Hi all, I have a few questions. I'm very new to real estate investing, and have just spent the past 2 weeks exploring my area (Charlotte NC). Granted, I've only been looking on the MLS...which leads me to my first question. I'm primarily interested in SFRs between 80-120K , and because we don't have cash our plan was to use a HELOC for the downpayment and mortgage the rest. The trouble I'm having is this: it doesn't seem like rent ratios are working out in terms of cash flow. I do know that we are disadvantaged in having to 100% finance, especially in terms of cash flow. But even when I'm doing the math and not including our HELOC (just to see), it isn't leaving much cf. I also know that because most of what we are finding are older ranch style homes, and because we are new at this, I'm being quite conservative in running my numbers. I'm starting to wonder if it would be smarter to do a flip first, and then have cash to put into a rental. Every time we go look at properties, my realtor tells me I will have to offer way over asking to compete with other investors - regardless of the home's condition. So for example, just the other day there was a house for 100K that he said would likely go for closer to 125K. If that's the case, how are other investors making these deals work? I understand they might be all cash, but that doesn't excuse bad math. Here's a run down of how I calculated our costs on a potential offer last week...perhaps you can shed some light if my math is incorrect, or if its just that cash investors don't care they are over-paying for property:
4 BD 1.5 BA - asking 100K, assuming it closes at 125K and rents at 1200.
Management (8%): 1152
Vacancy (8%): 1152
Repairs (8%): 1152
Cap Ex: 1800
TOTAL EXPENSES - 14,216
TOTAL RENT - 14,400
Even if I bump the rent to 1250, the monthly cash flow is 65 compared to 15. So, are my numbers too conservative or are they correct? Would love your feedback. I have run this same formula on even lower priced properties that need much more work, and never end up with good cash flow. Is the ONLY way to do this buying foreclosures? My realtor said we shouldn't even consider auctions unless we have all cash. Any and all feedback/advice welcomed!!
It's a sellers market so the "deals" available are minimal and you may have to search 100-200 homes offering 80% of asking price on all the ones that (fit the plan) to just find one property.
My area I have to look at duplex's if i want to make any sort of net income. If you have any interest in house hacking you should highly consider that.
Not much better up hear in Raleigh. May want to consider out of state investments. Your dollar goes a lot further
@Shane Welch - Thanks. Yes that seems to be what I'm hearing. I wish we could consider house hacking, but we are a family of 5 with 3 young kiddos and are settled in schools/jobs/etc, it wouldn't really work for us unfortunately.
@Caleb Heimsoth yes, we've thought about that but we were hoping to avoid that for our first time. Mostly I needed conformation that my math was correct, which sadly it appears to be. Sorry things aren't much better up there! Do you mostly look off the MLS?
If you want to make real money remember you make it when you make your purchase. Have patience and wait till the right deal comes along.
Kelly, I would stick with those numbers to be safe. What you are encountering is the market and the difficulty of making money with SFR. A 4 plex may yield a different story; but again the market sucks in most places. Maybe think about self management, and driving up to an hour away from your home and thus broadening your search area? I have no familiarity with where you are but that is what I do to make money here.
@Kelly Carter Way too soon to make any math assumptions :) Because...
1.) Two weeks is waaaaaaaay to short a window. Especially because...
2.) You’re looking at on-market deals where you’re competing against owner-occupants, and...
3.) You’re trying to get cash-flow with 100% down, and...
4.) Charlotte isn’t exactly a horrible market. People want to live there and investors want to buy there.
Come back after 90 days and revisit your strategy. I suspect you’ll still have huge challenges but at least you’ll have a reasonable timeframe.
capex seems high and couldn't you manage it yourself?
@Kelly Carter mostly mls and relationship building. I’m young so anything over 10 percent return is good enough for me
Yeah, obviously finding a deal on the MLS that's cheap enough for you to have someone else repair it and manage it for you while you sit back and get paid for running numbers isn't going to happen, right? Something's starting to ring false about those self-congratulatory "from zero to 100 doors in four weeks!" postings, isn't it?
But I get it: working the MLS is the path of least resistance, and that's where everyone starts. But if you want to find solid leads on SFRs, you'll need to look elsewhere in almost every community. I would suggest that the most valuable thing you could do right now is start learning the property records recording system in Charlotte. I know nothing about your city. How is it organized? What are the neighborhoods like? What are the 'burbs like? How about the school districts?
You say that Charlotte is your target area, That's a very big city. You really could use a smaller target area within Charlotte, a neighborhood with about 200-300 houses to start with. And you should start putting in the shoe leather to start walking that area. Once you know every house and street in the area well, you can expand.
Here's something very easy that you can do once you find a small target neighborhood to start your search in. Find the long-service, veteran agents in it. There are many ways, but one that's borne fruit for us is to find them through tradesmen, which made sense to me as a contractor but few people really seem to think clearly about. Agents who have been in the business for a long time are connected to everyone in their area. They swing into action when someone leaves a property unoccupied. They very often organize necessary repairs before listing a property. And so the plumbers and the electricians and the home inspectors of your area know exactly who these agents are. Start calling them and asking politely if they could give you the number of any agents that they know often work with property investors. Once you get to the agents, ask them if they have anything that fits your numbers, or know of any deals opening up. These people are often sitting on market opportunities and have leads to properties that are frankly unbelievable from our point of view. You'll often have to haul garbage out of these properties, but hey, buy real estate at low cost is always your gain and someone else's loss and that almost always means you're dealing in human misery.
Starting with a flip and going from there to buying rental properties is often putting the cart before the horse. When you own multiple rental properties, the flips work hand-in-hand with them. You can investigate this, but I would urge you to try to read between the lines when you listen to what flippers are willing to tell you about how their business actually runs and makes money, and how owning rental properties works hand-in-hand with flipping.
@Jim K. Haha, yep. Exactly. Thank for the action items, I will really dig in and see what I come up with. I've spoken to a few property managers to focus on certain zip codes, but that's it. That is excellent advice to get referrals from tradesmen. You are also 100% correct about buying real estate at low cost almost always means dealing in human misery - this is something I'm struggling with (cut me some slack, former social worker here!) and I keep trying to find a niche that might be more comfortable for me in that regard. When you are talking about flips working hand in hand, are you talking more or less about BRRRR?
@Will G. - I factored my CapEx at 10% based on a 5%-12% scale, knowing this particular property is older and will likely need some big ticket items. Yes, I could probably manage it myself and if we can stay local that would cut our cost significantly - but as we own more it will become an issue I think. But in order to get our foot in the door so to speak, it might be a necessary cost to eliminate. If I reduce capex and self manage it likely would be closer to $150-200/ mo return, but many say that's not enough either :/
@Andrew Johnson So any suggestions on re-vamping my strategy? I assume of I want cash flow I need to look off market for now and consider foreclosures, etc?
@Account Closed got it. thank you - so looking for homes that need work :)
Originally posted by @Account Closed :
I'm dropping a bombshell here.
Foreclosures, off market is not an indicator of good cash flow either.
What do you suggest for a strategy?
may i suggest, not doing r.e. now? Honestly it is a terrible time in the cycle to be in acquisition mode. Not only is value investing dead, "fair" deals are hard to come by. Let the interest rate increases soak in and hopefully put some sanity back in the market
$1200 a month against a $125k purchase should make you plenty assuming it is a B class area or above. C class area or below and it may not.
No, I'm not talking about BRRRR at all. I'm saying that flipping can be a very shady business, and discussions of how flippers make money in a public forum are often less than wholly honest, especially in the details.
Former teacher here. The slime of this business does not always sit well with me, either. But no one else cares once you scrape it off the money.
I will definitely vouch for this, Kelly...if you are doing this to make money starting from a limited base, you're going to be up to your neck in slime before you start to come out. Yes, there will be hard work, yes, there will be personal financial discipline, yes, there will be maximum effort, but there will be slime and it will be nasty.
If you have an overpowering reason to make money, this is where you should be. Connect, and I'll give you the skinny about flipping as I see it.
When everyone is looking for the same thing, in a competitive market, one should look closer to finding people you can trust when it comes to funding - those who can give you a bit of a break or you pitch an offering to them they cannot refuse in order to help you diversify any risks. This is still a business so due diligence is required to minimize it. Don't put all your eggs in one basket either, try and network first and learn / find ways where you can get more favourable rates and perhaps offer to work in this field first and decide whether this is something for you or not. You won't win all the time and having a good support team is vital to success. Don't believe everything people write or put down either. Self experience is a must and that requires time and patience. The above may all sound obvious but I protect clients and investors and I love to analyze properties and doing the inspections before I can advise on anything. Get the confidence by joining others who may require your passion to learn and you may learn a few tricks along the way! Cheers, Amit.
I'd say your math is working because you are trying to remain conservative - the houses you are applying the math to aren't working ;)
In a seller's market, asking prices and sold prices are higher, so it can be tougher to get good cash flow at the higher market prices. Do you also evaluate the houses you see for flip potential? That way you can get familiar with some things - buying, hiring contractors, rehabbing - at least.
@Russell Brazil can you tell me where my math is off in that case? It’s probably a B-/C+ area.
Originally posted by @Kelly Carter :
@Russell Brazil can you tell me where my math is off in that case? It’s probably a B-/C+ area.
I dont get into breaking down certain percentages for this or that because life doesnt happen like a spreadsheet. I do know from experience though 1% rule properties that are B assets make profit, and C/D ones at this same ratio do not. Also if you were to buy 10 of these, all 10 will give you different returns. Some of them will need nothing and out perform, and some will be disasters and under perform. So buy several at the least to spread out your risk.
@Russell Brazil makes sense - I will keep that in mind about the 1% rule in regards to B vs C/D. Thank you!
Yeah, it sounds a little to saturated. Another thing to keep in mind is there are more optimal properties to maximize rent per price paid. For example a $100k house might rent for $1000/mo but a $200k house in the same area probably won’t rent for $2000/mo. That being said, you need to determine what you are looking for. To maximize your COC returns you might look for 2/1 houses or small multi families that will yield better cash flow but these tend to see less appreciation over time.
An example. I sold a high end rental for $350k that was renting for only $2k-mo and invest in a different area to buy several smaller properties. For example one that I bought from those proceeds was $180k and has 4 units x $600 ea. So it’s not an even sliding scale, and there’s a sweet spot to find. Extrapolate the math and for the same $360k worth of total property price I could have either $2k in rent or $4.8k in rent each month. Obviously the expenses will be higher with 8 total units at that math but you get the picture.