Minimal/no cashflow, but good potential for appreciation

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Minimal/no cashflow, but good potential for appreciation

Alex Corvin
Apex, NC · Member since 2015 · 46 posts · 14 votes

Hello BP community. I'm considering buying a property to hold and rent out, and would like some more input on whether it's a good buy.

The property is in the Raleigh, NC market, specifically in the downtown Cary area (probably a C market right now). It's a 3 bedroom, 2 bathroom, 1050 SF SFR built in 1988. Structurally the house seems to be in fairly good shape, roof is new, HVAC has been maintained, hot water heater is recent. Needs paint and carpet and a little TLC in the kitchens/bathrooms, but overall it seems like a good little house.

The property is currently rented month to month to a tenant who has been there for about 7 years. Rent is currently $785/month. Market rent is more like $1,100/month. The seller is another investor who has since moved out of the area. They want to walk away from the sale with $125,000. Market value for the house is probably about $128,000 - $130,000. This is an off market deal, and properties on the MLS in this area tend to go very quickly with multiple offers. At market rent, this is just under the 1% rule, (my ideal target for my market). At the current rent, though, I'd obviously be way under what I'd need to cover expenses.

If I left it at that, I'd say this deal is mediocre at best. What makes things interesting, however, is that the house is in a market that I think has a strong chance for serious appreciation. The house is 2 blocks from the historic downtown section of one of the most desirable towns in North Carolina, and the town is putting a lot of resources into revitalizing this area. My thought is that I could acquire the property, get the rent up over the next couple of years where I'd cover my expenses but not really cashflow for a while. At this point, if the house never appreciates I'd be fine but if it does I'd get a nice bonus.

What do you guys think? Worth buying?

And another thing that might be relevant -- this would be my first property and I'm wondering if it's worth buying an ok deal to get my foot in the door.

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y

Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.

1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.

2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.

Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.

I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)

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  • Sean Clayton
    Real Estate Agent · Venice, FL · Member since 2016 · 7 posts · 3 votes
    10y

    Hello , Cash flow , cash flow ,and cash flow on the first thru the next ten properties . Of course exceptions to the rule may be a property next to the shopping area or some historic place or vacation spot  which will increase the homes value immediately . Numbers do not lie unless you lie to yourself and put in the incorrect optimistic numbers. Invest like its a business and your last dollar and you need to eat next month. Plan for the worst . Cover yourself and then reap the rewards of your first success. A first good or great experience will lead to more once you have the basics down. But a first bad experience maybe enough to deter you from a future of great investments. Good Luck and research , research , research that first deal.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Jack B.:

    I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.

    Do you believe everything you read on the internet? I hope not, because if so you are passing up some opportunities and worse yet opening yourself up to serious risk by blindly focusing on cash flow to the exclusion of everything else. Cash flow alone will NOT keep you afloat, will NOT eliminate risk, and will NOT save you during a downturn. Newbies who have never experienced a downturn in real estate are in denial about this, but that doesn't make it any less true ... investors by the thousands that thought otherwise lost their homes in the last downturn ... their precious cash flow did not save them. It is multiple exit strategies, and both cash flow AND equity AND reserves that will save you in a downturn, and in this case quality of cash flow matters more than quantity. Consistent and reliable high quality cash flow comes from investing in real estate markets/neighborhoods with high demand and limited housing supply. These are the kinds of markets and neighborhoods that will weather a downturn, but they are also the kind of markets that you will get steered away from by only listening to the siren's call of cash flow and ignoring everything else.

    Markets and neighborhoods that have high cash flow day 1 are priced that way for a reason ... renters in these neighborhoods rent there not because it is a nice place to live, not because they want to, but by and large do it because they have to, because they can't afford to live anywhere else. If they could afford it, at the very least they would choose to buy in the same neighborhood instead of rent there, since mortgage payments are much lower than rent, but they can't and that is why they rent there. And if it turned out that many of them could afford it and chose to buy, then prices would get driven up and cash flow on new purchases there would go down. But this doesn't happen and hasn't happened for decades (look at the historical pricing) ... This is common sense, fundamental supply and demand.  And what do you suppose happens in these neighborhoods with these paycheck to paycheck renters when a downturn hits? Rents don't go down, they stop.

    Not trying to insult those that live and invest in these type of markets, and not suggesting that money can't be made there, but at the same time I have no interest in dancing around the topic in an effort to not offend somebody; those markets are cheap and cash flow high on paper for a good reason and investors should not bury their heads in the sand and ignore these reasons. Cash flow is not always king; at best cash faux is a drag queen masquerading around as profit and those that get with her may be in for a surprise.

    2Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes
    10y

    I would be wary on this deal. I have six SFH in the Raleigh area in what I consider B+ areas. I am in the high 8% to 9% on rent to purchase price. And that is buying houses with no work. I buy them on Friday, and ready to rent by the next Monday. If you really are in the C market, I would require much higher returns than currently proposed.

    1Reply
  • Patrick Madigan
    Real Estate Agent · Raleigh, NC · Member since 2015 · 52 posts · 28 votes
    10y

    @Ben Geyer - here's a great thread on cash flow and appreciation in our market. Hope it's helpful.

    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @David Faulkner:
    Originally posted by @Jack B.:

    I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.

    Do you believe everything you read on the internet? I hope not, because if so you are passing up some opportunities and worse yet opening yourself up to serious risk by blindly focusing on cash flow to the exclusion of everything else. Cash flow alone will NOT keep you afloat, will NOT eliminate risk, and will NOT save you during a downturn. Newbies who have never experienced a downturn in real estate are in denial about this, but that doesn't make it any less true ... investors by the thousands that thought otherwise lost their homes in the last downturn ... their precious cash flow did not save them. It is multiple exit strategies, and both cash flow AND equity AND reserves that will save you in a downturn, and in this case quality of cash flow matters more than quantity. Consistent and reliable high quality cash flow comes from investing in real estate markets/neighborhoods with high demand and limited housing supply. These are the kinds of markets and neighborhoods that will weather a downturn, but they are also the kind of markets that you will get steered away from by only listening to the siren's call of cash flow and ignoring everything else.

    Markets and neighborhoods that have high cash flow day 1 are priced that way for a reason ... renters in these neighborhoods rent there not because it is a nice place to live, not because they want to, but by and large do it because they have to, because they can't afford to live anywhere else. If they could afford it, at the very least they would choose to buy in the same neighborhood instead of rent there, since mortgage payments are much lower than rent, but they can't and that is why they rent there. And if it turned out that many of them could afford it and chose to buy, then prices would get driven up and cash flow on new purchases there would go down. But this doesn't happen and hasn't happened for decades (look at the historical pricing) ... This is common sense, fundamental supply and demand.  And what do you suppose happens in these neighborhoods with these paycheck to paycheck renters when a downturn hits? Rents don't go down, they stop.

    Not trying to insult those that live and invest in these type of markets, and not suggesting that money can't be made there, but at the same time I have no interest in dancing around the topic in an effort to not offend somebody; those markets are cheap and cash flow high on paper for a good reason and investors should not bury their heads in the sand and ignore these reasons. Cash flow is not always king; at best cash faux is a drag queen masquerading around as profit and those that get with her may be in for a surprise.

     Sooo what you're saying is that investing in property that you only make money from via appreciation is the way to go? And exactly how does this protect you in a down turn when your property value goes down or never goes up and you're losing money every month on paying the mortgage portion the rental income doesn't cover?

    Because all I said was that cash flow is the primary source of income, appreciation is a bonus. I never said to the exclusion of all else, you came up with that in your mind. In fact you came up with a lot of fantasies in your mind very quickly. It's a proven FACT from the top investors out there that cash flow is the primary source of income, appreciation is a bonus. The math proves it. Only someone who has no idea what they are doing would gamble on equity alone. No professional real estate investor touts that. They would be laughed out of the room.

    Your argument that equity is king and cash flow is irrelevant is beyond reason. The math doesn't work that way. It's like saying that spending more than you earn while playing the Lotto is the way to wealth. What I'm saying is that you invest in an asset that pays for itself AND pays you income. If it goes up in value, like it does here in MY market in Seattle, one of the most expensive in the country (my handful of houses missing a finger or two pays me 53K a year, not counting appreciation) then you made a niiice bonus. If it goes down in value you weather the storm. It will bounce back. 

    Oh and to your disbelief, somehow I managed to buy these cash flowing properties in one of the top 10 most expensive markets in the country. Even as recently as a few months ago for a half million dollar house...In a market where it's cheaper to rent than it is to own. Yet somehow I make it cash flow...while it goes up in value.... 

    .

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    • Oh my, another poster that only reads their own posts.  LOL
    0Reply
  • Michael Mullins
    Investor · Cedar Park, TX · Member since 2016 · 463 posts · 177 votes
    10y
    Danger danger Will Robinson. Honestly if it doesn't cash flow I don't buy it. Because even if the economy goes down or up it doesn't matter the property is still paying for itself and putting a little bit of money in my pocket.
    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Michael Mullins:

    Danger danger Will Robinson. Honestly if it doesn't cash flow I don't buy it. Because even if the economy goes down or up it doesn't matter the property is still paying for itself and putting a little bit of money in my pocket.

    I can make a property cash flow.  You can't make a property appreciate.  Cash flow is for poor investors and investors that are poor.  I'd rather count on the market performing how it has for decades vs gambling on someone I met a month ago paying me possible cash flow each month or actually paying it yo me but taking it all back when they leave!  That's why they have eviction courts!

    0Reply
  • Michael Mullins
    Investor · Cedar Park, TX · Member since 2016 · 463 posts · 177 votes
    10y

    it's the cash flow that's gonna pay for the evection court, it's the cash flow that really pays for everything in the end.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Jack B.:
    Originally posted by @David Faulkner:
    Originally posted by @Jack B.:

    I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.

    Do you believe everything you read on the internet? I hope not, because if so you are passing up some opportunities and worse yet opening yourself up to serious risk by blindly focusing on cash flow to the exclusion of everything else. Cash flow alone will NOT keep you afloat, will NOT eliminate risk, and will NOT save you during a downturn. Newbies who have never experienced a downturn in real estate are in denial about this, but that doesn't make it any less true ... investors by the thousands that thought otherwise lost their homes in the last downturn ... their precious cash flow did not save them. It is multiple exit strategies, and both cash flow AND equity AND reserves that will save you in a downturn, and in this case quality of cash flow matters more than quantity. Consistent and reliable high quality cash flow comes from investing in real estate markets/neighborhoods with high demand and limited housing supply. These are the kinds of markets and neighborhoods that will weather a downturn, but they are also the kind of markets that you will get steered away from by only listening to the siren's call of cash flow and ignoring everything else.

    Markets and neighborhoods that have high cash flow day 1 are priced that way for a reason ... renters in these neighborhoods rent there not because it is a nice place to live, not because they want to, but by and large do it because they have to, because they can't afford to live anywhere else. If they could afford it, at the very least they would choose to buy in the same neighborhood instead of rent there, since mortgage payments are much lower than rent, but they can't and that is why they rent there. And if it turned out that many of them could afford it and chose to buy, then prices would get driven up and cash flow on new purchases there would go down. But this doesn't happen and hasn't happened for decades (look at the historical pricing) ... This is common sense, fundamental supply and demand.  And what do you suppose happens in these neighborhoods with these paycheck to paycheck renters when a downturn hits? Rents don't go down, they stop.

    Not trying to insult those that live and invest in these type of markets, and not suggesting that money can't be made there, but at the same time I have no interest in dancing around the topic in an effort to not offend somebody; those markets are cheap and cash flow high on paper for a good reason and investors should not bury their heads in the sand and ignore these reasons. Cash flow is not always king; at best cash faux is a drag queen masquerading around as profit and those that get with her may be in for a surprise.

     Sooo what you're saying is that investing in property that you only make money from via appreciation is the way to go? And exactly how does this protect you in a down turn when your property value goes down or never goes up and you're losing money every month on paying the mortgage portion the rental income doesn't cover?

    Because all I said was that cash flow is the primary source of income, appreciation is a bonus. I never said to the exclusion of all else, you came up with that in your mind. In fact you came up with a lot of fantasies in your mind very quickly. It's a proven FACT from the top investors out there that cash flow is the primary source of income, appreciation is a bonus. The math proves it. Only someone who has no idea what they are doing would gamble on equity alone. No professional real estate investor touts that. They would be laughed out of the room.

    Your argument that equity is king and cash flow is irrelevant is beyond reason. The math doesn't work that way. It's like saying that spending more than you earn while playing the Lotto is the way to wealth. What I'm saying is that you invest in an asset that pays for itself AND pays you income. If it goes up in value, like it does here in MY market in Seattle, one of the most expensive in the country (my handful of houses missing a finger or two pays me 53K a year, not counting appreciation) then you made a niiice bonus. If it goes down in value you weather the storm. It will bounce back. 

    Oh and to your disbelief, somehow I managed to buy these cash flowing properties in one of the top 10 most expensive markets in the country. Even as recently as a few months ago for a half million dollar house...In a market where it's cheaper to rent than it is to own. Yet somehow I make it cash flow...while it goes up in value....  

     "Even as recently as a few months ago for a half million dollar house...In a market where it's cheaper to rent than it is to own. Yet somehow I make it cash flow...while it goes up in value...." Congrats Bud! That one should be a winner for you long term. The key is in how you make it cash flow ... in this case precisely 100% of your cash flow and 100% of your total profits came from appreciation of both rents and prices, from forced appreciation or market appreciation or both. If you would've followed your own advise that appreciation is a bonus and cash flow is king then you would've never bought that property and you'd be a poorer man for it today, but you were smart enough to put your money where your mouth isn't. See, you are an appreciation investor after all. Both cash flow and appreciation are important, but appreciation are where the big gains come from, and this lovely example plucked right from your portfolio supports that statement. We are in violent agreement, though you seem to be more conflicted than I am about it ... you should try to resolve that, it is not healthy to live life with that level of cognitive dissonance.

    The way I protect myself from a downturn is literally described in detail in numerous posts on this very thread and in my original response to you, it is a combination of equity AND cash flow AND reserves, all of which are created by appreciation. I sometimes wish that experienced investors would laugh me out of the room for this concept, then I wouldn't have so much damn competition from thousands of other wealthy investors in CA, but alas, they're on to me and I can't convince them all that it is just speculation that they should just leave it alone to the gamblers like me :) 

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Michael Mullins:

    Danger danger Will Robinson. Honestly if it doesn't cash flow I don't buy it. Because even if the economy goes down or up it doesn't matter the property is still paying for itself and putting a little bit of money in my pocket.

    I can make a property cash flow.  You can't make a property appreciate.  Cash flow is for poor investors and investors that are poor.  I'd rather count on the market performing how it has for decades vs gambling on someone I met a month ago paying me possible cash flow each month or actually paying it yo me but taking it all back when they leave!  That's why they have eviction courts!

    I can make a property cash flow AND I can make a property appreciate. I know 'cause I seen me do it :)

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

    I can make a property cash flow AND I can make a property appreciate. I know 'cause I seen me do it :)

    Sure in an appreciating market.  But it's work.  I let the market do my lift and toting.   

    Try that in Indy!

      ;-)

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @David Faulkner:

    I can make a property cash flow AND I can make a property appreciate. I know 'cause I seen me do it :)

    Sure in an appreciating market.  But it's work.  I let the market do my lift and toting.   

    Try that in Indy!

      ;-)

    Yeah it's work, but that has never scared me off. How do you expect to get into speedo shape for the beach next summer without swinging a hammer, Bob? On second thought, rhetorical question, I don't want to know the answer, really ... :)

    0Reply
  • Alex Corvin
    OP
    Apex, NC · Member since 2015 · 46 posts · 14 votes
    10y

    Thanks for all of the input, guys! This is definitely my most successful forum post in terms of generating good discussion.

    The summary of this update is that, after more thorough analysis, I think this deal will cash flow enough to be worth it. For more, read on.

    I thought I'd give an update on where my thoughts are with this property. Based on some input here, I decided to really dive in on the analysis of the deal, using the most accurate numbers I could get. The numbers I used in the past were generally rough estimates for things like how much to save for CapEx and how much to expect to spend on insurance.

    I can lay out the specifics of my analysis if anyone wants, but here's a summary. The current rent is $785 and the tenant is on a month to month lease. I'd like to keep the current tenant (the seller, who has some experience, says they have been great), but the rent is way below market. (Market rent, again, is about $1100-$1200). My analysis says that if I can get rent up to $900 then I'll cash flow about $50/month. At $1100 (the lower end of market rent), that number goes up above what I'd like my minimum to be ($100/month).

    I really think this is enough cash flow to be safe. It covers all PITI, 1 month of vacancy, property management (I plan to self manage for now, but want to budget for future growth), and about $200/month for CapEx and repairs. There's $100/month in cash flow left over to make it worth my time. This works even if there is no appreciation, but I truly think there is huge potential for appreciation given the property's proximity to a downtown area that's being revitalized.

    Any thoughts? What am I missing?

    0Reply
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