Am I TOOOOO Conservative?

Question

Hey guys. I have yet to buy my first property, but I know its coming soon. My concern, recently, is that my deal analysis is too conservative, because NOTHING I scrutinize cash flows. Here is an example.

I'm currently in the niche of putting together subto deals for owners facing foreclosure. My market is rural, north FL. (not coastal, not flood plain) Look at this:

2100sqft SFH, 2 acre lot, 4/2, easily worth 400K, neighboring comps are between 420-450K. Build in 2006, solid brick house. Would easily pull $2,200 in rental income.

$1,090 P.I.(pulled directly from mortgage statement). $320 tax (Based on appraiser website, calculated without exemptions). $210 insurance (quoted). $220 capX (10%). $154 vacancy (7%). $220 repairs (10%). $220 property management (10%).

=$2434/mo expenses.

Lets say I bought this property subto, which is a real possibility since they are facing foreclosure. I would SCORE a 3.75% interest rate loan. I would SCORE all the paydown since 2016 when the property was purchased. I would SCORE the equity that already sits in the property. BUT STILL NO CASH FLOW? How, in the world, is anyone getting cash flow? I figure it has to be my underwriting, but my underwriting is based on the commandments established by BiggerPockets sponsored bibles. I mean, this is a creative finance deal. It isn't supposed to get better than that! Is it impossible to buy a cash flowing property with no money down?!

I'm not giving up, I just like being dramatic. Seriously though, I'm running out of time before I accept my fate and take a small loss on my first buy.

:D

Nicholas L. · Answer

@Ethan Whaley

i'll try to simplify.  since I am a random person on the internet, you can take or leave my advice.  but here goes.

-sub to is not a beginner strategy, period.  way too much risk.  no need for that much risk.

-nothing cash flows anywhere right now in the short term.  not in any market.  just to pay back acquisition and rent ready costs typically takes several years.

-anyone who says "cash flow from day 1" is selling something.

-the best way for a beginner to start is house hacking.  period, full stop.  it builds equity but doesn't cash flow (and isn't supposed to).

hope this helps

Kevin Poler · Answer

You’re not crazy — you’re stacking conservatism on top of conservatism and then asking why nothing works.

A few observations from someone who underwrites deals for a living:

• You’re underwriting like an absentee owner before you’re even an owner.10% CapEx + 10% repairs + 10% management + 7% vacancy is a fully stabilized, hands-off portfolio model. That’s not how most first deals actually operate, especially SubTo where the margin is in control + time, not instant yield.
• You’re double-counting downside.CapEx + repairs at full tilt simultaneously is rare on a 2006 brick house unless you know something the comps don’t. One should be dialed back once condition is verified.
• SubTo isn’t a “cash flow hack,” it’s a balance sheet play first.You’re buying:

• A below-market rate
• Locked-in debt with principal paydown
• Embedded equityCash flow is often thin at acquisition. The win is what happens after rent growth, refi, or ops optimization — not month one.

• Cash flow ≠ deal quality.Plenty of solid SubTo deals start at breakeven or slightly negative and turn into monsters over 12–36 months. What kills people isn’t low cash flow — it’s bad assumptions, deferred maintenance, or no reserves.

My rule of thumb:

• Early deals: protect downside, don’t demand perfection
• Later deals: tighten underwriting as portfolio risk increases

You’re doing the right math — just applying it at the wrong stage.

If you want, happy to sanity-check one of these deals and show you where the real risk actually lives.

Michael Smythe · Answer

As @Kevin Poler has noted you are being too conservative because you're mixing different options.

You haven't stated what the mortgage balance is, so we would know the current equity.

That's the play with this deal - a low rate & payment with "instant" equity. The tradeoff is negative cashflow for the short term.

Think of it another way - if you bought this property, with your own mortgage at current interest rates, would the cashflow be more or less?

FYI: prices go up faster than rents.Meaning the higher the value of the property, the harder it is to cashflow.

Ethan Whaley · Answer

@Nicholas L.@Kevin Poler preach fellas. so it seems i need to manage my expectations. i hate it.

Is cash flow for investors with more money to buy a better LTV then? I'm cool with spending $300/mo to own this kind of asset, I just have to wrap my mind around my net worth increasing as my checking account decreases. At least for the first couple years.

whats so risky about subto? I can easily carry the holding costs if it somehow came to that. I hire a title company or attorney to open escrow, ensure the title is clean, work up a purchase agreement,  i have an insurance agent reference, And then i get the deed. im saying this sarcastically because I know its more complicated than that, but idk how much i can learn about performing a transaction without doing it. is there a book or article that actually explains how a transaction actually takes place, step by step?

Kevin Poler · Answer

You’re exactly right, the disconnect usually isn’t the deal, it’s what return bucket people expect it to show up in.

A lot of newer investors are underwriting every deal like it needs to cash-flow day one, when in reality some of the best deals are balance-sheet plays first (rate, debt position, equity), then cash flow later through rent growth or refi.

This is actually what I spend most of my time helping investors with, pressure-testing assumptions so they understand where the risk really is instead of just killing deals because the spreadsheet says “negative.”

If you ever want a second set of eyes on a deal, happy to look at it.

Nicholas L. · Answer

@Ethan Whaley

hi again.  IMO cash flow on LTRs is something that comes later in the life cycle of ownership, and not in the first few years (unless you're purchasing entirely in cash, and then voila - cash flow on day 1).

much larger properties may come closer to cash flowing earlier in the life cycle, since they work like more traditional investments; residential real estate isn't really designed to cash flow.  but, there are really great benefits to owning a portfolio - such as passive losses against your W2 income, equity via debt paydown, and then hopefully eventual cash flow if they are well managed and you're able to gradually increase the rent over time while your mortgage stays fixed.  I'm buying for equity right now (and getting it.)

what is risky about sub-to?  I think you're right - the loan being called is not the end of the world.  hopefully you'd either just sell or refinance.  the reason it's risky is you're entering into a 3-party relationship - you, the seller, and the bank.  and the more parties involved, the more things can go wrong.  so even as the buyer, confident you can make payments - what if the seller does something bananas?  or likewise with the bank?  too many parties involved.  i just have zero interest in that (and, sub-to has a lower risk sibling called seller finance.)

so again - i didn't say there's never any reason for anyone anywhere to ever use it, just that it's not a beginner strategy (or maybe even an intermediate one).

i hope this helps.  i'm happy to dialogue further.  i've done a little bit of everything at this point and i spend a lot of time trying to help new investors be more patient.

Kevin Poler · Answer

This is a good synthesis of the issue.

Where people get tripped up is expecting every advantage to show up as cash flow immediately. In this case, the advantages are the rate, the debt position, and the equity, not the monthly spread.

If you underwrite this like a market-rate acquisition at today’s rates, of course it won’t cash flow. That doesn’t make it a bad deal, it just means the return shows up on a different part of the balance sheet and on a longer timeline.

The real test for something like this isn’t “does it cash flow day one,” it’s:

• Can I comfortably carry the downside?
• Is the debt meaningfully better than what I could get today?
• Is there a clear path to improve cash flow or access equity over time?

Can I comfortably carry the downside?

Is the debt meaningfully better than what I could get today?

Is there a clear path to improve cash flow or access equity over time?

If those answers are yes, the deal can be rational even at breakeven. If not, it’s probably not the right first deal.

Am I TOOOOO Conservative?

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