Would you pay full retail for excellent cash flow?
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10yThere 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.
86 Replies
- Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes10y
@Ben Leybovich Thanks for the clarification - I'm definitely a new guy, so it's great to get a response from someone I've listened to on the BP podcast :-)
I guess I would've called the appreciation you describe as 'forced' appreciation, which I can completely understand. I also understand buying properties under market value when they need some amount of work to make them rent/move-in ready, but I always got the impression that's not what most of the folks here are talking about (although I may have been wrong about that.)
'Just' appreciation is how I think about those wacky, hard to predict, market forces. I don't even know how to begin figuring those out with any degree of certainty, and my read was that it was just better not to count on.
I've done a little research on calculating IRR using excel, but I don't like using tools to make a job easier until I understand the concepts behind it - it's just the engineer in me I guess.
- Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes10y
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?
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
Mike, I think this is fairly complex scenario, more details required, however, immediate response -
Nothing wrong with buying something that is valued retail, certain conditions still apply, if you were to do a capital infusion as you stated it still needs, will the units sustain this improvement and equally your ARV will increase? Even through you may be seeking only cash-flow, even if the hime does not appreciate, as long as the money you intend on expending will enhance the value of the asset to a New ARV, if this is something that fits your strategy why not. Sounds like you will be able to really gain some nice cash flow, leveraged position, and maybe even a slight appreciation over time. Lots to consider still, at end if it fits your needs, thats good. At minimum take a closer look, worst case it will be a little more education :)
- 10yNate T.Pro MemberInvestor · Tempe, AZ · Member since 2014 · 145 posts · 74 votes
I have purchased properties for HIGHER than retail a number of times. Why? Because I could buy subject-to or with seller financing, and get great cash flow. Guess what, the sky did not fall. I knew I would have to hold long term but that's what I wanted to do anyway.
There's nothing wrong with paying full retail as long as the terms fit your needs.
- 10yMike R.Investor · Orwigsburg, PA · Member since 2016 · 28 posts · 5 votesOP
Fascinating discussion. Thanks to all for weighing in. Each of you has given me something to think about. Seems like it really does come down to each individual investor's risk tolerance and goals. I was struck by something @Ben Leybovich wrote:
"Understand - REI is all about safety first, and making money second."
I got a very expensive education on that point about 10 years ago, and it was enough to get me out of the REI game until now. I want to very conservative on my first couple deals back.
That said -- what about plowing all of your cash flow into the mortgage for the first few years, thereby quickly building equity? Wouldn't that give you an exit strategy? Of course, that assumes nothing goes wrong at the outset.
Perhaps the thing to do on this property is simply submit an offer 20 percent below asking. If they accept, great, if not, on to the next deal.
- Real Estate Agent · Burlington, VT · Member since 2015 · 108 posts · 46 votes10y
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.
@Mike R.I struggle with this question a lot in my market as there are very few non market value homes in the city where I want to invest.
My only concern for you is that the 50% rule is a broad estimate. $880 is very good cash flow! I would encourage you to use the rental property calculator on bigger pockets (or build your own spread sheet) and make sure that you are taking into consideration maintenance and capX. I personally would definitely take a closer look at a property with that type of cashflow, just make sure that you are going into it with eyes open on the expenses side of the column. That $292 per door could easily be eaten alive by an old roof/ need for new windows, bad foundation etc.
Good luck!
- 10yMike R.Investor · Orwigsburg, PA · Member since 2016 · 28 posts · 5 votesOP
Thanks, @Blair Knowles -- I definitely plan to use real numbers. I'm just using the 50 percent rule to quickly separate out-of-the-question properties from ones that merit a closer look.
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes10y
Originally posted by @Account Closed:
Originally posted by @Mike R.:
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.
So, existing cash flow is speculative , because all 3 tenants could leave? Heck, they could also do that, if you had bought below market and used a mortgage and now you have no way to pay the mortgage.
And then you say that Appreciation , which may or may not happen, is everything. To me it's much more speculative to bank on appreciation, than to bank on rental income. But many people in the mid 2000's were believing just like you - what happened to them?
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Michaela G.:
Originally posted by @Account Closed:
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.
But many people in the mid 2000's were believing just like you - what happened to them?
Well, hopefully like me they more than doubled their money! The thing is that you don't hope and pray for appreciation. You put on your businessman pants and calculate your appreciation rate just like you would your rental rates, vacancy rate, expense rate. Oh, you don't calculate those? You just use whatever is posted on the internet. Bad move.
Anyway I just saw sales from two of my building in the paper last week. One is a smaller unit than mine that sold for $440,000. I bought for $204,000 in 2003. I figure I could sell for $460,000+. The other one I bought in 1978 for $35,000 and the $500,000 sale is identical to mine. The 2008 property I bought for a little over $500,000 had an identical unit sell last month for $900,000!. Paid retail for all three and all three were cash flow negative. So over $900,000 in the equity bank.
Now back in the 00's there was a local real estate company that was aggressively courting long time Honolulu owners to 1031 to the Mainland for CASH FAUX! His kids moved to the Mainland so I guess they needed the business. I warned anyone that I knew that was considering it. I have flyover experience from being a Realtor in KY and investing in Vegas. Well Honolulu stayed pretty stable and returned to the normal doubling in value every ten years. Everyone that I know that did the exchanges have regretted it as their tenants are 100% opposite of their experience in Honolulu. They have experienced vacancies and repairs and maintenance issues that they never had in Honolulu and their rents AND values DECREASED.
So because I invest for profit, NOT cash faux and know my appreciation rate I am up in rents and over a million in appreciation. What's your point, @Manolo D?
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Manolo D.:
I find Bob's post amusing, and no point at all, but like in BP, there are great opinions and there are bad ones. The option is yours, just learn how to weed it out.
See above. I look forward to your comment.
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes10y
And if you were at good as paying attention, as you claim to be, you would have noticed that my name is not Manolo D.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Michaela G.:
And if you were at good as paying attention, as you claim to be, you would have noticed that my name is not Manolo D.
Nothing wrong with my attention, maybe your reading comprehension. I was merely trying to educate two people with the same post. See Manolo D's post above.
So anxiously awaiting your AND Manolo's response. Actually I'd love to hear from anyone that doesn't understand appreciation. I gotta MILLION things to tell you.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Michaela G.:
And if you were at good as paying attention, as you claim to be, you would have noticed that my name is not Manolo D.
And I noticed immediately that you transposed as and at. Dang, I ain't even had my morning Bloody Mary and I am on fire!
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes10y
Well, you did copy my post and wrote a separate post to Manolo, so, you're just backtracking now, because you were called on your mistake ;-).
Again, it's easy to say that you can hold properties for 10,20,30 years and it will increase. But tell that to all of the people that went belly-up in 2008, because they simply didn't have the funds to hold their houses another 10 years.
Yours is the riskier strategy in my opinion.
And in my case, all of my properties quadrupled in value in the last 5 years, since I bought them.
- Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes10y
Originally posted by @Account Closed:
Originally posted by @Michaela G.:
And if you were at good as paying attention, as you claim to be, you would have noticed that my name is not Manolo D.
And I noticed immediately that you transposed as and at. Dang, I ain't even had my morning Bloody Mary and I am on fire!
And I bet I speak English better than you do my native language
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes10y
@Account Closed perspective is different than the majority of investors because an island has limited land and one with perfect weather is going to be in limited supply. I don't think it is fair to make the blanket statement that since values went up dramatically in Hawaii, that you would expect the same everywhere.
You need to be careful when buying a triplex that is selling for under $100,000. If the cash flow is so great, then why is the owner selling it? The rents look good, but what is the vacancy rate? Are the tenants all current paying rents?
I was recently looking at fourplex and asked the owner about vacancy rate. He responded that the vacancy in my city is under 4%. I told him that is great, so are you saying your vacancy rate is under 4%? I got no response.
You could ask the owner for an income and expense statement for the last two years to show exactly how the property performed. You may get push back which means they are trying to hide something.
I like the approach of offering under asking price. No harm coming in low as a starting point. Don't worry if you miss this deal, there are plenty more.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Joe Splitrock:
@Account Closed perspective is different than the majority of investors because an island has limited land and one with perfect weather is going to be in limited supply. I don't think it is fair to make the blanket statement that since values went up dramatically in Hawaii, that you would expect the same everywhere.
I have invested in three states over 40 years. My point is that every market has an appreciation rate. Why invest in a low appreciation rate area?
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Mike R. one thing to remember this is highly regionalized..... in some parts of the country you can buy with instant equity but its only equity on paper very hard if not impossible to capture. because every other buyer will want to buy with the same metrics you did.. and these rental homes don't get sold to homeowners who pay retail.
In high value markets were you actually have home owners buying the homes for retail you have a legitimate exit.. in the rental markets you really don't you may think you bought under market and you may have an appraisal 0n your refi that says so.. but in reality would be near impossible to sell for that appraised amount.
if its units like what your talking about 3 units... if the market is saying that 15 Cap is retail then that is what its worth... given risk reward and lack of appreciation potential.
In non appreciating markets cash flow and buying right is essential. In high value easy to manage markets... neutral to even cash flow or even negative cash flow on certain properties is fine... let the tenant pay off your A grade property....
what folks usually don't understand until they try to sell .. the lower end rentals have an extremely thin market especially when you own 100 of them or more and want to sell them all at once.. investors back into the numbers and most times what you think thye are worth and what they will actually fetch is two huge different numbers.
- Investor · Richmond, TX · Member since 2014 · 58 posts · 13 votes10y
Why would you ever want to pay retail as an investor?
That's like running fingernails across a chaulk-board to me.
I like to buy below market value, preferably 70% below ARV and I do this by finding motivated sellers or property that requires rehab work.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes10y
Originally posted by @James Messa:
Why would you ever want to pay retail as an investor?
That's like running fingernails across a chaulk-board to me.
I like to buy below market value, preferably 70% below ARV and I do this by finding motivated sellers or property that requires rehab work.
Because some times retail is well below intrinsic value :)
- Benton City, WA · Member since 2014 · 135 posts · 50 votes10y
Disclaimer: I didn't read all the comments! I think it depends on how much you love being a landlord! You've got enough property for a property mngr, thats awesome. Those rents sound awesome for the price! But the exit strategy would not be quick and easy--- you'd either have to pay money to sell, or get creative in your selling strategy (and it might not be possible). I've never heard of an "area that doesn't appreciate" before, you might get lucky and be surprised, but I sure wouldn't bank on it. I'd just make sure I knew the "worst that could happen", and that my spouse was OK with the deal! Honestly, I don't know if we'd do it or not. Landlording's hard. And I do love equity!!! Hubs would be the decision maker on this one. If it was a little ways from where we live, and there was some anonimity, but not in a really bad neighborhood maybe. I'd definitely try to get them down on the price to cover the expenses of repairs at least, or shop around for a similar type of place, with a better deal. There are always more fish in the sea, this is not the last deal. If it was, then that means the neighborhood IS appreciating. :-)
- Investor · Richmond, TX · Member since 2014 · 58 posts · 13 votes10y
Duly noted. I now know why one would pay retail as an investor.
I am analytically OCD, and not philosophical ;)
- Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes10y
Normally I don't like to ruffle feathers but I can't let this one go. Everyone has their opinion and mine is that cash flow should be the #1 thing you look for in a buy and hold property. I do look at other "numbers" and appreciation of course, but only to ensure there is not something there like the house will lose half it's value in the next 5 years because the neighborhood is turning bad (I have walked away from decent cash flowing properties because of that). However, assuming there are no indications the property will lose value and the repairs are not astronomical, the only thing I ever look at is cash flow. So if I wanted to be a generalist, replace Bob's NEVER with ALWAYS and I might be saying "I wouldn't go that far for reasons previously mentioned, but it's a perfect #1 metric :)"
If I went by Bob's logic I wouldn't even get into real estate. If I was truly worried about all my renters just getting up and leaving and not being able to replace them, I would never buy anything. That comment is just too far out there. That's like saying you shouldn't invest in the stock market because all the companies may go the way of Enron and WorldCom. Also, if I questioned that deeply why a deal cash flows so much or why has it been on the market for a year and no one snatched it up and didn't buy because I thought that meant it was "cheap", I wouldn't have 75% of the properties I have. Sometimes properties can be "cheap" but that's why you analyze them. It's pretty easy to weed those types of properties out.
Also, to say "collect the appreciation and not have to worry about collecting rent to stay afloat" just sounds like horrible advice. You can't "collect" appreciation unless you sell. If you're a flipper maybe Bob's advice makes sense, but the person who posted is obviously a buy and hold investor. I'm sure there are people out there who can make a living buying for appreciation only, but that has to be a SMALL % of people who can pull that off. In my mind, that's risky. Investing for cash flow is just smart. I'm kicking *** with cash flow, but if I invested for appreciation only, I'd be losing my shirt.
I guess that's the great thing about BP, you get people on all sides of the spectrum. You want some heated arguments, go read about "LLC or no LLC" posts. Man, people sure are passionate about their real estate :)
- Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes10y
@Account Closed I never believe in anything that falls under could have, would have, should have, it is either you buy/sell or you don't, so how much did you make on those properties you bought? how much did you sell it for?
If we play the game on could have, would have, should have, then I could buy facebook shares on Sept 4, 2012 at 17.73/share and sold it on Feb 2, 2016 11:30 at 117.27, I would have made 99.54/share, that's 5.6 times my money in only 3 years and 5 months. I could have bought all the beach fronts in La Jolla 80 years ago and wait for appreciation 40 years from now and would have made a ton of money. I mean, my $1,000/acre would probably be $5MM per acre by then, but, who knows, it is not there yet, oh wait, if I wait 40 years more, that could be $20MM/acre, I could probably wait, but how much is in my pocket right now since I bought it? still -$1,000/acre.
If you're so much into appreciation, then go with stocks, they appreciate much faster than real estate.
I on the other hand don't want to guess anything beyond 6 months, that's why drip income will not attract me in any scenario.
- Investor · Saint Louis, MO · Member since 2015 · 204 posts · 37 votes10y
My input, not too much different that was has already been said. Everyone has different goals, if your goal is cash flow then it deserves "further investigation". Doesn't mean you would ultimately buy it, but if the cash flow projections are what you like, then it requires you to do more due diligence. Just because it's listed at a high retail doesn't mean you can't negotiate a lower price. Maybe the seller hasn't been educated on the risk involved. What if the property has been listed for 6 months? Has the seller been told why the price may be unrealistic? Your negotiation may be eye opening to the seller and you may get him to justify lowering the price due to the risks you uncovered. Sellers often times don't know why they came up with their selling price.
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