Is it normal to have to wait a few years for a rental to cashflow?

Question

Just curious for Seattle WA, if you know... is it relatively normal in a market like this to buy a rental property (a single family home or a condo) that doesn't cashflow much (if any) the first few years? I found a place that is so ideal as to building and area of the city, and I can easily afford it to live in if I have to, but I can't make the numbers look great for cashflowing as a rental for maybe 5 years at best. I could probably flip it, but would like to start building a rental portfolio if I can. Is it fairly normal to have to carry a place for a while before rental income starts to exceed carrying costs?

Marcus Auerbach · Answer

Real estate investing at it's core is not about cash flow. Just the fact that you can buy a property with mostly the banks money and have the tenant pay it off for you is kind of crazy if you think about it.

Would you buy a million worth of Amazon stocks if you could rent them to me and I pay them off for you??

Nobody ever regreted buying a nice property in a quality location. What if your parents would have bought that place in 1975 for $15,000 and told you that in the beginning it did not cash flow and that they were not sure if it was a good decision.

Rick Albert · Answer

In the higher appreciating markets, it does tend to take a second to cash flow. For example when I bought my second house hack here in LA, it would not have cash flowed immediately but a few years later it did. You also had the flexibility of refinances, etc. However keep in mind that you are dealing with bigger numbers, so a 3% appreciation on a $3,000/month rental is bigger dollar amount than other markets that may cash flow now. In other words if you look at a certain horizon (5 years, 10 years), that Seattle property might do better than other markets.

The wildcard with Seattle is rent control. That can hurt the appreciation if the tenant stays long term. You just need to factor it in.

Collin Hays · Answer

Yes

Henry Lazerow · Answer

Focus on 3/4 units buildings instead! For a single family/condo it can forsure be a few years before actually in the green. Atleast in my market chicago north side you cashflow day 1 if buy a 3/4 unit at 25 down. I would never buy anything that didn't cashflow day 1 way too much risk of taxes going up, rents going down, etc. that can get you in trouble if that negative cashflow spread widens.

Dana Furby · Answer

Actually saw that the law changed, so now landlords can only increase rent by 10% per year. But that is kind of a lot for a rent increase in my opinion so I think I'm still good in Seattle.

Sean Smith · Answer

@Dana Furby in the city of Seattle it is tough to find any SFH or condo that cashflows unless you are putting a substantially higher amount down (30% or more). However, small multifamily deals in certain pockets do cashflow if you know where to look.

My advice if you're trying to invest on a budget in the Seattle area, I'd start looking in secondary or tertiary markets around the city, not in it. There are plenty of zip codes that appreciate very well while also allowing for some light cashflow. I'm personally liking Everett, Marysville, Bremerton, and parts of Lynnwood & Renton, etc these days.

And remember HB 1217 just went into effect limiting rent increases to 7% + CPI or 10% total, whichever is less.

Dana Furby · Answer

Good point about increases. I actually don't think Seattle can have rent control. I believe that Washington State law precludes cities within the state from enacting rent control laws. I will have to confirm that though since that isn't currently my area of legal expertise.

Jaycee Greene · Answer

Hi @Dana Furby, yes this is very common in high-cost markets like Seattle, especially the more leverage you have in the property (over 70% LTV).

Rene Hosman · Answer

"normal" is very relative to location and timing, was it normal to find cashflow in 2020/2021? Significantly more normal than it is now at least.... It's certainly harder now to find that especially in Seattle.

Some people will say you HAVE to chase cashflow or it's too risky, or you'll never be able to build a portfolio, etc. Others will say it's ALL about appreciation. Neither group is fully correct or fully incorrect in my opinion.

It really depends on your goals, your lifestyle, and your timeline which end of the cashflow - to - appreciation spectrum you want to fall on.

If you can find both that's a home run but more than likely you won't find a home run until you get lucky or have more experience. And honestly that's kind of something I consider to be a great thing about real estate - even if you don't get a home run it doesn't mean it's not going to wind up being a great investment for you if you hold onto it for the long run. If you take a risk in alignment with your own risk tolerance and can survive the waves when downturns, vacancies, or unexpected maintenance happens then you'll be okay

Just pleaseeee make sure if you decide to buy a non-cashflowing property you are underwriting very conservatively so you know how much it will really cost you out of pocket. The BiggerPockets calculators can help with that and if you need some resources on books, podcasts, etc that we offer on how to underwrite your deals properly let me know and I can send you a list of my favorite resources on this topic!

Dana Furby · Answer

@Marcus Auerbach I think I get the point you're making, but would you confirm? Do you mean that real estate investing is about net worth more than cashflow?

Is it normal to have to wait a few years for a rental to cashflow?

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