Importance of cash flow for rentals

[Thom Ruley]

In my neck of the woods, prices have gone completely insane. With interest rates going up, I'm simply not finding properties that will cash flow. Is it more important to keep looking for a cash-flowing rental or is it more important to simply get into ANY property at ANY price and hope I can pay it off later? My long-term plan is to have several stable rental properties.

[Jimmy Lieu]

Quote from @Thom Ruley:

In my neck of the woods, prices have gone completely insane. With interest rates going up, I'm simply not finding properties that will cash flow. Is it more important to keep looking for a cash-flowing rental or is it more important to simply get into ANY property at ANY price and hope I can pay it off later? My long-term plan is to have several stable rental properties.

Hey Thom, I'm an investor and agent here in Columbus Ohio and I'm still able to find deals for clients - matter of fact, I just closed on a deal two weeks ago with my real estate client that will be giving him a 26% cash on cash return. Absolutely insane!

So my best advice, as an investor myself, is to adjust your expected returns with the market. If the market interest rates is going absurdly high and you typically need a 7% return on investment, then maybe you need to drop to 5%. Because we're in such an amazing market like Columbus, it doesn't matter if you get 5 or 7% returns. In 10 years, if you account for rental increases, principal paydown, appreciation, depreciation, etc. you'll be making 15% return on all your properties minimum. Plus, Honda and Intel's gigafactories are being built here so tons of job and population growth incoming. Remember - real estate is a long game! If you have any questions about Columbus, I'd love to help you out!

[Karl McGarvey]

Your frustration is real! Cash flow has certainly become way more difficult than it used to be, but not impossible. IF you can accept low returns now, then based on history and appreciation of both property value and rents, your long-term hedge on inflation can still produce very significant returns. Long-term meaning 10+ years, not the 2-3 holds we saw investors taking advantage of between 2019-2021. We just closed on a property that over the next year or two will produce 5% ish CoC, but when we run the numbers for 10 and 15 years the ROI is still absolutely fantastic.

They always say the best day to buy was yesterday. If you can whether a near term storm, but get your hands on a property in a great location that will stay rented, you should have no issue making returns over the long term.

[Theresa Harris]

Never buy out of desperation.  The numbers need to make sense for you.  In some areas, you make money through appreciation when you sell, others you have lower appreciation and better cash flow.

[Thom Ruley]

I can't help but notice sellers are still trying to get the same prices they got last year. Are we just in that in-between time when interest rates are high along with prices? Buyers are still constrained by the same budgets they had earlier, maybe not even that with inflation. These properties would become no-brainers if the prices were to slip a little.

[Jon A.]

Never do a deal just to do a deal. You need to have a strategy in place. That strategy will shift depending on the property. If you're buying a trophy asset in a downtown, for instance, you'll make your money a little differently than if you're buying a c class apt building. But the fact is people invest in Ohio primarily for cash flow, not for appreciation. So walking into an Ohio property that doesn't cash flow - What's your plan?

[Thom Ruley]

Is it possible I've just been looking in the wrong places? Mostly MLS and email lists from a couple of wholesalers.

[Karl McGarvey]

Quote from @Thom Ruley:

I can't help but notice sellers are still trying to get the same prices they got last year. Are we just in that in-between time when interest rates are high along with prices? Buyers are still constrained by the same budgets they had earlier, maybe not even that with inflation. These properties would become no-brainers if the prices were to slip a little.

The second the prices slip, buyers will come running and we may be back to multiple offers and sales way over asking! 

List price is a starting point, offer less and create the deal that works for you. I have had Seller’s tell me no and come back a week later accepting my terms. Can’t get a deal if you aren’t playing the game

[Thom Ruley]

So I keep looking and if sellers walk when I give a reasonable offer (based on attainable rents), then so be it. There is a lot of FOMO going around these days.

[Alfath Ahmed]

Hi Thom, 

It is very important that you make sure that your properties are self-sustaining. If you have ever read the book "Cashflow Quadrants", Robert Kiyosaki specifically mentions that you must buy properties that are self-sustainable for purchase. 

If I did not follow that principal, I would not be able to help scale my family portfolio of 400+ units to what it is today. If you need investing advice or just a sit-down conversation, shoot me a PM and I'll help you out. 

[Linda Labbe]

if the numbers dont work the deal does not work  never buy on what might be  we are still buying and finding great numbers  more then willing to share what we are doing with anyone who wants to chat.

creative financing helps a lot in getting the numbers to make sense

[Dan Heuschele]

I see agent say buy now.  I see investors say never buy a bad deal, cash flow is hard to find, etc.

Here is the reality. On high LTV properties the month P&I has almost doubled since the start of 2022. This is without an associated increase in the RE value. I would argue that in some ways it would be better if the RE had doubled in value and rate was the same as a year ago as at least you would be purchasing a higher valued asset.

The reality is I have been in RE a long time and have never found it harder to find RE that meets my current purchase criteria.  This is 1) because I am a big fan of leverage 2) I do not forecast rates declining 3) I am conservative in any appreciation or rent increase forecast 4) I am cognizant of the level of effort and risk involved with residential RE 5) I am cognizant of other investment options.

If I can effortlessly and with virtually no risk have money market or CD return near 5%, what sort of return do I need from residential RE to make it worth the effort and risk.  Note money market/CDs are not the only choice but I use them as a single reference point.  10% is not nearly sufficient.  I need approaching 20%.

If you can find an RE that with conservative underwriting projects the return that justifies the effort and risk compared to other investment options, it could be worth pursuing.  My issue is that I have not and therefore I have not purchased since Dec 2021 (but I did purchase $4M that month).  In fact, I have only offered on a single property since then and my offer was not close to the accepted offer (the accepted offer was apparently willing to accept a much lower return than I was willing to accept).

Good luck

[Michael Wooldridge]

Quote from @Dan Heuschele:

I see agent say buy now.  I see investors say never buy a bad deal, cash flow is hard to find, etc.

Here is the reality. On high LTV properties the month P&I has almost doubled since the start of 2022. This is without an associated increase in the RE value. I would argue that in some ways it would be better if the RE had doubled in value and rate was the same as a year ago as at least you would be purchasing a higher valued asset.

The reality is I have been in RE a long time and have never found it harder to find RE that meets my current purchase criteria.  This is 1) because I am a big fan of leverage 2) I do not forecast rates declining 3) I am conservative in any appreciation or rent increase forecast 4) I am cognizant of the level of effort and risk involved with residential RE 5) I am cognizant of other investment options.

If I can effortlessly and with virtually no risk have money market or CD return near 5%, what sort of return do I need from residential RE to make it worth the effort and risk.  Note money market/CDs are not the only choice but I use them as a single reference point.  10% is not nearly sufficient.  I need approaching 20%.

If you can find an RE that with conservative underwriting projects the return that justifies the effort and risk compared to other investment options, it could be worth pursuing.  My issue is that I have not and therefore I have not purchased since Dec 2021 (but I did purchase $4M that month).  In fact, I have only offered on a single property since then and my offer was not close to the accepted offer (the accepted offer was apparently willing to accept a much lower return than I was willing to accept).

Good luck

Interesting comment. My last purchase was October 22. Interesting enough even in year 1 (STR) we are on track to do 22% CoC and judging by bookings for next year wouldn't be surprised if closer than 30%. So I would say deals are out there but like you I've gone more conservative - and I absolutely have to have a decent return up front in cash flow - I don't buy just for appreciation because it's too risky.

That said while I lean more towards RE vs liquid - I'm curious about your needing 20%. Are you talking CoC? Or are you talking about overall? 10% CoC between tax write offs, appreciation, and long term value - in my experience it's hard to even beat that in the market when you factor in all benefits.

or are you just deeming the investment not worth the risk at that point? 

[Jay Thomas]

I'm sure many of you are familiar with Real Estate investing, especially in the Texas/Houston area. Real estate is an incredibly powerful asset class because it has the potential to generate passive income and wealth over time. However, one of the most important aspects of Real Estate Investing is making sure that your properties are self-sustaining. This means that when you purchase a property, it should be able to generate enough revenue to cover its own expenses (e.g., mortgage payments, taxes, and insurance).

One book that I highly recommend reading on this topic is "Cashflow Quadrants" by Robert Kiyosaki. He emphasizes the importance of buying self-sustainable properties and gives great advice on how to do so. If you need help understanding Real Estate Investing and want to learn more, please don't hesitate to reach out. As someone who has over 400 Real Estate investments, I am more than happy to offer guidance and advice. Good luck with your Real Estate Investing journey!

[Dan Heuschele]

Quote from @Michael Wooldridge:

Quote from @Dan Heuschele:

I see agent say buy now.  I see investors say never buy a bad deal, cash flow is hard to find, etc.

Here is the reality. On high LTV properties the month P&I has almost doubled since the start of 2022. This is without an associated increase in the RE value. I would argue that in some ways it would be better if the RE had doubled in value and rate was the same as a year ago as at least you would be purchasing a higher valued asset.

The reality is I have been in RE a long time and have never found it harder to find RE that meets my current purchase criteria.  This is 1) because I am a big fan of leverage 2) I do not forecast rates declining 3) I am conservative in any appreciation or rent increase forecast 4) I am cognizant of the level of effort and risk involved with residential RE 5) I am cognizant of other investment options.

If I can effortlessly and with virtually no risk have money market or CD return near 5%, what sort of return do I need from residential RE to make it worth the effort and risk.  Note money market/CDs are not the only choice but I use them as a single reference point.  10% is not nearly sufficient.  I need approaching 20%.

If you can find an RE that with conservative underwriting projects the return that justifies the effort and risk compared to other investment options, it could be worth pursuing.  My issue is that I have not and therefore I have not purchased since Dec 2021 (but I did purchase $4M that month).  In fact, I have only offered on a single property since then and my offer was not close to the accepted offer (the accepted offer was apparently willing to accept a much lower return than I was willing to accept).

Good luck

Interesting comment. My last purchase was October 22. Interesting enough even in year 1 (STR) we are on track to do 22% CoC and judging by bookings for next year wouldn't be surprised if closer than 30%. So I would say deals are out there but like you I've gone more conservative - and I absolutely have to have a decent return up front in cash flow - I don't buy just for appreciation because it's too risky.

That said while I lean more towards RE vs liquid - I'm curious about your needing 20%. Are you talking CoC? Or are you talking about overall? 10% CoC between tax write offs, appreciation, and long term value - in my experience it's hard to even beat that in the market when you factor in all benefits.

or are you just deeming the investment not worth the risk at that point? 

I expect 20% total projected return but remember I am conservative on my appreciation and rent increases in my underwriting. My underwriting currently has 5 years of no appreciation and 2%/year rent increase. I do not include tax write offs in my return. So, to get 20% total return when projecting no appreciation implies the COC is fairly close to 20%.

Why so high?  It is in part because of other returns I can achieve from other sources.  I have done exceptional with syndicators (often better than the 20% return with very little effort).  As indicated Money market is ~5%.  Rolling T-Bills last I heard were over 6%.  Safe and no effort.  if I can get 6% guaranteed with no work, there is no way I would consider residential RE at 10% with the associated risks and effort (I have many units for quite a few years and do not consider residential RE to be passive).

how long have you owned STRs? Is this your first STR (~6 months)? Do you self manage? I have owned STRs since 1999. We currently have 4 STR units, all in San Diego area. We used to have 2 STRs on the beach in Gulf Shores, Alabama. I have experienced Hurricanes (twice), the great Recession, the Covid restrictions, and, the most recent, changing STR regulations (one of my STRs that has operated legally since 1999 is getting shutdown May 1). There is a lot of risk with STRs. Management is either expensive or takes a fair amount of your time/effort. They should out produce LTR COC as in my opinion both the risk and effort are higher than LTR (the effort required justifies the high PM fees).

LTRs also involve risk and effort. LTRs are less effort and less risk than STRs, but typically produce lower COC. In my market, with the recent rate increases, it is tough to find cash flow positive when using realistic expense projections (realistic approach the 50% rule even in my high rent market) for high LTV RE.

There are a lot of investment options. RE is not always going to be the best option available. From 2012 to 2022, RE was a very reliable, typically high return investment. Is that true with the rates more than doubling and RE prices having barely fallen in most markets. Many properties that would have had underwriting justifying purchase at the beginning of 2022, would not today if using high LTV financing.

Good luck

[Michael Wooldridge]

Quote from @Dan Heuschele:

Quote from @Michael Wooldridge:

Quote from @Dan Heuschele:

I see agent say buy now.  I see investors say never buy a bad deal, cash flow is hard to find, etc.

Here is the reality. On high LTV properties the month P&I has almost doubled since the start of 2022. This is without an associated increase in the RE value. I would argue that in some ways it would be better if the RE had doubled in value and rate was the same as a year ago as at least you would be purchasing a higher valued asset.

The reality is I have been in RE a long time and have never found it harder to find RE that meets my current purchase criteria.  This is 1) because I am a big fan of leverage 2) I do not forecast rates declining 3) I am conservative in any appreciation or rent increase forecast 4) I am cognizant of the level of effort and risk involved with residential RE 5) I am cognizant of other investment options.

If I can effortlessly and with virtually no risk have money market or CD return near 5%, what sort of return do I need from residential RE to make it worth the effort and risk.  Note money market/CDs are not the only choice but I use them as a single reference point.  10% is not nearly sufficient.  I need approaching 20%.

If you can find an RE that with conservative underwriting projects the return that justifies the effort and risk compared to other investment options, it could be worth pursuing.  My issue is that I have not and therefore I have not purchased since Dec 2021 (but I did purchase $4M that month).  In fact, I have only offered on a single property since then and my offer was not close to the accepted offer (the accepted offer was apparently willing to accept a much lower return than I was willing to accept).

Good luck

Interesting comment. My last purchase was October 22. Interesting enough even in year 1 (STR) we are on track to do 22% CoC and judging by bookings for next year wouldn't be surprised if closer than 30%. So I would say deals are out there but like you I've gone more conservative - and I absolutely have to have a decent return up front in cash flow - I don't buy just for appreciation because it's too risky.

That said while I lean more towards RE vs liquid - I'm curious about your needing 20%. Are you talking CoC? Or are you talking about overall? 10% CoC between tax write offs, appreciation, and long term value - in my experience it's hard to even beat that in the market when you factor in all benefits.

or are you just deeming the investment not worth the risk at that point? 

I expect 20% total projected return but remember I am conservative on my appreciation and rent increases in my underwriting. My underwriting currently has 5 years of no appreciation and 2%/year rent increase. I do not include tax write offs in my return. So, to get 20% total return when projecting no appreciation implies the COC is fairly close to 20%.

Why so high?  It is in part because of other returns I can achieve from other sources.  I have done exceptional with syndicators (often better than the 20% return with very little effort).  As indicated Money market is ~5%.  Rolling T-Bills last I heard were over 6%.  Safe and no effort.  if I can get 6% guaranteed with no work, there is no way I would consider residential RE at 10% with the associated risks and effort (I have many units for quite a few years and do not consider residential RE to be passive).

how long have you owned STRs? I have owned STRs since 1999. I have experienced the great Recession, the Covid restrictions, and, the most recent, changing STR regulations (one of my STRs that has operated legally since 1999 is getting shutdown May 1). There is a lot of risk with STRs. Management is either expensive or takes a fair amount of time/effort. They should out produce LTR COC as in my opinion both the risk and effort are higher than LTR (the effort required justifies the high PM fees).

LTRs also involve risk and effort. Less effort and less risk than STRs, but typically produce lower COC. In my market, with the recent rate increases, it is tough to find cash flow positive when using realistic expense projections (realistic approach the 50% rule even in my high rent market) for high LTV RE.

Good luck

 Makes sense. Was just curious because 10% coc usually ends up returning much more in my experience than just the 10% (appreciation, depreciation etc…). 

STR is newer for more my portfolio but I knew the house I could sell easily enough. At this point I'd break even if it happened tomorrow. As to the PM part I have a stake in the group doing it and have known the owner for decades. So no brainer.

I’m 38 so only owned since the fun 08 Great Recession. My traditional rentals don’t cash flow near as much (well one paid off when I started my journey) obviously but safe and more than pay the bills - and actually appreciated rather well for cheap 2-2. 

But it was more of the comment around 10% caught my interest. If I throw the money into stocks and/equities I can certainly earn 9% for no work (obviously risk but negated over 20 years). but it's just with at least 10% CoC, with all the other benefits I was curious what you considered better/easier.

Always looking to diversify where I can but I just haven’t found much to compare to RE in the long run (cash flow today buying more being the big win). So was very curious/interested in the alternative. 

[Dan Heuschele]

Quote from @Michael Wooldridge:

Quote from @Dan Heuschele:

Quote from @Michael Wooldridge:

Quote from @Dan Heuschele:

I see agent say buy now.  I see investors say never buy a bad deal, cash flow is hard to find, etc.

Here is the reality. On high LTV properties the month P&I has almost doubled since the start of 2022. This is without an associated increase in the RE value. I would argue that in some ways it would be better if the RE had doubled in value and rate was the same as a year ago as at least you would be purchasing a higher valued asset.

The reality is I have been in RE a long time and have never found it harder to find RE that meets my current purchase criteria.  This is 1) because I am a big fan of leverage 2) I do not forecast rates declining 3) I am conservative in any appreciation or rent increase forecast 4) I am cognizant of the level of effort and risk involved with residential RE 5) I am cognizant of other investment options.

If I can effortlessly and with virtually no risk have money market or CD return near 5%, what sort of return do I need from residential RE to make it worth the effort and risk.  Note money market/CDs are not the only choice but I use them as a single reference point.  10% is not nearly sufficient.  I need approaching 20%.

If you can find an RE that with conservative underwriting projects the return that justifies the effort and risk compared to other investment options, it could be worth pursuing.  My issue is that I have not and therefore I have not purchased since Dec 2021 (but I did purchase $4M that month).  In fact, I have only offered on a single property since then and my offer was not close to the accepted offer (the accepted offer was apparently willing to accept a much lower return than I was willing to accept).

Good luck

Interesting comment. My last purchase was October 22. Interesting enough even in year 1 (STR) we are on track to do 22% CoC and judging by bookings for next year wouldn't be surprised if closer than 30%. So I would say deals are out there but like you I've gone more conservative - and I absolutely have to have a decent return up front in cash flow - I don't buy just for appreciation because it's too risky.

That said while I lean more towards RE vs liquid - I'm curious about your needing 20%. Are you talking CoC? Or are you talking about overall? 10% CoC between tax write offs, appreciation, and long term value - in my experience it's hard to even beat that in the market when you factor in all benefits.

or are you just deeming the investment not worth the risk at that point? 

I expect 20% total projected return but remember I am conservative on my appreciation and rent increases in my underwriting. My underwriting currently has 5 years of no appreciation and 2%/year rent increase. I do not include tax write offs in my return. So, to get 20% total return when projecting no appreciation implies the COC is fairly close to 20%.

Why so high?  It is in part because of other returns I can achieve from other sources.  I have done exceptional with syndicators (often better than the 20% return with very little effort).  As indicated Money market is ~5%.  Rolling T-Bills last I heard were over 6%.  Safe and no effort.  if I can get 6% guaranteed with no work, there is no way I would consider residential RE at 10% with the associated risks and effort (I have many units for quite a few years and do not consider residential RE to be passive).

how long have you owned STRs? I have owned STRs since 1999. I have experienced the great Recession, the Covid restrictions, and, the most recent, changing STR regulations (one of my STRs that has operated legally since 1999 is getting shutdown May 1). There is a lot of risk with STRs. Management is either expensive or takes a fair amount of time/effort. They should out produce LTR COC as in my opinion both the risk and effort are higher than LTR (the effort required justifies the high PM fees).

LTRs also involve risk and effort. Less effort and less risk than STRs, but typically produce lower COC. In my market, with the recent rate increases, it is tough to find cash flow positive when using realistic expense projections (realistic approach the 50% rule even in my high rent market) for high LTV RE.

Good luck

 Makes sense. Was just curious because 10% coc usually ends up returning much more in my experience than just the 10% (appreciation, depreciation etc…). 

STR is newer for more my portfolio but I knew the house I could sell easily enough. At this point I'd break even if it happened tomorrow. As to the PM part I have a stake in the group doing it and have known the owner for decades. So no brainer.

I’m 38 so only owned since the fun 08 Great Recession. My traditional rentals don’t cash flow near as much (well one paid off when I started my journey) obviously but safe and more than pay the bills - and actually appreciated rather well for cheap 2-2. 

But it was more of the comment around 10% caught my interest. If I throw the money into stocks and/equities I can certainly earn 9% for no work (obviously risk but negated over 20 years). but it's just with at least 10% CoC, with all the other benefits I was curious what you considered better/easier.

Always looking to diversify where I can but I just haven’t found much to compare to RE in the long run (cash flow today buying more being the big win). So was very curious/interested in the alternative. 

S&P500 lifetime is ~10% return. No effort. Risk in the short term, but likely risk free over long term. If I can get 10% return from passive S&P 500, I would need residential RE to produce a much higher return than 10% (due to effort and risk). As indicated, the return would not have to be all from COC, but my forecasts going forward in near term have no appreciation so currently the return is almost all from COC. Note a few years ago my projections were showing 4% near term appreciation (ended up being far less than actual) and 6% near term rent growth (again ended up being far less than actual). When projecting such appreciation (4% appreciation), the COC could be lower and still produce 20% return.

In practice because we have mostly done value adds, virtually all of our REI produced infinite return. Today I do not believe I can find RE that I can extract my full investment. In addition, after the rent and refinance my pro forma would show negative cash flow. In Dec 2021, I purchased $4m of RE at great rates. If I purchased those properties today (with current rates), the P&I would be double what it is and that would kill my cash flow projections. I would not purchase either of those properties today because they would not produce the return that I require.

Good luck

[David Bilandzija]

@Thom Ruley  Cash flow is king my friend.  Keep looking and don't chase properties that can't meet your minimum requirements.  There is no guarantee that real estate in your market will continue to appreciate.  Cash flow will insulate you from down turns in value and helps you wait out periods of stagnation.  Think back to the GFC where markets nationwide suffered huge price declines. Long term investors holding a portfolio of well managed cash flowing properties were able to weather the storm and pay down principle.  Values eventually swung back and then some.  Happy hunting.