Landlording for Cashflow or Appreciation? (in expensive markets)
Investor · Everywhere, USA · Member since 2016 · 69 posts · 19 votes
Hey BP!
Got a couple off-market deals I'm considering in Northern CA but I've got some "newbie" dilemmas going into them and it's this - these deals seem like great deals (like $50k-$100k less than what they are worth) - but even at these discounts they do NOT cash flow after accounting for repairs, management, vacancy, etc (they do "cash flow" in that it covers the mortgage and has a little bit left over... but that's obviously not true cash flow).
I understand that I could purchase these homes and flip them for profit but that's not my game plan (nor would the seller sell to me if that was my strategy). I'm seeking buy and hold rentals. Other buy and holders in Northern CA and similar markets - are you content with a deal like this where you're in the hole $300/month with the long term vision of either increasing rents or selling in the future for a big payday?
Part of me feels dumb not to jump on the deal for the equity but the other part looks at the numbers and wonders why I would buy something that puts me negative $300/mo haha!
Depending on future events to fix a problem isn't investing...it's speculating. REI isn't about buying properties, it's about moving money through a property, in the front and out the back, and when it comes out the back it comes out with "friends". If you are unsure of how many (if any) new friends your money is going to make, but you are sure you are going to lose friends in the process, and the goal is to make as many "friends" as you can, why would you...
How the meeting room where you are supposed to make these new friends looks isn't important. What matters is how many friends you can make. If you can meet at a less expensive meeting room, with the same amount of money to spend on meetings, and make more friends through volume, why would you...
Your advice is literally the exact opposite of what anyone should ever do.
@James Hamling Can you cite a statute that limits what a buyer may tell the seller of property about the purpose for which the seller intends to use the property outside the foreclosure process?
Sure; the criminal crimes statutes on Theft By Swindle, there ya go. Or would you like every criminal offense sited, and instructions on how to check a law library? Maybe the definition of Fraud, equity stripping.
Maybe he is asking for statutes because what you are saying sounds completely illogical. You also made the statement that it is illegal in all 50 states. Therefore, you should easily be able to find a handful of examples of buyers being charged with the crime of lying to a seller about their future intent.
A simply search on "equity stripping" will show that it has absolutely no relation to how you are using it. Every single example of Theft by Swindle that I found cited was the misrepresentation by the seller to the buyer. I didn't find a single instance of a buyer being charged due to lying to the seller. In fact, I can't really find anything that says it is illegal for a buyer to lie to a seller.
Got a couple off-market deals I'm considering in Northern CA but I've got some "newbie" dilemmas going into them and it's this - these deals seem like great deals (like $50k-$100k less than what they are worth) - but even at these discounts they do NOT cash flow after accounting for repairs, management, vacancy, etc (they do "cash flow" in that it covers the mortgage and has a little bit left over... but that's obviously not true cash flow).
I understand that I could purchase these homes and flip them for profit but that's not my game plan (nor would the seller sell to me if that was my strategy). I'm seeking buy and hold rentals. Other buy and holders in Northern CA and similar markets - are you content with a deal like this where you're in the hole $300/month with the long term vision of either increasing rents or selling in the future for a big payday?
Part of me feels dumb not to jump on the deal for the equity but the other part looks at the numbers and wonders why I would buy something that puts me negative $300/mo haha!
You might not be in the right place to be asking about negative Cash Flow. These forums are overflowing with "cash flow is the only thing EVER" people.
The people who dismiss appreciation as speculation are fools. ALL investments are speculation. The idea that you never know about appreciation is true. What is also true is that you never know about cash flow. It can change. Anyone here who ignores that probably hasn't been through a down market or had a new large apartment complex open up near them.
And yes, cash flow is in your hand while appreciation is "locked up" in the property. However, if you're the type of person who needs that cash flow in your hand, you're probably a paycheck-to-paycheck type person and not one I'd want to take investment advice from. Harsh, but true. I'm trying to build wealth, not put a couple hundred dollars a month in my pocket for beer money.
Would I have a problem buying an investment that I have to contribute $300/month to? Nope. Since when is the downpayment the only money you have to contribute to an investment? Besides, spending $300 a month to get $500/$600/$1000??? a month in principal reduction sounds pretty good to me. Not to mention that in CA rent tends to go up, appreciation tends to happen, and every month you own the place more is put toward principal reduction (AKA your net worth goes up).
But hey, if you need to cash flow for beer money, find another investment.
@Justin Koopmans, It seems like you and the seller are trying to bend the market to your own interests in a direction that is opposite to what the market intends? Strange...
The seller wants to forgo a possible $100k profit to give you the benefit of owning a property which you will lose money on.
You, the buyer, are willing to buy a property which you do not intend to sell and intend to lose money on in the hopes of it appreciating.
This is very strange and illogical.
Personally, I see us at a highwater mark in property values in my market. There is more cash, and stupid cash at that, on the street than 2007. Is your market different? Can't say I have heard a lot of good news coming out of northern California... and the one deafening drumbeat I hear is "work remotely, look'it Texas, work remotely, drought, forest fires, taxes, work remotely..."
I put too much time and energy into managing my properties to not get paid very well every month to do it. And I don't really put that much time and energy into it. ;)
I also find that a lot of people who bank on appreciation don't properly account for the fees and taxes on that.
But, quite frankly, you are not really talking about appreciation at all... You are talking about picking up a property that is being sold for $100k less then market and I think any of us on here would advise buying an asset that some one is willing to sell at a $100k discount. Appreciation doesn't even come into play because it is already baked in.
Good luck
@Justin Koopmans, It seems like you and the seller are trying to bend the market to your own interests in a direction that is opposite to what the market intends? Strange...
The seller wants to forgo a possible $100k profit to give you the benefit of owning a property which you will lose money on.
You, the buyer, are willing to buy a property which you do not intend to sell and intend to lose money on in the hopes of it appreciating.
This is very strange and illogical.
Personally, I see us at a highwater mark in property values in my market. There is more cash, and stupid cash at that, on the street than 2007. Is your market different? Can't say I have heard a lot of good news coming out of northern California... and the one deafening drumbeat I hear is "work remotely, look'it Texas, work remotely, drought, forest fires, taxes, work remotely..."
I put too much time and energy into managing my properties to not get paid very well every month to do it. And I don't really put that much time and energy into it. ;)
I also find that a lot of people who bank on appreciation don't properly account for the fees and taxes on that.
But, quite frankly, you are not really talking about appreciation at all... You are talking about picking up a property that is being sold for $100k less then market and I think any of us on here would advise buying an asset that some one is willing to sell at a $100k discount. Appreciation doesn't even come into play because it is already baked in.
Good luck
That just about covers it.
@Patrick M. You are correct, I realized that after I already posted my topic that I'm not really asking about appreciation. What I'm really asking about is equity. Should I buy an asset that has $50k equity but lose money on it every month? That's the dilemma I'm facing. The responses have all been super helpful. The market does seem high so would it be wise to buy something (even under valued) because the market could turn and then that equity is gone...? But like @Michael C Williams said, it is a steal in my market to get something at that much of a discount.
To answer the comments about why the seller would sell to me at a discount - I know them personally and they'd rather sell to me then go through the hassle of getting it ready to be listed. That's all :) as such I also wouldn't want to tell them that my intention is to keep it if it wasn't.
Thank you everyone! Wow, lots of responses! I really appreciate that. @Michael C Williams The two properties in question are in rural outskirts of Sacramento.
How rural are we talking? There are areas in Sacramento where rents are exploding with virtually no vacancy. There are also plenty of areas that cash flow with ample forced appreciation.
@Joe Bertolino - pretty rural - Amador county