Would you pay full retail for excellent cash flow?

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Would you pay full retail for excellent cash flow?

Mike R.
Investor · Orwigsburg, PA · Member since 2016 · 28 posts · 5 votes

@Brandon Turner and others often talk about making sure you have cash flow AND equity going into every buy-and-hold deal. But are there any circumstances where you'd pay full retail if the cash flow is good enough?

There's a triplex in my area listed at $85,000. Rents are $2,390. 

Using the 50 percent rule to ballpark expenses, and a P&I payment of $315 ($68K loan, 30-year mortgage, 3.75 percent interest), that's $880 per month cash flow, or $292 per door. 

This triplex is listed at full retail; it's an area where houses do not appreciate; and there is probably some deferred maintenance. So that's three strikes against it. 

But, still ... does the cash flow make this house warrant a closer look?

Thanks,

Mike

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10y

There is nothing wrong with paying full retain if the property meets your criteria. There is nothing wrong with buying for cash flow and not appreciation. That doesn't mean this is the right deal to do that. 

The condition and ongoing repairs may mean your expenses are greater than 50%. This is certainly worth a closer look. I would the tenant about the repairs that have or have not been done.

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  • Brandon Battle
    Real Estate Agent · Buena Park, CA · Member since 2016 · 743 posts · 424 votes
    10y
    Any property that needs repairs and not just refreshing the decor isn't worth full retail.You could agree to pay full price to get it off the active list and then go for credits to pay for all the serious repairs they should have made.Make sure to check plumbing,electrical,and roofing carefully because that's where this home can turn into a nightmare fast,cash flow or not.
    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Mike R.:

    @Brandon Turner and others often talk about making sure you have cash flow AND equity going into every buy-and-hold deal. But are there any circumstances where you'd pay full retail if the cash flow is good enough?

    Mike

    :BIG SMILE: (non-solicitation) as profile states, I'm exiting my 6-unit fmu at FMV. Sitting this weekend on three offers and an ongoing bidding war.

    Somebody thinks so :)

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    There is nothing wrong with paying full retain if the property meets your criteria. There is nothing wrong with buying for cash flow and not appreciation. That doesn't mean this is the right deal to do that. 

    The condition and ongoing repairs may mean your expenses are greater than 50%. This is certainly worth a closer look. I would the tenant about the repairs that have or have not been done.

    3Reply
  • Mike R.
    OP
    Investor · Orwigsburg, PA · Member since 2016 · 28 posts · 5 votes
    10y

    Thanks for the input, all! Ned, that's exactly was I was trying to get at with my question -- it was not only about this deal in particular but also more generally whether it's ever appropriate to buy full retail in a market that doesn't appreciate if the goal is cash flow (which mine is). I'd be interested in hearing others' opinions on the matter.

    1Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    10y

    Well, I bought quite a few properties in 09/10 for 10K or so and with a little work, they were rentable for 500/600./700

    So, lets' say I have a total of 20k in the house - and that was the market then - I'm quite happy with the deals I've done ;-)

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    i will add that I know some landlords in baltimore are into properties after all repairs for more than market value.  Why - they get great cash flow returns. If you never plan to sell and just want the cash flow equity is not important.  That said it certainly adds to your risk if something goes wrong. 

    2Reply
  • David Behrendt
    Handyman · Belleville, MI · Member since 2016 · 13 posts · 6 votes
    10y
    More risk that way, getting below market value allows you to sell quick without losing your shirt.
    3Reply
  • Joe Norman
    Property Manager · Baltimore, MD · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    It is absolutely more risky to by near/at/above full market value, because if things go wrong and you decide to sell you'll loose your shirt.  That said there isn't anything wrong with investing for cashflow and not for equity - it all depends on your goals and your criteria.

    That said, if the building has deferred maintenance issues then it probably isn't worth full market value.

    3Reply
  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    10y

     If the building has good cash flow, why not ? it's like the stock market, if you plan to sell it in a few years then its best to buy below retail to make your money, but if you plan on holding it for a long time and you make a good cash flow ( after checking what needs to be fixed and what that will run) than paying full retail is not necessarily a bad thing.

    i have one rental, bought it for 100,000, 3 years ago, it has gone down in value to 90,000. so what, i still make positive cash flow from the property, it did not change that at all and i'm making more than i did 3 years ago because the rent was raised. my only concern would be if i sold it, but i do not plan on doing that.

    2Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
    10y
    Originally posted by @Mike R.:

    This triplex is listed at full retail; it's an area where houses do not appreciate; and there is probably some deferred maintenance. So that's three strikes against it. 

    But, still ... does the cash flow make this house warrant a closer look?

    Thanks,

    Mike

    I don't really care about appreciation unless it's in an area that I feel is going downhill and will become a very bad area in the future.  Deferred maintenance depends if you are talking $3k or $30k.  As far as full retail, who cares what the price is.  If you can buy a $85k property, put around $5k into it, and rent makes it almost $900/month cashflow, I don't see the problem, unless the property was about to fall off it's foundation or something.

    Keep in mind, there could be a lot of things that would make it a bad deal, but nothing in what you wrote scares me.  and that's all I have to go on.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    @Mike R. - If the deal looks THAT good, I'd suspect that there must be something I'm missing. Either it ISN'T being sold for full retail value (yay!), or more likely - there's something the seller knows about but isn't revealing (uh oh). 

    I'm more cynical than many, however. Get that baby inspected like a mofo, maybe even get some inside scoop from the existing tenants, and good luck!

    2Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Mike R.

    Nothing wrong with paying full asking price, which may or may not be retail price.  the 50% rule is just a rule of thumb, before I'd put in an offer I'd want to see ACTUAL expenses and ACTUAL rents/income.

    I just sold a property that was all rehabbed and ready for move in and sold it at a 15 cap rate and had multiple offers.  The numbers were great and the price made sense to multiple buyers. 

    I've bought and sold over 900 properties and am located in Harrisburg, PA.

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y

    I see some comments here that are dangerous. I even disagree with my friend @Ned Carey, which is the first time that happened...

    In mathematical terms, I would tell you to underwrite to IRR. In layman's terms - you have to at least be able to exit, and better yet be able to project what that's going to look like!

    Understand - REI is all about safety first, and making money second. Your ability to cash flow is one half of the safety equation, the other half being your ability to exit. note - I don't mean you have to exit; you wanna hold - hold. But, you must be able to exit if need be, cause **** happens in life...

    Now - can you pay fair market value and still achieve the spread allowing an exit? Yes, but that's a function of improving the fair market value, and that is outside of this conversation...

    CF is everything, and nothing! Be careful!

    2Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Mike R.:

    @Brandon Turner

    There's a triplex in my area listed at $85,000. Rents are $2,390. 

    But, still ... does the cash flow make this house warrant a closer look?

    Thanks,

    Mike

    No, you should NEVER buy a property for cash flow only!   It's just too speculative.  What happens when you close and the three tenants decide not to pay rent.  Yer screwed.  Cash flow is gone and you can't get your money out without losing MORE money.  OK, try to find replacement tenants and you find out you can't get the same rents and it is hard to even get a good tenant.  HEY, doofus (not you Mike, you were smart enough to question the group think) , why was there initial cash flow to begin with?  Cause the property was CHEAP!   Why was the property cheap?  Cause there was little to NO demand.

    Appreciation is everything.  I don't have to lift a finger or worry about boots on the ground.  If I can't manage or hire a bad manager my appreciation is gonna be there for me when I sell.  Getting rent is WORK!  It may be worth it but wouldn't you prefer to just collect the appreciation and not have to worry about collecting rent to stay afloat.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y
    Originally posted by @Ben Leybovich:

    I see some comments here that are dangerous. I even disagree with my friend @Ned Carey, which is the first time that happened...

    Baloney, Ben has disagreed with me lots of times.  :-)

    But Ben you are not disagreeing with me this time. You simply went into more detail than I did. I clearly said buying with no or negative equity adds risk. Depending on someone's overall portfolio and financial position they may view that as a risk they can handle. 

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y
    Originally posted by @Account Closed:

    No, you should NEVER buy a property for cash flow only!   It's just too speculative. 

     It is interesting that Bob emphasized the word never. Most people say cash is king and don't count on appreciation.   "It's just to speculative" wow most people would say buying for appreciation is speculative.

    Bob likes to talk in absolute terms but there are no absolutes in this business. Just like you can't count on the cash flow being what you project, you can't count on appreciation being what you project. 

    You analyze a deal taking into account your goals, your financial position and your risk tolerance. The most sophisticated approach is to calculate IRR as @Ben Leybovich mentioned. But that means making assumptions about both appreciation and cash flow that may  not come true. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Ned Carey:

    Bob likes to talk in absolute terms but there are no absolutes in this business. 

    Ned, ever, never?  LOL

    But Geez Ned it's just a little tongue in cheek.  Go post to the people that say the opposite!  Ha Ha  Just having a little fun and making a point.  Real estate is Fun.  People making money have Fun.  Was 2015 a little tight for you?  Com'on and have some Fun!

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Ned Carey:

      If you never plan to sell and just want the cash flow equity is not important.  

    Oops!

    0Reply
  • Brian Lacey
    Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
    10y

    Still comes down to numbers, and controlling as many of the known variables as possible. The less you can pay for the property the better, always. Keep in mind, the unknown variable of repairs and deferred maintenance. This is all risk that you are taking on. That doesn't take into consideration what you may find or need to repair once you get going.

    It all comes down to how much money you're putting into it at the end of the day.

    @Account Closed, I agree with him and @Ned Carey and @Ben Leybovich. Appreciation is important, the how and where it comes from is more important. You can get instant appreciation (equity) by closing on a good deal and buying below market value. The other is through sweat equity and improving the condition of the property. Cash flow is important as well. Cash flow is equivalent to a stock paying a dividend. Appreciation is equivalent to seeing your stock rise in value. The only difference is cash flow is money in your pocket, appreciation is not (yet). You don't cash in on appreciation until you sell or refinance.

    In terms of the deal, you need to buy it for what it is currently performing at. Do not pay the price you know it'll be worth once you get working on it. That's giving away your equity. You pay the seller for what they have done with it so far. 

    As you can see from the thread, all 3 of the aforementioned investors I mentioned are very successful, yet have differing opinions on to accomplish that. And that pretty much sums up real estate investing. No two deals are alike, just how no two investors are alike. Plenty of ways to skin the cat.

    1Reply
  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
    10y
    Yes, we just paid near-retail for excellent cash flow and appreciation. Good luck.
    0Reply
  • Simon Shih
    Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
    10y

    Okay guys. 

    @Ben Leybovich @Account Closed @Ned Carey

    What about turnkey properties. I have no interest in it, but many investors are building whole companies on providing turnkey properties. Am I missing the definition of turnkey or are these deals retail or close to retail and rented and ready to go?

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    @Simon Shih Yes i would agree with your definition of turnkey. Turnkey properties tend to be at or sometimes even above market. Think nicely renovated house in sound but dated neighborhood. 

    I don't like turnkey properties as they don't give the return I expect. they can be right for some people. 

    For the record My personal philosophy is to have solid equity in a property. I think the idea of negative equity, even with high cash flow, is a high risk strategy. But I know people who have been successful with it.

    1Reply
  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    Ok, so we're discussing "Full Retail" and whether or not we should be paying it for investment properties - but how do you determine what full retail value actually is? 

    In my mind (and I believe this is a common expression) something is worth what someone will pay for it. For the sake of argument, if a property has been on the MLS for a year at $100,000, and you come in and buy it for $75,000, do you think you're paying $25,000 under full retail? I would argue that $75,000 is the actual value, even if the identical house across the street sold for $100,000, 366 days earlier.

    Is it just a matter of casting a wider net? Looking at an entire neighborhood, zip code, or county for comps? Even then, we talk all the time about the difference a couple of streets can make in the value of a property. That's true in areas large and small. 

    Is there a REI formula for what is considered full retail or full market value? Especially in lower sales volume areas (that might not have more than a handful of multi-family properties at any given time?)

    I think a lot of great points have been made in this thread, and it definitely represents a great cross-section of great investors, but it's interesting to note how the different markets have influenced the investors. i.e. @Account Closed's 'buy for appreciation, cashflow is too speculative' mentality (can't get much more Hawaii than that!) and @Ben Leybovich's much more conservative mentality (because if you buy below market value, it cashflows well, and then appreciates, you'll be able to survive when disaster strikes.)

    As an aside: Ben - I've looked through your articles/posts, but you write so much I can't find what I'm looking for (or maybe I'm just a complete idiot) - can you point me towards the correct way to calculate IRR? Any tips for a new guy on estimating appreciation? For all my estimates I just assume it won't appreciate at all, and make sure the numbers still work before considering offers.

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    10y
    Originally posted by @Jason V.:

    Ok, so we're discussing "Full Retail" and whether or not we should be paying it for investment properties - but how do you determine what full retail value actually is? 

    In my mind (and I believe this is a common expression) something is worth what someone will pay for it. For the sake of argument, if a property has been on the MLS for a year at $100,000, and you come in and buy it for $75,000, do you think you're paying $25,000 under full retail? I would argue that $75,000 is the actual value, even if the identical house across the street sold for $100,000, 366 days earlier.

    Is it just a matter of casting a wider net? Looking at an entire neighborhood, zip code, or county for comps? Even then, we talk all the time about the difference a couple of streets can make in the value of a property. That's true in areas large and small. 

    Is there a REI formula for what is considered full retail or full market value? Especially in lower sales volume areas (that might not have more than a handful of multi-family properties at any given time?)

    I think a lot of great points have been made in this thread, and it definitely represents a great cross-section of great investors, but it's interesting to note how the different markets have influenced the investors. i.e. @Account Closed's 'buy for appreciation, cashflow is too speculative' mentality (can't get much more Hawaii than that!) and @Ben Leybovich's much more conservative mentality (because if you buy below market value, it cashflows well, and then appreciates, you'll be able to survive when disaster strikes.)

    As an aside: Ben - I've looked through your articles/posts, but you write so much I can't find what I'm looking for (or maybe I'm just a complete idiot) - can you point me towards the correct way to calculate IRR? Any tips for a new guy on estimating appreciation? For all my estimates I just assume it won't appreciate at all, and make sure the numbers still work before considering offers.

     I guess you are a new guy :) We don't estimate appreciation. We know what appreciation will be. Our idea of appreciation is not a magical market-driven thing, but is a function of carefully executed strategy. It's nice when the marketplace helps us, and we try to buy so the it does, but when I say "appreciation" I don't mean sit and wait - I mean know what you will do the make the fundamentals of the assets justify a higher value in the marketplace.

    As to IRR, I'm dumber than you are. But I do know this - you have to underwrite all of the cash flows for the hold, including refinances and liquidation. So, out of 20 steps, the first 17.5 have to do with zeroing in on the cash flows - the rest is just a function in the spreadsheet :)

    1Reply
  • Stephen FrancoPro Member
    Scranton, PA · Member since 2016 · 201 posts · 44 votes
    10y

    I would and have. except My "full retail" is often called "embarrasing" by sellers. lol

    I do my math the same way on all rentals.  

    income

    - hard costs

    -10% maintenance

    -10% management

    -10% vacancy

    -$100/unit profit

    rest goes to mortgage

    amount that number can afford at 6.5 % 20 yrs is value.

    unless appreciation figures in.

    In my market, ROI/COC returns are 15-22%

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