Buy and Hold Rental SFR

13 Replies

I'm about to purchase my first Buy and Hold SFR, Most the properties rental around 1% out of the asking price and tax about 2% from the asking price. So I started from there, then I went a little deeper and using Biggerpockets Rental Calculator and started plugin the numbers.

After seeing the results, mostly the cash flow is negative and Cap Rate is not even close to 5%. Am I looking at the wrong location? 

My questions are;

1. What are you strategies to achieve at least $100 cash flow after all expenses. 

2. Can you guys share any unique method to offer the seller without insulting with low ball offer. Is there any incentive that I could offer to make it attractive?

3. This is outta state rental, so I know resources is kinda limited and is it wise to buy a property that need rehab or just buy the one that ready to move in. 

Thank you so much in advance

We have purchased 30 SFR since 2015 and prefer this method of investing far and away more than any other opportunity. Here are my thoughts :

After seeing the results, mostly the cash flow is negative and Cap Rate is not even close to 5%. Am I looking at the wrong location?

My questions are;

1. What are you strategies to achieve at least $100 cash flow after all expenses. Personally I would never consider anything less than $300 / month unless there was huge upside potential. Eg... purchased a prop for 95k put 8k into it  n while rehabbing from time of purchase to deposit made on home was 8 days.Taxes were obscene but got them reduced for 2018 tax year. Currently cash flows for $258 next year it will be around $450 /m

2. Can you guys share any unique method to offer the seller without insulting with low ball offer. Is there any incentive that I could offer to make it attractive? I would move onto another opportunity

3. This is outta state rental, so I know resources is kinda limited and is it wise to buy a property that need rehab or just buy the one that ready to move in. out of state investing very difficult as I have done both and am no down to only 2 units in Florida - at one time we had 8. I would stay close to home until you have a larger portfolio. I see you are from NY but surely there are opportunities that cash flow within a 1 hour drive? Maybe I'm way off base. If so forgive me in advance.

Meanwhile best wishes

@Franky Juwana , "This is outta state rental". "Cap Rate is not even close to 5%". "Am I looking at the wrong location?" Answer: If you want cash flow, then yes: (generally)* wrong location.

ie. Why are you looking at only one of the other 49 States? Cheers...

* ["Generally" means that within any market, there will be opportunities, but, some of them mean that you will need to overcome your reluctance to make lowball offers].

Originally posted by @Brent Coombs :

@Franky Juwana, "This is outta state rental". "Cap Rate is not even close to 5%". "Am I looking at the wrong location?" Answer: If you want cash flow, then yes: (generally)* wrong location.

ie. Why are you looking at only one of the other 49 States? Cheers...

* ["Generally" means that within any market, there will be opportunities, but, some of them mean that you will need to overcome your reluctance to make lowball offers].

Thanks for the respond, I might have to offer really low ball and see if any being accepted.

I cant buy any in NY, where everything is expensive and takes close to a year to get rid of tenants. 

Yeah, there 49 more states...  i'll start looking on the map =) 

You have to understand the 1% rule is a general rule of thumb and not applicable in every situation. In my market, 0.7% is the typical sale. The good news is that when I find a 1% property, i'm pretty sure it will work.

Originally posted by @Nathan G. :

You have to understand the 1% rule is a general rule of thumb and not applicable in every situation. In my market, 0.7% is the typical sale. The good news is that when I find a 1% property, i'm pretty sure it will work.

Agreed, it is a starting point for me to start digging a little more. I'll do more research and see if I can find a way to create the cashflow, if not then I'll try somewhere else. 

You are late in the game. Prices have run up substantially, making it harder and harder to find the few good deals around. Plus there is still a lot of cash chasing those deals. I wouldn't wait for the perfect opportunity, but I would definitely not jump on the wagon just to create some action. There is nothing wrong with waiting a few years if no good opportunity arrises. I agree with the others here. There might be better options out of state.

Originally posted by @Andreas W. :

You are late in the game. Prices have run up substantially, making it harder and harder to find the few good deals around. Plus there is still a lot of cash chasing those deals. I wouldn't wait for the perfect opportunity, but I would definitely not jump on the wagon just to create some action. There is nothing wrong with waiting a few years if no good opportunity arrises. I agree with the others here. There might be better options out of state.

Im not sure I agree with you but what do you mean late in the game?   I am looking out of state because opportunity in my backyard is just too expensive and rules and law dont favor landlord at all. So I'm in the process of buying in Texas where price still make sense. But even then, the cash flow still negative or under $100 after all expenses.  

I'm new in buy and hold, that;'s why i'm trying to get better perceptive from others and hopefully learn something. But I think I can start now, just might be taking bit longer to find a deal. I'm not in a rush. 

If you're looking at negative cashflow, I'd move on. There are too many good opportunities out there to consider buying negative cashflow.

Unless you have some people you really trust on the ground, I wouldn't attempt a rehab from out of state. Especially if you don't have prior rehab experience.

I bought a couple that were (almost) rent ready in my own city, because I didn't have a GC I trusted and didn't have time to oversee jobs. Now that I have a good GC, all I want to buy are rehab jobs ;)

My point is you can still get cashflowing deals on properties that are rent ready.

Originally posted by @Rob Drum :

If you're looking at negative cashflow, I'd move on. There are too many good opportunities out there to consider buying negative cashflow.

Unless you have some people you really trust on the ground, I wouldn't attempt a rehab from out of state. Especially if you don't have prior rehab experience.

I bought a couple that were (almost) rent ready in my own city, because I didn't have a GC I trusted and didn't have time to oversee jobs. Now that I have a good GC, all I want to buy are rehab jobs ;)

My point is you can still get cashflowing deals on properties that are rent ready.

Thanks for the advice,  I agree 100%, if I need to rehab, prob just cosmetic small job, like painting, flooring, etc. Other than that... it'll be a hustle.  

To get positive cash flow and even close to $100, I have to really make a low ball offer, low enough to have seller might throw something to my face. =)  but... i'll try... I might get it. 

thanks

Sure, I can tell you how to get at least $100 per door.  Buy a $100,000 house for all cash.  Rent it for $1,000/month.  Figure 50% of rents go to expenses and reserves....booyah...$500/month!  We did 5 times better than what you asked!

(wink)

As you can see, I took your somewhat general questions and ran a direction totally the opposite of where you wanted to go, probably.  First, we need to better understand your goals.  Why do you want to make $100/month?  Is there something "magic" about that number?  Did you come up with it yourself or did someone else tell you that's what you're "supposed" to do?

It's all about perspective.  If $100 is your goal, I can tell you 100 ways to get there, but none of them may align with what you really want to do.  If you give me $1 million to work with, I guarantee I can find a way to get you $100/month with that: a savings account.  However, if you're wanting to get $100/month with no money in the deal....there's a totally different strategy for that. 

How about give us some more information about yourself, what goals you're wanting to achieve in the short-term (< 5 years), what resources you have at your disposal, and what it is you're hoping to accomplish ultimately by being a real estate investor (10+ years)?  I ask this because if someone had asked me the same questions back when I started in 2005, I'd have done a lot better than I have.  I'm not unhappy with my success, but could've gotten there faster, easier if I'd have thought more about the overall strategy and approach vs. "I want a house that makes $100/month."

Btw, if you want to play around with CAP rates with single family investing that's fine, but typically CAP rates only come into play with commercial property. For residential rentals, unless it has 5+ units....CAP rate is not a very good measure of an investment.

Originally posted by @Erik W. :

Sure, I can tell you how to get at least $100 per door.  Buy a $100,000 house for all cash.  Rent it for $1,000/month.  Figure 50% of rents go to expenses and reserves....booyah...$500/month!  We did 5 times better than what you asked!

(wink)

As you can see, I took your somewhat general questions and ran a direction totally the opposite of where you wanted to go, probably.  First, we need to better understand your goals.  Why do you want to make $100/month?  Is there something "magic" about that number?  Did you come up with it yourself or did someone else tell you that's what you're "supposed" to do?

It's all about perspective.  If $100 is your goal, I can tell you 100 ways to get there, but none of them may align with what you really want to do.  If you give me $1 million to work with, I guarantee I can find a way to get you $100/month with that: a savings account.  However, if you're wanting to get $100/month with no money in the deal....there's a totally different strategy for that. 

How about give us some more information about yourself, what goals you're wanting to achieve in the short-term (< 5 years), what resources you have at your disposal, and what it is you're hoping to accomplish ultimately by being a real estate investor (10+ years)?  I ask this because if someone had asked me the same questions back when I started in 2005, I'd have done a lot better than I have.  I'm not unhappy with my success, but could've gotten there faster, easier if I'd have thought more about the overall strategy and approach vs. "I want a house that makes $100/month."

Thanks you for your response, ok i guess I wasnt too clear or detail regarding my goal in this goal of mine. 

Im looking for a single family home in houston texas that could produce passive income. Why $100, once Brandon mentioned that in his podcast, that's the least that he would take in buy and hold, but i doubt he would take that now. 

So far from what I have seen, the average rental from the area that im looking at is around 1300-1500, taxes is about 2900-3500 annually. They have an HOA for the city which only cost $300-$400 per year.

Insurance could run me about $80/ month or so. 

So with other expenses like property mngt 6-8% ( i shop around, and this what the average people would charge), and cap-ex around 10% (im guessing), and fixing etc another 10%. 

And if i pay the asking price, it definitely would take me to the negative, so i have to at least 25%-30% less than the asking price to be more make sense, and even then my passive income isnt at $100 yet. 

So with your experience,  what do you suggest in the case like me, do i low ball everything and hope for the best or do you have any creative ways or advice for me to approach this in little different mindset. 

Btw, im seeking advice with something i have never done before so i highly appreciate all the suggestion you might have  and a mentor is what I need in this very early time, so I wouldnt do any stupid or silly mistakes that would take me back years to get back up again. 

Thank you so much

@Franky Juwana , I don't think you'll like my answer, but here it is: you're looking at a terrible market for real estate investing in terms of cash flow return.  

First, $100 is a pittance.  You didn't give a price for the house that would generate the $1300-$1500 rent, but my guess (and this is a total SWAG based on what I've heard from others in that market), is you'll be "all in" around $150K-$200K.  $100/month free cash flow on $150-$200K of capital invested is actually worse than horribly.  It's abysmal and you should run the other way in terror because houses like that are alligators that will eat you alive rather than fund dreams of passive income.

Plus, it just doesn't scale well. Even if we go dirt cheap at $80,000 per unit, you'd need $800,000 to generate $800 per month in passive income. You'll get a better return investing in an S&P 500 Index Fund. My IRA mutual funds are making 7x that return each month when we consider the ratio of cash invested to return, and that's with zero management other than I log on to a website each month to see how much they've grown. Even if we get another 2008-2009....I'll still be miles ahead on the last 5 years of run up alone, and I'll just sit tight until it bottoms out and buy everyone else's shares at rock bottom prices and watch it swing back up again. Basically what I did in 2010-2011. Anyway, consider the capital needed to generate the income....that's all I'm saying. See if there's an easier way to hit your target.

Unless you're banking on appreciation and amortization, this is a non-starter as an investment.

So here's what I'd do.  Ask yourself how much money you're willing to put on the line to get $100/month back.  My goal is what I call the "Rule of 7".  When I buy something, I want to own it free and clear and have all the money I put into it returned to me in no more than 7 years.  AND it must cash flow positively during that time as well.  I'm not as picky on the actual free cash flow to say it must return at least $X, but I typically get between $100-$150.

I buy things stupid cheap....many folks call them "Class C" units, but we keep them clean, safe, and functional.  We don't upgrade them to the latest and greatest, but we are responsive on maintenance and keep our tenants an average of 3-4 years.  Not much appreciation, but what some people call "pigs" we call "ATMs" because they spit out so much positive cash flow it's nuts.  We also self-manage, so not as hands off as you'd like to be, and many management companies are to lazy to work Class C rentals properly.  But we are very careful with tenant selection and find the creams of the Class C resident pool.

I think you're going to be disappointed with paying out more than $50K per unit for anything that only yields $100/month positive cash flow.  There's a ton of risk with those number if you use a lot of leverage, and on the other side if you pay all cash the risk is less but the return is pitiful.

Markets are on a tear right now.  It might be a good time to find a lower cost of entry market or just bank your money for the next downturn.  

Consider what else you might invest in while waiting that will position you to take advantage of the market when prices drop.  They will....eventually.

Originally posted by @Franky Juwana :
Originally posted by @Andreas W.:

You are late in the game. Prices have run up substantially, making it harder and harder to find the few good deals around. Plus there is still a lot of cash chasing those deals. I wouldn't wait for the perfect opportunity, but I would definitely not jump on the wagon just to create some action. There is nothing wrong with waiting a few years if no good opportunity arrises. I agree with the others here. There might be better options out of state.

Im not sure I agree with you but what do you mean late in the game?   I am looking out of state because opportunity in my backyard is just too expensive and rules and law dont favor landlord at all. So I'm in the process of buying in Texas where price still make sense. But even then, the cash flow still negative or under $100 after all expenses.  

I'm new in buy and hold, that;'s why i'm trying to get better perceptive from others and hopefully learn something. But I think I can start now, just might be taking bit longer to find a deal. I'm not in a rush. 

You are late to the game because after the crash, properties were able to be purchased for significantly less than they can be today.  A lot of articles on buy and hold investing you've probably read were written when housing prices in many markets were much less than they are right now so the returns won't be the same.  You mentioned that you are having trouble with finding property in Texas, but there are other states and cities that may give a better return.  Don't get fixated on one market and if the numbers do not work then they don't work, move on to another investment property or market until you find one where the numbers work.