(-) cash flow properties have me wondering - what am I missing?
Member since 2021 · 14 posts · 35 votes
(-) cash flow properties have me wondering - what am I missing?
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesCash flow
64 Replies
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Cash flow
- 5yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
@Joe Villeneuve That response deserves 2 votes! Muahahah!
- Member since 2008 · 30 posts · 23 votes5y
Assuming no input errors, all variables you listed could be a main factor. I manage properties on my own, I sometimes don't understand how others are able to hire a property manager and still cash flow. Maybe consider simplifying the analysis, look at the 1% rule first (does monthly gross rents hover around 1% of purchase price) to focus on just two variables.
@Jennifer Walsh my best advice is to connect with local investors so you can find out what works in your market. There’s a strategy or multiple strategies that work in every market. The challenge is solving for profitability. You don’t give any specifics in your post so I can’t give any feedback. Good luck!
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
You can't magically change the math just because you want to. Maybe (most likely) these properties are just bad deals, and any REI in the area that are buying up these properties...shouldn't be.
Golden Rule #3: Sometimes the best deals you make, are the ones you don't make.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes5y
Very easy to make every deal (even a good one) look like cash flow negative - all you have to do is change every single parameter a little bit to the conservative side! The cummulative effect (lower rents, higher vacancies, a bit higher expenses, PM fees etc, will be enough to make a good deal look like cash flow negative. or the other way, make a bad deal look like it could work. I am sure you have heard of the expression: garbage in, garbage out. So the trick is to not use pessimistic or optimistic numbers, but realistic ones.
New investors are often very concerned to calculate cash flow accuratly (how much exactly for lawn mowing?), but they just budget a small percentage of rent ('someone on BP said 5% is good") to cover all capex without much consideration, which can really range anywhere from almost nothing to six figures on a small multi. This is what really makes or breakes a deal. Future capex needs to be estimated/calculated for every individual property!
Property values have been going up faster than rents over the last 3 years in the Milwaukee metro area - last year rents grew 1.5% and median sales price per MLS +10.26%. (all the details and stats on my Milwaukee YouTube channel, link on the BP profile page). So, yes it is getting tougher every year.
Also keep in mind, you don't need to make all your profit on your first deal, the main thing is to get started. Smaller ROI is okay, as long as you keep it low risk, never risk your principal!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Jennifer Walsh:
New to real estate and looking for my first rental. Have been using the rental calculator on every potential property I find in Waukesha, Wisconsin and surrounding towns. Every single property is a bust! Negative cash flow properties have me wondering - what am I missing? Are these properties over priced, rents too low, taxes too high... Any help would be appreciated.
Markets usually provide strong appreciation or strong cashflow. They rarely provide both. My market has strong appreciation but properties don't cashflow...unless you find deals off-market and below market price, which is what I've accomplished.
I assume you're investigating properties on the MLS for sale. Figure out how to find deals that have not been listed yet and you'll find better-performing investments. I just bought a storage facility that I found by calling every storage facility in town to see if they wanted to sell. It's going to cashflow better than ten houses combined for 1/4 the cost.
The DIY Landlord Book4.7247 Reviews - 5yAndrew AdamBusiness MemberReal Estate Agent · Sioux Falls, SD · Member since 2014 · 159 posts · 111 votes
Hi Jennifer, I agree with the above statements. It could be that one of those things you mentioned is off but without seeing those numbers and being from that local area it is hard to comment on that. It could be that there are not many good deals there, which seems typical these days most places. You will probably have to make something a good deal. Once you get to know what local taxes should be you can spot errors. After you get a good feel for market rents you will be able to find places that could rent for more.
I suggest using rentometer and other stat gathering tools for that. You can also look at PM companies sites to see what rentals are listed for. After a while of consistently doing that you will start to get a better feel for rents.
Lastly, Just like when I started out you could be killing every deal with your inputs. I used to put in 10% Maint, 10% cap Ex, 10% management, and 10% vacancy when I started out. If a property really uses 40% just in those then it is certain it won't be profitable after taxes, insurance, and utilities, let alone financing. I killed every deal I looked at until I started looking into what vacancy rates were in my area, what maint/cap ex would be for certain properties. I do self manage now which helps as I buy properties with low rents and deferred maint then I can survive while I fix the property and increase the rents adding value and cashflow.
Keep us posted on your progress!
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
This looks like one of those times where we might be overthinking things. Simply put, if it doesn't cash flow, it's not a deal. If you try to manipulate the numbers to try to make it work, you're probably going to be putting yourself in a bad spot. If the numbers are that close, it's likely not a deal.
@Jennifer Walsh
I researched Waukesha County during the housing crash. I remember the weekly sheriff sales going from about 5 to 20 (it would’ve been higher but they couldn’t handle more).
You are right about the cash flow. It’s hard to find a positive cash flow.
My conclusion was that there are too many investors here. When a foreclosure (that was worth more than the mortgage it owed) made it to the sale date (and it was not often) there were usually 20 people with Bigger Pockets than me waiting to bid.
So here is my suggestion:
1. If you are looking at foreclosures and find a home listed below it's FMV, approach the owners ahead of time to see if you can do a deal (I don't know the legals on this so if anyone thinks this is a bad idea please chime in).
2. Find delinquent taxes. I use Waukesha Tax site and created a program that runs through all properties (but there might be an easier way). Then approach the owners to work out a deal. You can usually figure out ahead of time to determine if they owe more than the house is worth by finding out when the house was last sold and for how much then use a mortgage calculator to get general numbers.
3. If you are looking at homes for sale ... the best deals get bought up way before they get listed on websites like Zillow or even Realtor.com because real investors have realtors that give them the best homes before they get listed to the public.
Disclosure: when I did my searching, I never ended up buying anything (couldn’t really afford to). I have never flipped or rented any homes. My opinions are not worth a whole lot unless a seasoned veteran can back then up. But I have lived in Waukesha County since 2000.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Marcus Auerbach:
Very easy to make every deal (even a good one) look like cash flow negative - all you have to do is change every single parameter a little bit to the conservative side! The cummulative effect (lower rents, higher vacancies, a bit higher expenses, PM fees etc, will be enough to make a good deal look like cash flow negative. or the other way, make a bad deal look like it could work. I am sure you have heard of the expression: garbage in, garbage out. So the trick is to not use pessimistic or optimistic numbers, but realistic ones.
New investors are often very concerned to calculate cash flow accuratly (how much exactly for lawn mowing?), but they just budget a small percentage of rent ('someone on BP said 5% is good") to cover all capex without much consideration, which can really range anywhere from almost nothing to six figures on a small multi. This is what really makes or breakes a deal. Future capex needs to be estimated/calculated for every individual property!
Property values have been going up faster than rents over the last 3 years in the Milwaukee metro area - last year rents grew 1.5% and median sales price per MLS +10.26%. (all the details and stats on my Milwaukee YouTube channel, link on the BP profile page). So, yes it is getting tougher every year.
Also keep in mind, you don't need to make all your profit on your first deal, the main thing is to get started. Smaller ROI is okay, as long as you keep it low risk, never risk your principal!
Marcus,
Here is my thought since this is a recurring theme in many markets and with most BP beginner landlords.. they are simply using the wrong math.. they are under the impression its not a deal if it does not cash flow with ONLY 20% down .. well you might have to put a little more down to get cash flow so maybe the metric is now for our current environment 30% down or 40% down is the norm and the number you use in your handy dandy number crunching cash flow calculator put those numbers in and see where you end up.. Now all of a sudden the deals work. There is no rule that says its ONLY a great deal if it cash flows with 20% down.. that's the break in the model and the mind set ..
I personally look at what is the COC if I paid cash.. then work backwards..
For now the formula is broken.
If we're reasonably certain we can beat the 1% rule easily, we're willing to consider adding a deal to our rental portfolio. There are certain aspects of this that make the calculation easier for us in our market. Please read my profile for additional information about our operation.
- 5yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
@Jennifer Walsh just curious - what financing / financing terms are you assuming when you run numbers on these properties?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
I was wondering how other investors pivot when a normally cash-flowing market stops being so.
When my area became more of an equity/appreciation market years ago, I switched to plexes and multifamily for cf, equity capture at the buy for houses.
Houses here are too high end/ high--priced to be straight rentals and covid no-pay risk is higher so I rent as lease options.
Latest example was buy for $277k, rent $1650 with 12 month option to buy for $325k within 12 months for $9k. It's hardly a .5% deal but works because of the $45k in net equity capture.
I suppose it would be lucky to break-even with debt. Without, it should 'cf' about $1100/mo. This deal needed speed and I probably won't be in it long enough to justify the pain and costs of a loan so I disnt get one.
The common denominator to succeed in this point in the cycle is off-market deals under worth belly to belly with sellers or quality wholesalers. CF isn't the only way to get yield.
- Member since 2021 · 14 posts · 35 votes5y
Originally posted by @Nicholas L.:
@Jennifer Walsh just curious - what financing / financing terms are you assuming when you run numbers on these properties?
15% down
4% interest
25yr amortization
@Jennifer Walsh its simple, overpriced and or low of rent. You do not need a rental calculator ( I never heard of one ) Gross rent, less taxes , Ins, PM, 10% for Vacancy and Maintenance.
BTW, you are not ready to put in offers. Connect with a local investor doing deals, learn then apply what you learn
Good Luck
- 5yAnthony KingPro MemberInvestor · Charlotte, NC · Member since 2020 · 239 posts · 247 votes
@Jennifer Walsh 1% rule and the 50% rule is a good starting point until you find actual numbers. First thing I do when I see a property I'm interested in is ask for rent roll, P&L, and seller disclosure if there is one. Then start verifying those numbers and plugging them in the calculator. Get an insurance quote for the property, verify taxes on the county website, etc. If you viewed the property you can roughly, but quickly, determine your maint and capex expenses. Also research comparable rents in your area to see if they can be increased to market rate. Can you submeter water to pass that expense onto the tenant? Plenty of value add options to look at. You can't take the owners current rents and expenses and throw on a brand new mortgage and higher down payment than they had when they bought it 20 yrs ago and expect it to cashflow without increasing revenue and/or decreasing expenses. They likely aren't selling it at a price where you have to do absolutely nothing and have it cashflow day 1.
- Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes5y
@Jennifer Walsh
Most properties are what I call retail properties. People want to buy rhem to live in. They are not calculating roi or cash flow, they just want a place to live. Competing against retail buyers is difficult because the numbers rarely work for investors, especially in sellers markets. You may need to branch out in to the houses whixh need some work as many retail buyers are not interested in these properties. Or you may need to look at off market properties.
- Rental Property Investor · Virginia Beach, VA (Virginia Beach) · Member since 2019 · 173 posts · 129 votes5y
@Jennifer Walsh The question is what properties you are looking at and how are you finding them? The residential "Market" and by that I mean properties on the market (MLS) have been seeing a steep rise in value recently, the rents however are not seeing as steep a rise (or at least not my market here).
The thing to keep in mind is properties listed for sale, by and large are listed with the target of owner occupied and are thus being listed at retail. The value assigned to retail properties leaves very little room for profit as a rental much like if you were to buy anything at retail and try to re-sell the margins would be tight (this is a very broad analogy) With supply being low and demand being high you will be hard pressed to find a good rental on market as the competition with those who are looking to owner occupy is fierce, they can simply pay more than you can to meet their goals.
That leaves you with the wholesale market, find out who the local players are and network with them. The downside to this is there is still quite a bit of competition, there are a lot of folks who are in the wholesaling business and you will have to wade through a lot of folks that are "in the business" to find the folks that are "doing business". The properties are also not quite "show ready" and may require some work before they are rent ready, which could present some financing issue depending on how you are going to pay for them.
The other option is to become your own wholesaler and go direct to owner, seeking out and finding the properties that suit your needs. The down side to this approach being it is not as simple as click, buy, rent but you are largely in control of the process.
At the end of the day if you are trying to find property cheaper you will have to take on some of the roles you are cutting out. MLS listed properties have to pay the owner, the agent, the broker the contractors that have done the work to get it to market(either prior to listing or at some point in the past) etc... Wholesale opportunities cut out the agent, and the broker and give you the advantage of working with and choosing what work the contractor does but the owner and the wholesaler still get paid. Direct to owner and your only paying the owner, the rest is up to you, all of the same actions still need to happen but you are doing the work, the fees for the services you are cutting out are being returned in the form of a discounted sales price you have to decide how much of your time and energy are worth playing those roles.
- Real Estate Agent · Rochester, NY · Member since 2020 · 19 posts · 9 votes5y
@Jennifer Walsh
What if you change your strategy totally and tried Air BNB. I have a client that did that in Rochester NY and is having great success.
- Property Manager · Fox River Grove · Member since 2009 · 39 posts · 9 votes5y
@Nathan G.
Hi Nathan, regarding your storage investment, I've always wanted to get involved with storage but the barrier to entry seems a bit more challenging than SFH or Duplex, etc
What are your thoughts?
Thanks!
Beginner.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Patrick Roane:
Hi Nathan, regarding your storage investment, I've always wanted to get involved with storage but the barrier to entry seems a bit more challenging than SFH or Duplex, etc
What are your thoughts?
It depends. I bought mine off-market and below market value because the Owner was tired and didn't want to own it any more. I paid 25% down. The cash flow will be very high compared to a residential rental, without nearly as much effort. I have the software set up so renters can rent a space online and move in without ever dealing with me directly, so it's pretty minimal.
No toilets. No interior inspections. No lawns to watch. No barking dog complaints. I probably spend a couple hours a week dealing with it right now and it will produce a greater NET profit than ten houses purchased for 4x the cost. That's hard to beat!
There are negatives. Storage is in high demand right now but that could change. Our city just approved construction of two new facilities that will add another 400+ units in the next 1-2 years, so that could impact my occupancy levels. But even right now, at 53% occupancy, I am making a really good return!
The DIY Landlord Book4.7247 Reviews - 5yBonnie LowPro MemberLender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
As someone else mentioned, the variables you're entering can change the outcome a lot. I see you're using 15% down and 25 year amortization. Have you tried running it at 20% down (which would remove your PMI and thus lower your mortgage) and a 30 year amortization? Either of those would change the calculation as would your vacancy rate, capex, etc. And yes, seems like most people are seeing retail prices unless they're well connected and are getting pocket listings or working with a qualified wholesaler - all of these things impact your cash flow potential. But just remember, in almost any market you will find people who are still getting deals and making money so don't get discouraged. Maybe look at a different location or asset type? Is there value add potential that could result in higher valuation and increased rents? Could you manage yourself and cut out the cost of a PM? Do a 'subject to'?? Or??? As an investor it's important to be open minded and not be afraid to think outside the box.
@Jennifer Walsh - I grew up in New Berlin but now am living in FL. I have been pricing deals in MKE, tosa, Waukesha and oconomowoc since it’s much more affordable for multifamily than where I’m at, but in my calculations and in my experience owning personal residences in both states, WI real estate taxes are extremely high and always seem to push me into negative cash flow.
I didn’t run any single family homes, but I know when I owned a condo in Madison, my taxes were more than what you pay on a $300k single family home here. In WI people bought home to save on taxes so they can itemize on their tax returns vs paying rent. Here, owning a home I still can’t even itemize on my tax return. So I know that’s a large factor while I’ve been looking in that area.
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