@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
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.
Do you want to be a "I lost it in the crash story" because this is how you become one. If you're looking for cashflow and can only get it paying retail on the mls... You need to get into direct mail marketing.
Unless being underwater sounds like fun to you.
@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?
I agree with a strategy of avoiding low appreciation areas. Areas that appreciate are more desirable to live in, so even while you are holding the property, you will get better tenants and receive higher rents.
Realistically, many investors starting out that are buying properties for under $80,000 are generally not investing in high appreciation neighborhoods. The key with those types of property is cash flow and buying at the right price.
I would say no. Not trying to kill your deal! After reading several books, and one (The Millionaire Real Estate Investor by Gary Keller) that has been instrumental in my thoughts, I subscribe to what I now consider my #1 rule: you make your money when you buy. Following that rule makes me a better smarter investor with better results. I purchased my last two properties for about 75% FMV. It's great to make tax free money:)
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.
Cash is King! Personally I would hold on to the cash as a liquid asset. Nice to have it for emergency repairs, vacancies, other investments or any number of other opportunities/problems.
I'm so glad I joined biggerpockets. I love the experience I see on here. I'm going to add and take a little bit from everyone and say there is a happy medium to buying at retail. One thing I agree that I read over and over was all about due diligence. Have those inspections done, know what you are looking at. Make sure those financial reports have some proof to back them up also. How often do the units turn over or are they long term tenants? What is the maintenance history and actual maintenance costs? I have many people that buy close to retail because they have full time jobs and want to put their money into something that generates a return quickly or cash flow quickly. But they know what they are buying. Inspections are done, a history of work is presented and a certain warranty is given on the property. And they absolutely do not want to go looking through 20 properties, do estimates, lease units, over see contractors and wait it out for a month. Some of them can also acquire more properties because they finance and not have to come out of pocket so much. A lot of good advise here and like every deal, it all comes down to the deal and the property.
Angela
And I bet I speak English better than you do my native language
Who cares? If you live in America then learn English as best as you can. If I move to your country then judge me by your standards. Keep America American!
. I purchased my last two properties for about 75% FMV. It's great to make tax free money:)
If you are actually buying under FMV. Yeah, sure you are then how does that make it tax free" If you sell at "market" value you will pay capital gains.
@Mike R. The simple answer to your question is not, should you buy at full retail, it should be what is the position in the current cycle that warrants full retail? Let me explain. ALL property markets operate in cycles. Each cycle has a top and a bottom. Both the top and the bottom can only ever be clearly seen after you have passed them. In other words they are not known until after the event. However, with due diligence and some knowledge and a lot of work you can learn to read the indicators of where in the current cycle a market is sitting at and therefore make an educated guess of where it might lead to. There are many posts on BP covering this topic, so research those to get the basics of understanding property cycles.
Now, imagine the property you are considering buying is in a market that is on the upswing in its cycle. That is to say the property cycle is rising and with rising cycles come increasing prices. Demand is rising whilst supply is falling causing an increase in prices. In this instance it is fair to say that property will sell at or near its full, CURRENT, retail value. If you can find sub retail values in these markets you stand to make even better profits moving forward.
Now imagine that the market you are looking at is at the top of its cycle. Again, prices are high and demand is higher than supply so property sells at its full retail and in many cases above full retail. In this scenario there is only really one place prices can go, and that is down. Cycles go up and down and when. like being on a roller coaster, you are at the top, the next stage is down. Prices fall and you lose equity.
Note, neither of these scenarios should have any immediate bearing on cash flows. Cash flows are an object of return on equity. in other words, if you paid cash for your property then it will no doubt cash flow very nicely. If you are highly geared then the cash flows may not be so good.
So, the answer to your question is, "what is the purpose of your investment"? If you are buying at or near the bottom of a cycle and you understand this then you may pay full retail and have poor cash flow by looking for the upcoming growth in the market. If you look at @Account Closed's comments he clearly shows that he would have bought his properties at or near the bottom of the cycle. He was investing to make capital gains, not short term cash flows. I say short term because rental increases always follow rising prices. I say follow, because rental returns are a factor of yield for an investor and the greater the value of the asset the greater the cash yields should be to warrant the investment in the first place. Bob therefore was playing the game ahead of time. He was buying low priced property in an increasing market that he knows will increase in rental yields. He would then, as he no doubt does, increase his borrowings from the increased equity and cash flows to free up capital to go again. Thereby reducing his initial investment in the property and raising his IRR, plus having the funds to invest in other deals.
If, on the other hand you are buying for cash flow only then you are only partly playing the game and missing where the real money is. The real money is understanding investment cycles, in this case property cycles. Buy low sell high. Or, buy low, refinance high, buy low again, repeat. Follow Bob's lead because when a guy spends most of his working life as a professional property appraiser as he did, from what I know of him, you would be wise to acknowledge that he understands market cycles. He knows when to buy and when not to buy.
Would I pay full retail for a property? Absolutely, in the right market conditions. Would I prefer to get it below full retail? Absolutely. But I invest to make money and making money is what it is all about. Knowing your market and where it sits in its current cycle will make these decisions easier for you to make moving forward. If you do not understand your market and its cycles then these decisions will always be difficult to make.
Good luck on your journey!
I would always offer less on a property because that is the nature of what we do. Did you run the comps in the area and how rough is the location? Those are things to factor in as well. I know a lot of locations around us where you can basically buy stuff for free but you would receive a bullet proof vest at closing. I am guessing by the comment on houses not appreciating that it is in a pretty tough area. It doesn't mean you can't make money there, but it is something to consider.
Normally I don't like to ruffle feathers but I can't let this one go. flow is just smart. I'm kicking *** with cash flow...
Justin, it can be therapeutic to vent ones spleen. Bob gives us AMPLE opportunity, very often. He as good as admitted earlier on (in reply to Ned Carey) that he DELIBERATELY provides the opposite recommendation to the tried and true invest-for-cash-flow strategy - not because he believes it's wrong, but because he likes poking FUN - because he can! Well vented though. Kudos!...
Normally I don't like to ruffle feathers but I can't let this one go. flow is just smart. I'm kicking *** with cash flow...
Justin, it can be therapeutic to vent ones spleen. Bob gives us AMPLE opportunity, very often. He as good as admitted earlier on (in reply to Ned Carey) that he DELIBERATELY provides the opposite recommendation to the tried and true invest-for-cash-flow strategy - not because he believes it's wrong, but because he likes poking FUN - because he can! Well vented though. Kudos!...
Must have missed that post :) I wouldn't call it a vent, more of a difference of opinion. One thing is for sure though, if I could buy properties for $200k and sell them 2 years later for $500k, I'd probably be an appreciation investor and forget about rent, but I can't seem to find them :)
@Justin B., apparently, Bob likes to vent his spleen too. He just had a crack at me on another thread. Any dubious mention of Cap Rates, or Hawaiian Real Estate and/or Hawaiians - really gets him fired up! That's fun, for US! Cheers...
David... what a great post. I have seen how investor's here have gotten stuck at the bottom of the market prices. Yes, when we fell we took advantage of the market and did well but I can't expect to pay those prices anymore. We are still low here but I can't buy the same deals here I did two years ago and I'm not worried about it. I can still buy under market value and do the work to create both equity and cash flow however, I will not pass on a property where the money I put in just brings it up to market value and pass on a good cash flowing deal and a house that when we hit our higher cycle, I will be sitting where I can sell and take the cash or still sit and enjoy the cash flow. I never buy for appreciation, I call it a bonus. I've always bought when we hit bottom or while we were on on our way up. Your post was just amazing and well said.
Besides, buying for appreciation is called 'speculating' - it's not investing.
I've been reading these posts and thought I'd put my 2 cents in. I constantly buy properties that nobody else wants. I specialize in lower income neighborhoods where appreciation is almost non existent. The people that live there are very close nit and probably will die there and many of there family members live on the same street. My houses rent in a matter of days usually before the rehab is even finished and I'm making around $600/m on $20k (often times on less). My tenants rarely call me for anything because my houses are actually completely fixed, not extravagant, but everything works properly and I don't bother them. Most people that live in these areas couldn't get a mortgage on these houses even if a bank would lend on that low amount (typically in the $30k range). If and when I do decide to sell in about 15-20 years I don't really care what I sell them for if I've made my money 5-10x my initial investment. Even if I paid full price that's still around a 20% coc return!
$7,200 annual rent
___________________ = great investment
$30,000 purchase/rehab
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.
Any investment property in a decent neighborhood without extensive repairs will create steady cash flow by holding the property even with negative equity. It is still smarter to buy residential property below market value to avoid losses due to declining housing values.
Steve K - New Investor from Gaithersburg, MD
Any investment property in a decent neighborhood without extensive repairs will create steady cash flow by holding the property even with negative equity. It is still smarter to buy residential property below market value to avoid losses due to declining housing values.
Steve K - New Investor from Gaithersburg, MD
Steve, I agree. I always target properties that not only cash flow well, but are priced below market value and have the potential to appreciate. Of course that's not always achievable and that's where the risk comes in. The original poster of this thread is talking about a sub-$100k property. Even if the value was cut in half over time, that's still not a huge risk. A $1 million property becoming a $500k property can seriously hurt. I personally only have sub-$100k properties (at purchase time, several are worth over $100k now). So *I* personally see the risk as low. Even at 20% down, he'll have all his money back in 1.5-2 years depending on repairs. Unless it's a "money pit" situation or the area is SO bad that anyone would be dumb to buy there, even a little loss in value doesn't scare me on this one. It's a risk I would be willing to take. Again, I only have the information in the post, but if I'm going solely off that, this is a deal I would definitely be looking into if the scenario's I've mentioned aren't in play.
@Angela Harding Thank you for your kind words. I am happy to know someone got something from my post. You sound like a smart investor who knows what you are doing. However, I would like to suggest that by not investing for appreciation you are missing some of the game. Many times I have made money by looking for property that has a very clear upside to it. For example, the property may be in line for rezoning to a higher value use, it may be in a gentrification area that is creeping outwards, it may be in an area where there is clear growth on its way due to positive changes in the employment in an area. To not look at these factors means you are potentially missing some future big pay days.
Investing for just cash flow has its place, but it also comes with a lot more risk that many people on this site seem to ignore. Just read some of the posts on BP from veteran investors about buying low end property to discover some of the down side that you would not necessarily think of. Vandalism, long term vacancy, costs of eviction, breakdowns, unexpected repairs etc. These things do happen and when I look at the yield I want from my property investments, which after all is why I am doing this thing, I also have to look at the risk associated with securing that yield. The higher the risk the higher my yield needs to be to make sense of the investment. Why take risk when you don't need to.
Investing money is about getting the best return you can relative to the risk you are prepared to take and need to take. Property investing has the same rules.
However, many investors starting out have little capital available and so they tend to favour low end property. Property they can afford to buy. But let's imagine for a moment that you have say $200,000.00 of cash in the bank and you want to invest in property. Your choices are varied but I 'll look at two scenarios. Scenario 1. You find a property that you can buy for $600,000.00 that you can invest $200,000.00 into to rehab. Total Investment $800,000.00. Now you should not be doing this kind of rehab if you cannot add 25% to your total cost. So the end value should be circa $1Mill. To keep this example as simple as possible because it is being made to highlight a point and is not an actual set of numbers. So, you sell the property for a net $1Mill and make $200,000.00 profit. Time to do this can vary but let's say 6 to 12 months.
Scenario 2. You have the same $200,000.00 and you buy 10 properties at $20,000.00 each. You cannot borrow on these because lenders don't like them. I wonder why that is? However, you now have 10 properties to manage and they return to you a net $600.00 per month each, so you have $6,000.00 per month coming in, which is taxable income by the way. How long will it take to make the same $200,000.00 profit as in option 1? Answer, a little over 33 months. This assumes you have not breakdowns, vacancies, rent collection issues etc. Which would you rather do with your cash in this case. Invest for 6 months or even up to 12 months in a good quality flip, or invest for 33 months for the same potential return?
Before people start challenging my figures I only want to make a point and that point is that the more capital you have the more choices you have to invest in and then the lower end properties lose their attraction. Many of us have started at the lower end, learned our lessons, hopefully earned a few dollars and moved up the scale as we got more capital. Capital rich investors can and do invest for appreciation because they can afford to wait for it to reach them. Capital poor investors cannot do this because they need the cash flow to make a deal worth doing. I hope this makes sense and as you increase your capital base you will look for deals that offer you a bigger upside of appreciation whilst still getting a bargain at the front end.
Many of us have started at the lower end, learned our lessons, hopefully earned a few dollars and moved up the scale as we got more capital. Capital rich investors can and do invest for appreciation because they can afford to wait for it to reach them. Capital poor investors cannot do this because they need the cash flow to make a deal worth doing. I hope this makes sense and as you increase your capital base you will look for deals that offer you a bigger upside of appreciation whilst still getting a bargain at the front end.
Thanks for the posts @davidnolan. Very thought-provoking. I own one lower-end duplex and only have the resources right now to buy more lower-end properties ... but your post and some other reading I've done (including Seven Years to Seven Figure Wealth) makes me think I should sell them eventually and trade up.
Normally I don't like to ruffle feathers but I can't let this one go. flow is just smart. I'm kicking *** with cash flow...
Justin, it can be therapeutic to vent ones spleen. Bob gives us AMPLE opportunity, very often. He as good as admitted earlier on (in reply to Ned Carey) that he DELIBERATELY provides the opposite recommendation to the tried and true invest-for-cash-flow strategy - not because he believes it's wrong, but because he likes poking FUN - because he can! Well vented though. Kudos!...
Brent ya got it about 100% wrong. Investing for immediate cash flow is for poor people or novice investors. There is a reason a property cash flows immediately, the price is cheap, There is a reason the price is cheap, the market recognizes the property will be less profitable so there is little demand for the property. Less demand, lower prices equals less profits! BASIC economics.
@Angela Harding Thank you for your kind words. I am happy to know someone got something from my post. You sound like a smart investor who knows what you are doing. However, I would like to suggest that by not investing for appreciation you are missing some of the game. Many times I have made money by looking for property that has a very clear upside to it. For example, the property may be in line for rezoning to a higher value use, it may be in a gentrification area that is creeping outwards, it may be in an area where there is clear growth on its way due to positive changes in the employment in an area. To not look at these factors means you are potentially missing some future big pay days.
again... Really great advice.With prices this low leveraging properties is a bit harder also. Loan products have minimum loan amounts. We do have investors that can use them on some properties in order to be able to purchase more but not all. Which makes us a very good place for people that do have cash that are completely focused on returns.
@Account Closed, I somewhat agree: "Investing for immediate cash flow is for poor people or novice investors".
That's why I like BP. Because they/me are who it's for! Bring on the cash flow!
Those who don't need cash flow - don't need BIGGER pockets!
I will make one amendment to your premise: Less demand, lower prices equals GREAT cash flow! Thank you, mid-west...
@Mike R. Trading up is the way to go. If you consider the effort involved in buying, improving and either refinancing or selling is the same basically if the property is worth $50,000.00 or $500,000.00. The difference is that you get a much higher return for your time and effort at the $500,000.00 range. Trading up therefore is one way of saying, "I value my TIME more now than I did in the past". Instead of earning a few dollars per hour I earn a few hundred or even a few thousand dollars per hour.
One of the great challenges most novice investors and even a lot of experienced investors get wrong is not their knowledge of property or how to do deals, but their mindset is wrong. It is not geared to maximum wealth creation. having the right mindset is crucial to optimising your wealth creation strategy. Congratulations to you for accepting there may be a better way.
@Angela Harding Could I suggest to you that it is possible to forecast growth in a market. Your comment of, "Right now looking at our market we have nowhere to go but up. However, I can't predict that. No one can." Is a limiting belief that will not be of great service to you. There are many people who can and do successfully predict where a market is going. Whilst there are no guarantees their predictions will be correct the ability to understand and read economic data and population trends has proven over many decades to be a really good forecaster of growth in property markets.
I would suggest that if you are not familiar with this type of analysis that you undertake some study to find the key drivers that grow markets. Things like jobs growth, population trends, redevelopment activities, housing affordability, interest rates and where they are headed, current supply rate, normal supply rate etc. ALL prices are driven by supply and demand so understanding these forces will give you the crystal ball you are looking for. However, as I said, there are no guarantees but an educated opinion based on sound research will help you immensely.
@Account Closed Help me out with this Bob, because appreciation is something I really struggle with. In fact, it's such a non-factor in my area that I typically use a -1% rate for appreciation, because I really believe it's just completely flat around here, and -1% makes for a safe assumption.
How do you calculate appreciation? Not necessarily in an area like Hawaii, where appreciation is historically and reliably 6-7%, but in an area which may be on it's way up, down, or nowhere?
Using the interwebs (which you clearly advise against) shows my area having some of the worst appreciation in the country, but how would you go about calculating appreciation for an area like this?