Why properties more than 300k doesn’t make cash flow?
Member since 2023 · 11 posts · 3 votes
Why properties more than 300k doesn’t make cash flow?
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesQuote from @Behzad Sharifi:
ARBNB AND VRBOS are good, but I need a long term rental agreement to keep up with the expenses and the principal.
In most markets, make sure the property works as an LTR. this is because STRs are under attack from multiple directions. Quotas, bans outrageous taxes. OTAs that continuously become less owner friendly. AirBnB is advocating owners pick up the fees that are currently paid by the guests. Even some vacation markets are implementing outrageous STR taxes/fees.
STR can make more money, but requires more effort and has the risks from the various attackers. Best to be sure any purchase can work as an LTR.
by the way lowering LTV is purchasing cash flow at too high a price as the difference between 80% LTV and 70% LTV reduces the return significantly. In terms of return, in most markets you are better off having the negative cash flow than lowering the LTV to obtain cash flow. At 80% LTV, 10% appreciation results in 50% return from appreciation. At 70% LTV, the same 10% appreciation results in 33% return from appreciation.
Good luck
32 Replies
- 2yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
Keep in mind that almost any property can cashflow if you purchase it cash. But the name of the game is leverage! Whether a property will cashflow or not has less to do with the price range and EVERYTHING to do with the PURCHASE PRICE, EXPENSES, AND RENTAL PRICE. These three will make or break deals.
Bartomeo Property Management4.7150 Reviews - Real Estate Agent · Northern Virginia · Member since 2021 · 106 posts · 50 votes2y
Quote from @Behzad Sharifi:
I looked up a lot of properties through Zillow, and used the bigger pockets calculator to analyze it. The results surprised me, so basically properties which are expensive than 300k are not making cash flow. And the other properties which make cash flow are in a bad environment or a bad neighborhood. So any advice or suggestions?
You're not too far off here. This NOVA area is hard to cash flow for sure. Usually takes about 40% down payments to break even with the current interest rates and prices. Of course every deal is different. So usually you need more cash or you need to get creative.
Can you rent Medium term or furnished to increase rents? Can you rent by the room to increase rents?
Do you need to look further out from NOVA to get your deals. Out of state or hours away?
Can you assume a mortgage with a lower interest rate that will cash flow?
Do you want to just go for the appreciation in this market and realize that making 3%+ appreciation per year is more than you'll ever receive in cash flow a year.
- Real Estate Agent · VA · Member since 2022 · 49 posts · 6 votes2y
In the nicer/more expensive areas of Northern Virginia my clients who do invest tend to aim for gain through appreciation/the mortgage being paid off for them, and cashflow is about break even.
The tenant base is much easier to manage for this type of property. More risk/more reward tends to hold true in any market.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
Okay here are some LTR basics: you make money 4 ways:
1.) Cash Flow
2.) Appreciation
3.) De-leveraging your loan
4.) TaxesCash flow is controversial: your business needs cash flow to survive, but the source does not matter, could be your W2 if you have one. But cash flow does not make you wealthy. Look at the break down after 30 years on the BP rental calculator.
Appreciation works often times better for medium priced properties that do not cashflow well. It's a percentage. Hood properties often do not appreciate at all, but they cash flow well.
Loan pay down: the bigger the loan, the more you make. On average about 3% of property value p.a., that's typically a 9-12% guaranteeded ROI on your down payment.
Tax write offs: the more the better.
The more you focus on cash flow, the more the other 3 will shrink and vice versa. So it's basically a strategic choice you make. The unicorn years of cash flow galore are over: we are back to normal and real estate is a long term investment, not a quick way to fund your life while you are travelling the world. The time tested combination is to build a buiness and funnel the cash flow into real estate investments. It does not matter if that business is in real estate, a coffee shop or a shopify account.
I am lucky to live and invest in Milwaukee, which has become one of the hottest markets in recent years, which extremely high rental demand (#3 in US per rentcafe) and a chonic housing shortage. And we buy 300k properties, because of what I just outlined. Yeah cash flow is not great, but we put 30% down and that makes it cashflow alright with todays rents, but we expect rents to go up at least with the rate of inflation (2-3% per year) and that compounds over a few years and translates into more cash flow. I am a firm believer of investing in quality properties, good locations that are desireable. The worst thing you can IMO do is to buy an odd listing nobody wanted, just because your numbers said so. Do you have to go 300k? No, but I would start out by looking around the median price for the city you want to invest (and don't go much below the median)
- Member since 2023 · 11 posts · 3 votes2yThank you very much for your information. I learned a lot from your text. I am 20 years old still in college, and I have very big goals. What kind of analysis should I do to know that is a good investment? I am living in Virginia, and the market over here is tough.
Quote from @Marcus Auerbach:
Okay here are some LTR basics: you make money 4 ways:
1.) Cash Flow
2.) Appreciation
3.) De-leveraging your loan
4.) TaxesCash flow is controversial: your business needs cash flow to survive, but the source does not matter, could be your W2 if you have one. But cash flow does not make you wealthy. Look at the break down after 30 years on the BP rental calculator.
Appreciation works often times better for medium priced properties that do not cashflow well. It's a percentage. Hood properties often do not appreciate at all, but they cash flow well.
Loan pay down: the bigger the loan, the more you make. On average about 3% of property value p.a., that's typically a 9-12% guaranteeded ROI on your down payment.
Tax write offs: the more the better.
The more you focus on cash flow, the more the other 3 will shrink and vice versa. So it's basically a strategic choice you make. The unicorn years of cash flow galore are over: we are back to normal and real estate is a long term investment, not a quick way to fund your life while you are travelling the world. The time tested combination is to build a buiness and funnel the cash flow into real estate investments. It does not matter if that business is in real estate, a coffee shop or a shopify account.
I am lucky to live and invest in Milwaukee, which has become one of the hottest markets in recent years, which extremely high rental demand (#3 in US per rentcafe) and a chonic housing shortage. And we buy 300k properties, because of what I just outlined. Yeah cash flow is not great, but we put 30% down and that makes it cashflow alright with todays rents, but we expect rents to go up at least with the rate of inflation (2-3% per year) and that compounds over a few years and translates into more cash flow. I am a firm believer of investing in quality properties, good locations that are desireable. The worst thing you can IMO do is to buy an odd listing nobody wanted, just because your numbers said so. Do you have to go 300k? No, but I would start out by looking around the median price for the city you want to invest (and don't go much below the median)
- Real Estate Agent · Central Virginia · Member since 2020 · 38 posts · 20 votes2y
Quote from @Behzad Sharifi:
I looked up a lot of properties through Zillow, and used the bigger pockets calculator to analyze it. The results surprised me, so basically properties which are expensive than 300k are not making cash flow. And the other properties which make cash flow are in a bad environment or a bad neighborhood. So any advice or suggestions?
Finding cash-flowing properties can be challenging, and your observations highlight some common hurdles. Here are some thoughts and suggestions:
Understanding the "Cash Flow vs. Appreciation" Trade-off:
- Generally, more expensive properties tend to appreciate faster, but their higher purchase price and potentially higher expenses often result in negative cash flow. This strategy relies on long-term value growth to generate returns.
- Conversely, affordable properties may offer positive cash flow, but their appreciation potential might be lower. This prioritizes consistent income.
Expanding Your Options:
- Consider different property types: Multi-unit buildings or single-family homes with additional units (e.g., duplexes) can offer better cash flow potential compared to single-family homes.
- Look beyond traditional neighborhoods: Up-and-coming areas with revitalization projects can offer a balance of affordability and potential growth. Thorough research is crucial.
- Explore non-traditional rental strategies: Short-term rentals (e.g., Airbnb) can provide higher returns in specific markets, but come with their own management challenges.
Refining Your Analysis:
- Double-check your calculations: Ensure you're factoring in all relevant expenses (taxes, insurance, repairs, etc.) in your BiggerPockets analysis.
- Consult local experts: Real estate agents or property managers familiar with your target market can provide insights on hidden gems and realistic expectations.
- Remember, location matters: While affordability is important, don't compromise on factors like tenant demand, and access to amenities.
Additional Tips:
- Network with other investors: Connect with local investor groups or online communities to learn from their experiences and share strategies.
- Start small and scale gradually: Building experience with a manageable property can be valuable before taking on larger investments.
- Remember, investing requires patience: Don't expect immediate results. Be prepared for market fluctuations and potential challenges.
Ultimately, the best approach depends on your individual goals, risk tolerance, and investment timeline. While finding the perfect cash-flowing property requires effort and research, diversifying your strategy and utilizing various resources can increase your chances of success.
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