaper according to local agents.
- OR · Member since 2018 · 33 posts · 8 votes4y
Quote from @Nathan Gesner:
Quote from @Pascual Torres:
Hi, Im trying to invest in rental properties but the prices in my local area are so high that everything I look at doesnt cash flow (with traditional financing). Everything is flying off the shelves. I mean everything. Offering over asking price is the norm and necessary if you want to get the property. Buying for appreciation seems what people are doing but from what I read, that is not good strategy.
Should I stop trying to look for cash flowing properties and buy negative cash flowing properties just for the appreciation and loan paydown?
What strategies have you experienced investors deployed in such climate?
I think you already know the answer. We're in a peak market with prices that are unhinged from reality. It didn't make sense to buy properties with negative cash flow six years ago, two year ago, or last week.
Stick to the principles and exercise some patience. It may be a year - or even two - before we return to some sense of normalcy. Don't get caught up in the frenzy and make a mistake that may negatively impact the rest of your life.
Very good point on the patience. It can be easy to get caught up in the frenzy. It's easy to just get all pumped up and want to just make something happen, which is a good thing in some circumstances. Also easy to think you are missing out when you compare homes prices from a year ago to now. Makes you think that you should "jumped on it".
- Rental Property Investor · Jacksonville, FL · Member since 2015 · 343 posts · 142 votes4y
@Pascual Torres
Stay the course. I prefer to always get Cashflow
Or, you can buy a property that needs work and add the equity that way instead of going the traditional route of buying at retail.
- 4yKaroline KaonPro MemberInvestor · Queens, NY · Member since 2016 · 64 posts · 22 votes
Quote from @Pascual Torres:
Quote from @Aaron W Cary:
To add to this, what is driving people to be buying these properties where the numbers just simply don't make sense and it obviously doesn't cash flow? Are people hedging on inflation and appreciation?
There is not a lot of supply around here and it is a very desirable place to live. Lots of people from big cities are moving in and bringing their big equity with them. It's hard competing with owner occupied as in "investor".
I hear from local agents that some people are totally buying and holding regardless of cashflow just for the appreciation. A year ago a house would have been 80K cheaper according to local agents.
Have you thought an investing out of state? Are you tied to Oregon because you live there?
- Realtor · Woodland, CA · Member since 2020 · 33 posts · 43 votes4y
@Pascual Torres
If you need your investment to cash flow, it is not good to buy investments that don’t do that. Dont get caught up in what everyone else is doing. Stick to your plan and your numbers.
You want to make your money when you buy. Then cash flow and appreciation is all gravy. There are a lot of people out there doing deals where margins are slim. I guess the more experienced you are, the easier that is to do, but why buy something that barely works? You should buy a property with multiple ways to profit off of it.
If it takes money out of your pocket monthly, that is a bad deal. Buying things with the hopes of it appreciating later is speculation. Don’t be a speculator. Be an investor.
- Las Vegas, NV · Member since 2019 · 173 posts · 78 votes4y
@Pascual Torres I'm in a similar situation where I live. We are looking to get into investing but properties don't last more than a few days and go for over asking, often sight unseen. The prices are increasing faster than you would think could be possible.
I'm not in a position to tell anyone what to do but we are doing our best to be patient. We look at properties daily, run numbers, if something looks decent we take another step but often can't compete with an all cash buyer.
Sometimes the best action is no action. Not going to buy something for the sake of saying we own one. For now I'm looking to continue to learn and take some of the money that would be a down payment and use it to make money for future investments.
Good luck
- OR · Member since 2018 · 33 posts · 8 votes4y
Quote from @Brian Walters:
@Pascual Torres I'm in a similar situation where I live. We are looking to get into investing but properties don't last more than a few days and go for over asking, often sight unseen. The prices are increasing faster than you would think could be possible.
I'm not in a position to tell anyone what to do but we are doing our best to be patient. We look at properties daily, run numbers, if something looks decent we take another step but often can't compete with an all cash buyer.
Sometimes the best action is no action. Not going to buy something for the sake of saying we own one. For now I'm looking to continue to learn and take some of the money that would be a down payment and use it to make money for future investments.
Good luck
Good luck Brian!
- OR · Member since 2018 · 33 posts · 8 votes4yI have thought about it but since a I am noob, I have not thought of it as a viable option.
Quote from @Karoline Kaon:
Quote from @Pascual Torres:
Quote from @Aaron W Cary:
To add to this, what is driving people to be buying these properties where the numbers just simply don't make sense and it obviously doesn't cash flow? Are people hedging on inflation and appreciation?
There is not a lot of supply around here and it is a very desirable place to live. Lots of people from big cities are moving in and bringing their big equity with them. It's hard competing with owner occupied as in "investor".
I hear from local agents that some people are totally buying and holding regardless of cashflow just for the appreciation. A year ago a house would have been 80K cheaper according to local agents.
Have you thought an investing out of state? Are you tied to Oregon because you live there?
I plan to do the property management myself. - Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes4y
@Pascual Torres sounds like you may be in a good market for a value-add strategy: but the worst property in the best neighborhood you can find, with under-market rents. Fix it up, bring it up to the standards of the surrounding properties, bring the rents up to market and you’ll force a lot of appreciation to build a lot of equity quickly as well as create positive cashflow in time. This has been my strategy and actually the properties I bought with initial negative cashflow have had much greater overall returns than the few ones I bought with initial positive cashflow due to being in better locations with higher appreciation, more significant rent increases, more substantial principle pay down and bigger depreciation tax benefits. Keep in mind this is market-specific as natural appreciation has been averaging $1,000 PER DAY here for the last few years without lifting a finger, and I can do even better than that and build significant equity quickly with value-add properties plus get them cash-flowing within a year or two by raising rents to market. So I could care less about whether a property is cash flowing a few hundred a month or not at the time of purchase. The downside is that it’s a bit more of an active strategy and also more capital intensive because of the rehab component/ initial monthly losses. Also higher barrier to entry as markets where this works best are typically more expensive. Works best in high-appreciation markets where rental demand is high/rents are increasing. Pays off very well in the end, certainly much better than doing nothing.
- Portland, OR · Member since 2019 · 45 posts · 32 votes4y
They say you can find a deal in any market. Maybe that's true, but it gets a lot harder when the market is hot like it is now.
Don't buy unless it cash flows. Don't bet on appreciation. Don't forget you have to pay a lot of taxes on those capital gains.
Also, Oregon is a terrible place to invest. The regulations here have gotten quite onerous the last few years. A friend and investor recently had to pay two tenants 4000 to put their stuff in a pickup and move across town. He sold his property as he was retiring, gave them a year notice, but was still required to pay their moving expenses. And don't forget the state wide rent control.
- 4yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
@Pascual Torres you just need to look harder to find deals or you become a lemming following the rest of the herd of the cliff.
Are you letting EVERYONE you know that you are looking for an investment property? How often are you reminding them, so you stay top-of-mind?
What messages can you consistently send and rotate, about situations that are appealing to you?
Logical Property Management4.9459 Reviews - Real Estate Broker · Portland, OR · Member since 2018 · 126 posts · 71 votes4y
I wouldn't agree @Joel W. that Oregon is a bad place to invest. City of Portland may be a tough place to invest with moving policies if you no cause evict tenants but there are many other surrounding cities that are doing very well.
The market is hot for real estate, which pushes many people out of the option of being able to buy so they will have to rent. There is a shortage of rentals in our market, which makes it easy to rent, raise rents and make a profit. Our market lost a lot of rentals over the last few years so those of us that have remained have raised rents and stayed in the game.
Yes, Oregon has rent control, but it's over 9% we can raise rents this year. I am very comfortable with that because I do a rent analysis each year and make sure I am charging Fair Market rents. My rental properties are doing very well and I reinvested this year and did some remodeling and raised the rent when my tenant moved out. Wrote off the remodel on my taxes and rerented the property quickly.
The metro area is a mecca for ADU's, house hacking and other creative ways to add units to properties. I have many clients who only look at properties that have been sitting on the market - we look at many different strategies to make the property work. When the going gets tough - the tough get creative. Every investor is trying to find the easy markets when sometimes you have to think a little differently, look at projects through a different lense and be willing to try something new. I have clients turning a SF into a triplex and with HB2001 coming the flood gates will open for building extra units on most any lot in the area. It's an exciting time to be an investor here. The skies the limit.
- Member since 2021 · 402 posts · 277 votes4y
I do not see how waiting a few years will make the difference. Prices will not magically drop by 100k, 200k...I can see 10%-15% percent down in adjustments that will be a temp reprieve but the real estate price has always been trending upward. If you do have other sources of income and you are planning to keep the property long term and perhaps for your children it my make sense to get it even if you will subsidize the tenant's rent for a while. We are in the new territory and some of the older rules might be less applicable than before. There is a risk in everything. But what is important are you gaining as much knowledge from the experts and applying it to your specific situation which might be unique? Do not use cash to buy these properties. Use lenders.
- Lender · Vancouver, WA · Member since 2015 · 482 posts · 316 votes4y
Something to consider is to evaluate the current situation as the new norm with interest rates and prices of homes. If I look at the things I have bought in the last few years, I have to remember that I bought them with interest rates that were lower, and the current formulas worked. Now, we may need to re-evaluate the formulas themselves.
We are in a different era of rising interest rates and high appreciation. If this is the new normal, ironically the same rules apply, if I buy today, can I make it cash flow and get appreciation as well. The rents I saw a few years ago seemed apppropriate, but now they seem totally unaffordable. But, tenants have nowhere else to go cheaper. It doesn't matter what the rent is, whenever someone tells me that they are renting, I suggest they buy to stabilize their own rent payment, not necessarily for today, but for next year. People tell me what they are paying and they say they barely make it work and I often wonder, "How will they make it work next year?" But I really don't care, not really, not meaning to be harsh, but we charge market rates, for rent. There are so many programs out there for people to buy. I.e. Last fall, I helped a family buy a home using the Washington Bond. Truth be told, their out-of-pocket cost was $3,000 as their portion of the down, plus the cost of an inspection, an appraisal. That is less than the cost to get into an apartment. The rest of the costs were financed. Is that what I would do? No, but it is what this family chose to do. It is totally crazy to me, but so is paying $2,000 for a 1,000 sqr foot 1970's house, or paying $1,700 for a newer 1-bedroom apartment.
Our market doesn't have super high wages, but most households are dual-income or triple-income because that is how people make it work. A mentor told me a few years ago that families would be returning to more multi-generational households, from an affordability perspective. I scoffed at the idea, but here we are.
Rent control? Who cares - it forces me to raise rent every year. I find it very perverse, and counter-intuitive, but there it is. I can't afford to not raise rents and then be left holding the bag as my costs increase, because I didn't raise the rent. It's a business model, no different than others - provide a service for a price, if costs increase then pass them to the end consumer.
As someone here said, buy the worst house on the block, rehab it, rent it or sell it at market rate. Rinse and repeat.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes4yIt depends on your comfort levels and what you can afford. Can you afford the negative cash flow that will be in play for a while until rents increase and the appreciation happens? If you go the appreciation route, it's critical not to just do it blindly--make sure you know exactly why you think a particular property should appreciate and by how much.
The alternative is you can always invest out-of-state for cash flow. You won't get as high of appreciation, but it'll be a lower cost of entry and list risk each month with cash flow. I live in California and tons of people from here invest out-of-state for the exact reason you're stating.
It's not just you or Oregon, it's the entire west coast that doesn't cash flow. - OR · Member since 2018 · 33 posts · 8 votes4y
thanks guys for all you input.
I was curious if negative cash flow was a huge mistake and big no no. From all the reading/listening ive done, it all says to find something that can cashflow, even if its 25$/month
Sounds like there is in fact people who dont mind the temporary negative cashflow, I think that aligns with I am seeing here locally. - Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes4y
You can change your rental strategy and furnish the property. I doubled my rent from $2,400/month to $5,500/month
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