How Are You Structuring Long-Term Holds?

Question

Are you prioritizing cash flow stability or appreciation plays this year?

Curious how other landlords are thinking about positioning.

Priya Menon · Answer

I've got 6 SFHs in Indy and I've never sold one. Buy, hold, let the debt pay down over 30 years. Appreciation shows up eventually but I don't build it into the deal analysis.

The number I care about is cash-on-cash at purchase, with conservative vacancy and capex baked in. I've been holding the 8% threshold and haven't moved off it even as rates went up. The last two deals I bought at DSCR rates took me 6-8 months each to find, not because there was nothing out there but because most of what came up didn't hit the number.

The piece I think gets underweighted in long-term hold math is tenant retention. My average tenancy across all 6 is about 2.4 years. A turnover in Indy runs me 6-8 weeks vacancy plus $1,500-2,500 in make-ready. Every year a good tenant stays is money you're not spending on cleaners, contractors, and re-listing. That doesn't show up in the original proforma but it shows up in the trailing 12s.

I buy in B neighborhoods here, working class, stable employment base. The 130-160K SFH range still has a rent-to-price ratio that works at current rates, though tighter than 2020 and 2021. I'm picking up deals slower than I was back then.

Run a Google Sheets tracker across all 6 and after 6 years I've got real actuals. Which properties track close to my original assumptions, which ones eat more capex than I projected. That data calibrates how I underwrite the next one.

Greg Namrow · Answer

For long-term holds, I am prioritizing cash flow stability first and letting appreciation be the bonus.

Appreciation is good, but I do not like betting on something I cannot control. I would rather own rentals where the numbers work today, the debt is manageable, and the property can absorb normal life stuff like vacancy, repairs, and CapEx without turning into a complete failure.

That does not mean I'm ignoring growth markets -- it just means I want the deal to stand on its own feet from day one, conservatively. If appreciation comes too, great. If not, I still want a property that performs like a business.

Dan H. · Answer

As is often the case I am the contrarian.

I am all about best return.   The reality is the best return is achieved with the highest appreciation.  The highest appreciation market will have the best cash flow over a long hold.

1) There is poor correlation between initial cash flow and actual long term cash flow.  The reason for this is that RE market prices are based on numerous criteria.  Some of the big ones are expected appreciation, expected rent growth, and risks.  In most markets, the market with the highest rent to price ratio is the lowest class areas.  This is because of the risks and effort to have rentals in that market.  Similarly, the markets with the best initial cash flow typically have poor historical appreciation and rent growth.  The properties with poor initial cash flow often have good/great historical appreciation.  Rent growth has a strong relationship to appreciation. The better appreciating property is likely to have the better cash flow over a long hold. 2) cash flow is taxed annually.  Appreciation gets taxed at property sale and there are legal means to avoid paying the taxes upon selling.  RE investors often are in high tax brackets and those that are not strive to get into high tax brackets.  My goal is to obtain return while minimizing taxes.  If I have to pay taxes of 40% on cash flow but nothing on the appreciation (even extracted appreciation), then the cash flow only provides 60% value compared to the value achieved from appreciation.  Appreciation accomplishes paying less taxes much better than cash flow. 3) Some people act as though cash flow is guaranteed. At the  Great Recession (GR), there were many markets that suffered increased vacancy and reduction in rents.  Detroit, Las Vegas, much of Arizona, etc had actual cash flow reduced due to the GR. In contrast there are many cities that have not had a single 10 year period since the numbers were tracked without appreciation (my market is one such market).  Appreciation may not be guaranteed, but it has yet to not happen for a 10 year span in my market.

My last RE purchase was the most negative cash flow non-commercial property that I have ever heard of.   Purchase $2.3m, fully occupied rent of $6k/month.   Today the value is up $1m above purchase and rehab costs.   I expect rents to exceed $20k/month this year.  My PITI is $9476.   From huge cash negative to pretty good cash flow.   Total return has been outstanding.

Now for the $1m of gain, I can extract some of this appreciation and not pay taxes until I sell the property.  I can 1031 exchange to put off the taxes at time of sale.   If I die the properties get a step up basis and the taxes on the gain is forgiven.

As to the deal structure, best return, and RE’s super power, is via leverage.   I have yet to see a thorough underwriting that justifies a lower LTV to buy cash flow.as for rent model, buy high class RE in extremely desirable locations and rent them as STRs.   They are not making more beaches.   Lakes can be made, but it is not easy.   Major rivers, lovely mountains.  Private access to a beach, is there any realistic scenario that private beach access will not gain value in the long term?

Or you can choose to buy that cheap Midwest property that cash flows a few hundred a month and has historical rent growth and appreciation below the inflation rate.  If you concentrate on paper cash flow (versus actual cash flow), the best properties will be in lower class areas. See how that is working for you a decade.

Good luck

Denise Supplee · Answer

Hi @Kelly Schroeder. We’re leaning toward deals with strong in place or near term cash flow, conservative leverage, and operators who’ve been through tougher cycles. If appreciation comes, great, but we’re not underwriting deals assuming it.

In our group, we’re also spreading capital across multiple deals and asset types rather than concentrating, which helps manage risk in this environment.

V.G Jason · Answer

I aim to buy properties in the best locations that are discounted or distressed.  Cash flow is a function of leverage in the deal.

I buy real B properties in small-cap metros, and no none of those are $130-$160k those are D class. Bs are closer to the median price point in that given region. And I buy A properties in large-cap metros.

Mendy J. · Answer

Long term cash flow is my priority especially this year when appreciation is kind of cooling down in a lot of cities so if you got nice cash flow that keeps you in the game

Sofia Gutierrez · Answer

The tenant retention point is something I don't think about enough and probably should. Every time I consider bumping rent at renewal, I run the turnover math first -- vacancy during re-listing, make-ready costs, new tenant risk -- and you've eaten months of whatever increase you were chasing. My property manager in Vegas actually tracks this with me now, and we stopped being aggressive on renewal bumps after doing that math two years running.

My market situation is a bit different. Sacramento doesn't have a cash flow story the way a Midwest market does. The rent-to-price ratio just doesn't work the same, so if I held to a strict CoC floor I would never have bought anything there. What Sacramento has is real appreciation and rental demand that holds up -- state government workers, healthcare sector, university spillover. Those first properties I bought there penciled okay at the time but look a lot different now after 7 years of rent growth and equity. Vegas is where the actual cash flow math works for me without forcing it.

I'm still doing 20-25% down across everything, nothing creative on the financing side, and my next deal has to work at current rates with real vacancy and capex assumptions. That's been a slow search the last couple years. But I'd rather wait than close on something that barely works.

Victor Huang · Answer

Same here -- cash flow from day one, not a bet on what the market does in five years. Cleveland doesn't have the appreciation story that some Sunbelt markets pitch, so if you're buying here, the numbers have to work without it. That discipline got baked in early for me.

The thing I'd add for anyone in multifamily specifically is that the expense ratios are higher by nature -- more units means more maintenance events, more PM complexity, and in an older building, more capex surprises. I budget 10-12% vacancy, 35-40% operating expense ratio on my smaller multis, and at least 8% capex reserve on gross rents. If the deal doesn't work at those assumptions, it doesn't work.

The other thing I track closely is trailing 12 on every property each year. The difference between my original underwriting and what the T-12 actually shows has calibrated how I model the next deal. My first duplex I projected 5% vacancy. Real vacancy over the first three years was closer to 9% because one unit had a turnover stretch to almost five months. Now I don't model under 8% for any unit regardless of where the rent comps are.

Tenant retention is real money that doesn't show up in acquisition analysis. Every year a solid tenant stays in one of my units is probably $3,000-4,000 I'm not spending on make-ready, contractor time, and lost rent during the gap.

Twannisha Jackson · Answer

hi, i’m prioritizing cash flow stability $$$

How Are You Structuring Long-Term Holds?

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