We found a good deal on a duplex in Puyallup, WA. Duplexes in this area have been going for $380,000 and above. After running the numbers, it does not seem to be as good of a deal as we thought. Are we doing something wrong in our calculations? We are using our VA loan, and will be living in one side at first, however we estimated the rental income for both sides once we move out. We are also not putting any money down, since we are using our VA loan and are not required to.
If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.
Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.
Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.
I guess i did not realize houses did not steadily appteciate all over the US like it does here. Appreciation is not really speculation here. Sure another 2008 might happen but as long as you are not over leveraged who cares?
Well I care for one haha. It really depends on your life goals. My rentals, which I self manage, only consume a few hours a month but net more than my W2 as a software engineer. I'm trying to replace my and my wife's earned income with rentals, so cash flow is infinitely more important and more predictable monthly than appreciation to me. Just depends on what reason you're investing for.
losing money every month isn’t a good deal to me . Don’t bank with make believe money ( appreciation)
. If the deal can’t stand on its own two legs -then it sucks. Keep looking . If you can’t get 1% rent then keep looking because the reality is it will go negative if there’s not enough( or very lIttle) cashflow .
So, you would turn down something that had a negative cash flow, even if it was in a rapidly appreciating area and the upside potential was far more than a few years of negative cash flow?
I guess I am just not understanding this focus only on cash flow - Cash flow is about how much $$ you put down..... any property will cash flow if you pay cash.....
Yeah I sure would . Appreciation is phantom money I don’t count on that because it’s not a for sure thing and by buying this way you are essentially banking on speculation . In a downturn market you could go bankrupt. Look Appreciation is wonderful when I get it but I never paid my bills with appreciation money any more than I did Monopoly money or obamabucks
Investor · Louisville, KY · Member since 2017 · 199 posts · 253 votes
7y
Two fundamentally different positions being presented here:
Which is better? Cash flow or appreciation. The answer all depends on your values and goals. Only you can answer which is best for you.
Personally, I would never buy a property for the appreciation value and resell only. Not that that is wrong but it just is not my approach. There are plenty of people who can profile a building, make a deal, rehab it, refinance it, rent it and sell it in six months for a $50,000 profit. It is hard to argue with the results if the person is successful.
However, I wonder how many of these deals fall flat or lose big money and the investor does not come on to Bigger Pockets bragging about how they lost six months and $18,000 on a deal they profiled incorrectly and was oversold by a shady contractor.
So as a buy and hold investor that has figured out how to buy apartments and manage them and make steady guaranteed money I would never look at a property to buy and resell on appreciation alone. Again, not because it is wrong but because I know how to make good money in the lane that I am in and why do I need to risk what works by switching lanes? I could crash over there.
On the the other hand I am certain a flipper would look at my most challenging moments when i had rubber gloves on and a stopped up toilet full of feces and a baby toy and say "Are you crazy? No way I would do what you do."
So, its all in what are your goals and values.
With that being said, the original post was asking about the deal and you said your plan was to buy and hold. As a buy and hold investor that has figured out how to make money in my lane I would not walk away from the deal and numbers you posted above. I would run as fast as I could away from it. It does not cash flow. Repeat. It does not cash flow. Once more. It does not cash flow.
You can fix kitchens, you can paint, you can move washers and dryers and you can spend a lot of money. But if you are going to spend $380,000 on a property to buy and hold then the monthly rental income needs to be close to $5,000 per month which is 1.3% monthly return.
There is nothing you can do to this property in the kitchen or the laundry rooms to go from $2,700 to $5,000 per month income.
Hopefully you never read to the end of my rambling post because you started running away.
Do not let your desire "I really want this to work" talk you into buying a deal that will not cash flow.
Property Manager · Lakewood, OH · Member since 2015 · 250 posts · 258 votes
7y
Here's a question for the OP.
Would you buy a stock that you had to pay every month in order to own with a chance that it might be worth more years down the road? If so, then maybe the investment is right for you.
Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes
7y
@Mary Mitchell I think it depends on the investor. If you have a strong portfolio or big paycheck from your job that can support holding a negative cash flow property with a big appreciation upside that could be the way to go. For someone still building that strong portfolio a dog that you have to support every month would slow your progress down drastically. As far as cash flow goes there are other ways to get it than put a big down payment. An example is buy cash and add value to the point you get all of your money back when you put long term financeing on the property. This is what I do and all of my places have strong cash flow with 0 of my dollars left in the deal.
Thank you all for the valuable inputs, the amount of constructive comments really helped put things into perspective. I have read every comment and discussed it with my wife, but for unseen circumstances we will be unable to proceed on this property. We are frustrated about this but not because we fell in love with it. But we have devoted a large amount of energy and time towards this property. We are moving on and looking forward to analyzing more properties!
Property Manager · Lakewood, OH · Member since 2015 · 250 posts · 258 votes
7y
@Adam K. when deals fall through it sucks. That said, any good investor will tell you they look at and attempt to make deals on WAY more properties than they actually end up buying.
I just had an offer accepted 5 min ago on a building. I've been looking for 2 months and I've made a few offers. I had one verbally accept my offer (after I came up in price) then the seller never followed through with getting me the rent roll so it fell through. It was a 12 unit property!
**** happens. Just look forward to the next better deal that you're going to find now with all your new experience.
Insurance Agent · Sacramento, CA · Member since 2017 · 45 posts · 33 votes
7y
@Anthony R."You can pitch what if scenarios all day. What if an asteroid strikes? What if a hurricane happens? What if my leg falls through a step and gets eaten by a homeless guy living in the basement?"
Hurricanes you can insure for (give me a call! My brokerage can help.) and the rest of it is nonsense. Start listening to this weeks podcast (EP 306 I believe) around the 44 minute mark. They say the same thing I did and the sentiment is repeated by anyone who knows better. Buying for cash flow in a company town (or a nothing town) is a real risk. I'm on the same page about cash flowing in the first six months, but only in a town that has a college, state capital, some sort of financial anchor. The OP is house hacking in a growth market. He's 40 minutes drive from seattle...one of the hottest markets in the country and this may be the best play available to him.
@Anthony R."You can pitch what if scenarios all day. What if an asteroid strikes? What if a hurricane happens? What if my leg falls through a step and gets eaten by a homeless guy living in the basement?"
Hurricanes you can insure for (give me a call! My brokerage can help.) and the rest of it is nonsense. Start listening to this weeks podcast (EP 306 I believe) around the 44 minute mark. They say the same thing I did and the sentiment is repeated by anyone who knows better. Buying for cash flow in a company town (or a nothing town) is a real risk. I'm on the same page about cash flowing in the first six months, but only in a town that has a college, state capital, some sort of financial anchor. The OP is house hacking in a growth market. He's 40 minutes drive from seattle...one of the hottest markets in the country and this may be the best play available to him.
Well having more than a few successful rentals under my belt, I think buying for cash flow is a much better game plan than buying for appreciation. It's infinitely more likely that your market appreciation will stagnate or appreciate at a much slower rate, than it is your going to lose all your tenants at the same time. Over the last 8 years now I've had a 2% vacancy rate. Everyone likes to point to Detroit but that's a rare case.
Like I mentioned in a later post. I wouldn't buy a stock that I had to pay to keep monthly in the hopes that it's going to appreciate in value over the next few years. I don't treat real estate investments any different. Maybe not buying for cash flow is why so many people lose at real estate?
Insurance Agent · Sacramento, CA · Member since 2017 · 45 posts · 33 votes
7y
@Anthony R. "Maybe not buying for cash flow is why so many people lose at real estate?"
Very well could be. Right there next to buying a rental property in a town where the only grocery store and biggest employer is a Walmart. They closed over 150 stores and more than 60 Sam's clubs in the last two years if I remember right. Let's see how they do after this trade war with China really gets going or, worse yet, if the action we're seeing causes another crash. Businesses relocating and closing are not a one in a million act of god...they are very common occurrences that will likely be more volatile in the years to come. The last 8 years have been a real gravy train...buy for cash flow, buy for appreciation, both have worked with little effort in recent history. I wouldn't recommend either for granted.
