@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.
@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?
Bob, can't comprehend any market outside of California or Hawaii.
Those are obviously highly speculative , high appreciation markets.
The fact is in most markets, and even in cali or hawaii, you can't reliability know what the appreciation is going to be. You can give estimates based on the past, but that's not a guarantee. In most markets in the midwest, you probably can only count on 1 or 2 percent, just keeping with inflation over the long term.
But Bob thinks if you buy a 50k property in Indiana, and hold it for 20 years, while cash flowing 3k net a year, and then you sell the property for only 60k. That you have lost money. When in turn you have made 60k in cash flow, 10k in appreciation and 25-30k in equity pay down. And you got a mortgage, so you only had to put down 13k. When in turn you have invested 13k, and made 100k over a 20 year period or over a 700 percent return.
Don't get me wrong it sounds like Bob has done great in Cali, and if I had the money for a down payment on one of those properties, I wish I would of bought. But California and Hawaii and high appreciation markets aren't the only places to make money in real estate.
@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?
Bob, can't comprehend any market outside of California or Hawaii.
Those are obviously highly speculative , high appreciation markets.
The fact is in most markets, and even in cali or hawaii, you can't reliability know what the appreciation is going to be. You can give estimates based on the past, but that's not a guarantee. In most markets in the midwest, you probably can only count on 1 or 2 percent, just keeping with inflation over the long term.
But Bob thinks if you buy a 50k property in Indiana, and hold it for 20 years, while cash flowing 3k net a year, and then you sell the property for only 60k. That you have lost money. When in turn you have made 60k in cash flow, 10k in appreciation and 25-30k in equity pay down. And you got a mortgage, so you only had to put down 13k. When in turn you have invested 13k, and made 100k over a 20 year period or over a 700 percent return.
Don't get me wrong it sounds like Bob has done great in Cali, and if I had the money for a down payment on one of those properties, I wish I would of bought. But California and Hawaii and high appreciation markets aren't the only places to make money in real estate.
Sorry @Jason V I missed your post. I track market values annually for the property types I'm interested in. I found that neighborhoodscout.com is pretty good at getting generic appreciation rates and they break it down in periods which helps show if the appreciation is consistent or a spurt 20 years ago or just recently.
For CA and HI the rate has pretty much doubled within every decade for the last 5. Usually that appreciation happens in only 2-3 years and then flattens for the rest of the decade, maybe decreasing 10%.
Look for the property type you are interested in and ask a long time investor/Realtor what was the high sale in the 70's, 80's, 90's etc. Most places appreciate pretty regular with the exception of identifiable events like a large factory moving to town.
@Gabe Gordon is wrong about my comprehension of flyover America. I sold real estate in the 70's in Kentucky. I have family in KY and IN and know their values. I also invested in Vegas back in 1994.
$100,000 over 20 years. Look at the purchasing power in 1996 vs. 2016. Just my 2008 purchase has almost doubled in value.
that's $400,000 in 8 years and rents growing 6% a year. That's $50,000 a year. He'd need 10 to match that.
If you live in flyover that is probably the best place to invest. My suggestion tho is to look at the better submarkets within that market. Who shouldn't invest in flyover? People that don't live there and are counting on a third party that has more interest in selling rehabbed properties in crap neighborhoods.
@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?
Bob, can't comprehend any market outside of California or Hawaii.
Those are obviously highly speculative , high appreciation markets.
The fact is in most markets, and even in cali or hawaii, you can't reliability know what the appreciation is going to be. You can give estimates based on the past, but that's not a guarantee. In most markets in the midwest, you probably can only count on 1 or 2 percent, just keeping with inflation over the long term.
But Bob thinks if you buy a 50k property in Indiana, and hold it for 20 years, while cash flowing 3k net a year, and then you sell the property for only 60k. That you have lost money. When in turn you have made 60k in cash flow, 10k in appreciation and 25-30k in equity pay down. And you got a mortgage, so you only had to put down 13k. When in turn you have invested 13k, and made 100k over a 20 year period or over a 700 percent return.
Don't get me wrong it sounds like Bob has done great in Cali, and if I had the money for a down payment on one of those properties, I wish I would of bought. But California and Hawaii and high appreciation markets aren't the only places to make money in real estate.
Sorry @Jason V I missed your post. I track market values annually for the property types I'm interested in. I found that neighborhoodscout.com is pretty good at getting generic appreciation rates and they break it down in periods which helps show if the appreciation is consistent or a spurt 20 years ago or just recently.
For CA and HI the rate has pretty much doubled within every decade for the last 5. Usually that appreciation happens in only 2-3 years and then flattens for the rest of the decade, maybe decreasing 10%.
Look for the property type you are interested in and ask a long time investor/Realtor what was the high sale in the 70's, 80's, 90's etc. Most places appreciate pretty regular with the exception of identifiable events like a large factory moving to town.
@Gabe Gordon is wrong about my comprehension of flyover America. I sold real estate in the 70's in Kentucky. I have family in KY and IN and know their values. I also invested in Vegas back in 1994.
$100,000 over 20 years. Look at the purchasing power in 1996 vs. 2016. Just my 2008 purchase has almost doubled in value.
that's $400,000 in 8 years and rents growing 6% a year. That's $50,000 a year. He'd need 10 to match that.
If you live in flyover that is probably the best place to invest. My suggestion tho is to look at the better submarkets within that market. Who shouldn't invest in flyover? People that don't live there and are counting on a third party that has more interest in selling rehabbed properties in crap neighborhoods.
I agree. people who don't live here, and are buying turnkeys at retails or above retail. Are going to have a hard time of it long term to make money. We agree on that Bob.
But just understand a 400k property in cali, with a normal 25 percent down investor loan. is 100k. People out here in the midwest, don't have that kind of cash to get started. So they have to start small and investing in their own backyard, or a market that is more reasonable. Which is likely going to mean a cash flow market and not appreciation.
Yes that's great appreciation, that any investor would love. That's great.
You are correct, I would need 10 properties to equal that. However, properties in Indiana are 50k a piece, which in cali they are 500k a piece(maybe) So total purchase equals out.
However a investor here can get started with 13-15k, instead of 100k there.
You are right 100k, over 20 years, some of that gets ate by inflation.
But keep in mind total investment was only 13k
Say 20 percent of the 100k gets ate by inflation. That's still 80k, off a 13k investment in real terms.
That still beats any stock market return.
@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?
Bob, can't comprehend any market outside of California or Hawaii.
Those are obviously highly speculative , high appreciation markets.
The fact is in most markets, and even in cali or hawaii, you can't reliability know what the appreciation is going to be. You can give estimates based on the past, but that's not a guarantee. In most markets in the midwest, you probably can only count on 1 or 2 percent, just keeping with inflation over the long term.
But Bob thinks if you buy a 50k property in Indiana, and hold it for 20 years, while cash flowing 3k net a year, and then you sell the property for only 60k. That you have lost money. When in turn you have made 60k in cash flow, 10k in appreciation and 25-30k in equity pay down. And you got a mortgage, so you only had to put down 13k. When in turn you have invested 13k, and made 100k over a 20 year period or over a 700 percent return.
Don't get me wrong it sounds like Bob has done great in Cali, and if I had the money for a down payment on one of those properties, I wish I would of bought. But California and Hawaii and high appreciation markets aren't the only places to make money in real estate.
Sorry @Jason V I missed your post. I track market values annually for the property types I'm interested in. I found that neighborhoodscout.com is pretty good at getting generic appreciation rates and they break it down in periods which helps show if the appreciation is consistent or a spurt 20 years ago or just recently.
For CA and HI the rate has pretty much doubled within every decade for the last 5. Usually that appreciation happens in only 2-3 years and then flattens for the rest of the decade, maybe decreasing 10%.
Look for the property type you are interested in and ask a long time investor/Realtor what was the high sale in the 70's, 80's, 90's etc. Most places appreciate pretty regular with the exception of identifiable events like a large factory moving to town.
@Gabe Gordon is wrong about my comprehension of flyover America. I sold real estate in the 70's in Kentucky. I have family in KY and IN and know their values. I also invested in Vegas back in 1994.
$100,000 over 20 years. Look at the purchasing power in 1996 vs. 2016. Just my 2008 purchase has almost doubled in value.
that's $400,000 in 8 years and rents growing 6% a year. That's $50,000 a year. He'd need 10 to match that.
If you live in flyover that is probably the best place to invest. My suggestion tho is to look at the better submarkets within that market. Who shouldn't invest in flyover? People that don't live there and are counting on a third party that has more interest in selling rehabbed properties in crap neighborhoods.
I agree. people who don't live here, and are buying turnkeys at retails or above retail. Are going to have a hard time of it long term to make money. We agree on that Bob.
But just understand a 400k property in cali, with a normal 25 percent down investor loan. is 100k. People out here in the midwest, don't have that kind of cash to get started. So they have to start small and investing in their own backyard, or a market that is more reasonable. Which is likely going to mean a cash flow market and not appreciation.
Yes that's great appreciation, that any investor would love. That's great.
You are correct, I would need 10 properties to equal that. However, properties in Indiana are 50k a piece, which in cali they are 500k a piece(maybe) So total purchase equals out.
However a investor here can get started with 13-15k, instead of 100k there.
You are right 100k, over 20 years, some of that gets ate by inflation.
But keep in mind total investment was only 13k
Say 20 percent of the 100k gets ate by inflation. That's still 80k, off a 13k investment in real terms.
That still beats any stock market return.
@Gabe Gordon, hard to be disagreeable to that even for me. The one thing I will say is that if you live in the Bay Area and are not making Bay Area wages and want to invest in Flyover you are probably best to move there vs trying to do it long distance.
Another thing I will say is that you don't need $100,000 to buy in SF/Honolulu. There is VA FHA and first time homebuyer programs, etc.
Now for a little comparison, my first purchase in 1978 Honolulu was for $35,000 with only $2,000 down owner financed at 9%. That one property has generated about $500,000 in rents and another $500,000 in appreciation for a total of $1,000,0000!
Definitely better than the stock market.
Hi Mike!
It's interesting to read the responses on here. It actually makes me feel like an odd duck. That's ok, though. My real estate investments have allowed me to become financially independent in just 3 years, so I think I'm probably doing something right. Or I'm doing it all wrong, and I'll find out in a few years. :)
I personally think that cash flow is king. My biggest money making property sat on the MLS for 6 months because investors thought it was overpriced. The property nets me about $50k/year (after even the P&I on the mortgage), and I only put $32k of my own cash into the deal. It's a 4-plex, and I bought it in 2012 for $369k. It appraises now around $450k. I don't want to sell it. It makes too much money.
I'm also not in a high risk category for having to rely on appraised value for anything. That's a piece of this that I haven't seen discussed. I have a 30 year fixed loan on my property, and I still owe about $345k on it. If that was a hard money interest only loan with 12 month terms, I'd be in a whole different risk category. If you are financing this through a hard money lender or are getting a 5 or 7 year balloon mortgage, I think you should figure out how to mitigate your risk of not being able to refinance when the mortgage comes due. I personally wouldn't rely on appreciation as my risk mitigation strategy regardless of historical market data and projections. I think it's too risky.
I have another property that I bought 10 months ago and financed with a 12 month interest only loan from a private lender. I'm in the process of refinancing that loan into a conventional 30 year fixed mortgage. I only financed half of the purchase price, and I have both cash reserves and a HELOC on another property that I could tap into if I'm unable to refinance right now for some reason and have to pay that loan off in cash. That's the sort of preparation and risk mitigation I think you should be thinking about.
As for using the cash flow to pay down the mortgage, I wouldn't do that. The interest rate on the loan I have on my 4-plex is under 3.5%. I can find a lot of ways to invest my cash that net a much bigger return that that and are not very risky. I would build up 6-12 months of cash reserves to cover expenses - including mortgage payments - and then invest cash on hand after those reserves are built up.
Good luck with everything!
One "Captain Obvious" response that I I have not read yet is that if you can achieve excellent cash flow paying retail, then you can achieve even more excellent cash flow by not paying retail ... anything you can do (retail), I can do better (non-retail) ...
I personally think that cash flow is king. My biggest money making property sat on the MLS for 6 months because investors thought it was overpriced. The property nets me about $50k/year (after even the P&I on the mortgage), and I only put $32k of my own cash into the deal. It's a 4-plex, and I bought it in 2012 for $369k. It appraises now around $450k. I don't want to sell it. It makes too much money.
Will you share the rents and expenses? Are you vacation renting it?
@Account Closed yes, I'm renting it as a vacation rental. Here are monthly numbers:
| PITI | ($2,800.00) |
| Elec/water/trash | ($880.00) |
| Cable | ($400.00) |
| Maintenance, CAPEX & turn around | ($2,500.00) |
| 12 month avg monthly income | $12,279.00 |
| Profit/loss | $5,699.00 |
If I rented it long term, these are the numbers:
| PITI | $(2,800.00) |
| Elec/water/trash | $- |
| Cable | $- |
| Maintenance, CAPEX | $(840.00) |
| 12 month avg monthly income | $5,600.00 |
| Profit/loss | $1,960.00 |
@Account Closed yes, I'm renting it as a vacation rental. Here are monthly numbers:
| PITI | ($2,800.00) |
| Elec/water/trash | ($880.00) |
| Cable | ($400.00) |
| Maintenance, CAPEX & turn around | ($2,500.00) |
| 12 month avg monthly income | $12,279.00 |
| Profit/loss | $5,699.00 |
If I rented it long term, these are the numbers:
| PITI | $(2,800.00) |
| Elec/water/trash | $- |
| Cable | $- |
| Maintenance, CAPEX | $(840.00) |
| 12 month avg monthly income | $5,600.00 |
| Profit/loss | $1,960.00 |
Good job, thanks for sharing. Four of my Honolulu properties allow 30 day rentals and I thought about it but have only done friends and friends of friends. Still thinking about exchanging my beach front condo to get into foreign areas that I couldn't rent in although the Air bnb sites are changing that.
So are the wife and kids crew?
@Account Closed I love doing short term rentals and am in the process of converting 2 of my LTR units into short term (I just mentioned this on another thread). I have a great area for short term because we have vacationers, snow birds, business travelers, etc and stay busy year round. It gives me the added benefit of being able to employ (and help out) some family members as my maintenance/turn around crew. It's been a good fit all the way around!