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Are there still positive cash flow deals??

Meir Preis
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Posted Jul 22 2023, 20:25

For starters, this is my first BP post :)

I have been looking in the Greenville NC area and Eastern NC for an investment property that I would be renting out for LTR or MTRs. I have cash available for a down-payment and I am pre approved.  I am not looking for a property that would need substantial work. Thus far I am finding

-Even with the current rates houses are moving very quickly off the market and they are going for the asking price.

-The average monthly rental income, even from higher MTR amounts, is producing at best a minimal positive cash flow and a very poor CoC.

It seems that housing prices in the current market (mortgage and monthly costs) are exceeding what the going monthly rental rates are in many areas which translates into unimpressive cash flow.

Am I missing something? Thoughts?

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Replied Jul 23 2023, 04:56
Quote from @Meir Preis:

For starters, this is my first BP post :)

I have been looking in the Greenville NC area and Eastern NC for an investment property that I would be renting out for LTR or MTRs. I have cash available for a down-payment and I am pre approved.  I am not looking for a property that would need substantial work. Thus far I am finding

-Even with the current rates houses are moving very quickly off the market and they are going for the asking price.

-The average monthly rental income, even from higher MTR amounts, is producing at best a minimal positive cash flow and a very poor CoC.

It seems that housing prices in the current market (mortgage and monthly costs) are exceeding what the going monthly rental rates are in many areas which translates into unimpressive cash flow.

Am I missing something? Thoughts?

 @Meir Preis

If I may offer my perspective. Do with it why you will. 

I am not a “cash flow is king” investor  

Pending one’s stage in life and career, I submit growing equity and increasing net worth should be the goal of most investors in their 30s and 40s - as they enter their prime income years. Presumably someone who has cash to buy investment real estate has a W2 income sufficient to cover their total monthly cost of living - their “job” pays for their lifestyle. So they don’t need cash flow to live off of. From folks in that position, I submit it’s better to invest for capital growth. Properties should pay for themselves with some cash flow left over to cover unexpected expenses. But the focus in my should opinion should be on long term capital growth.  

Question: Who will be able to generate more cash flow when they want and need it?

Investor A with $1M of investible assets

Or

Investor B with $3M if investible assets

The answer is obvious, it’s investor B. 

To move to the specific cash flow question:

I see countless investors talking about buying a cash flow property. I see countless brokers and owners trying to sell property by indicating “it’s a cash flow property”. 

If I may offer another perspective on:

Does the property cash flow?

It’s an incomplete question with no answer. 
I believe an additional layer of detail and sophistication is required. 

I submit:

Every property will cash flow if you buy with all cash. Right?

So the better question the more informative question is:

What size cash down payment do I need to make so that the property cash flows?

Does an investor need to put 20% down or 30% or 50% down to cash flow?

That’s the better question. 

Any question or statement about cash flow only has meaning when connected to the amount of cash required to buy it. 

And yes in todays market with todays debt costs, I suspect most SFRs will require 30% to 40% down to cash flow. In my opinion you won’t find cash flow with 20% down unless the property and location are horrible. 

You are on the right track stating to look at real estate investing. It’s the best way in my opinion to obtain financial security and wealth. Aim for line drive base hits not grand slams over 10 years and you will be well on your way to get there. 



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Replied Jul 23 2023, 04:58

Yeah that's about right.

you can try out smaller towns as they typically have more cash flow. Every state as at least a few. But you'll be giving up appreciation (which, mathatically, tends to make more than cash flow ever could).

there might still be a unicorn town here and there that JUST Started growing quickly so you can get in while there's still cash flow. I don't know of one though. Chattanooga was that about 3 years ago. Prices all up now. Rents only up some.

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Replied Jul 23 2023, 07:33

I appreciate the insight. In my case the truth is I dont need the short term positive cash flow, although it would be nice, so it seems real benifit is the long term appreciation and asset value.

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Replied Jul 23 2023, 07:38

have you been finding off market deals or are these numbers from properties already on the MLS?

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Replied Jul 23 2023, 08:33

@Austin Paige

I hunt for deals all the time.
Both on market and off market. 

It's about networking. Build relationships with brokers and PM. Attend local network events. Use social media in your target markets. MLS for smaller properties.

Basically you want to get your name out there as a buyer. However you can do that is good. The more people who know you are looking to buy the more likely you are to find a good property. 

And if one takes a long term outlook to investing. One does not need to find a screaming deal. 

Just buy good properties in good locations and pay a decent market price. 

Warrant Buffet said: Hed rather buy a good company at a fair price than a fair company at a good price. 

There’s a qualitative aspect to investing that matters. That doesn’t mean numbers the quantitative don’t matter. It just means a focus on ONLY numbers doesn’t do it. An investor who looks for quality or let’s say intrinsic value beats the crowd to solid long term deals even if the “numbers” don’t jump of the page at you. 

And don’t forget the numbers are just projections based on assumptions about the future. 

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ModeratorReplied Jul 23 2023, 09:20

All (occupied and paying) properties cash flow.

If they are not....it isnt because of the property, it is because of the leverage on the property. It is important to understand 2 very different factors in the risk in investing. There is risk that emanates from the property and the market. Then there is the risk that ememates from the leverage. The 2 are completely independent of one another.

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Replied Jul 23 2023, 16:44

Hi @Meir Preis, I specialize in MTRs in the Greater Charlotte NC market and have begun to branch out in Greenville and Spartanburg areas. There are plenty of homes in that area that still cash flow with conservative numbers. They aren't easy to find but definitely doable. What areas of Greenville are you targeting? What is your target CoC return and cash flow per month? I'm seeing between 8-11% after (conservative) expenses.

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Replied Jul 23 2023, 16:48
Quote from @Meir Preis:

For starters, this is my first BP post :)

I have been looking in the Greenville NC area and Eastern NC for an investment property that I would be renting out for LTR or MTRs. I have cash available for a down-payment and I am pre approved.  I am not looking for a property that would need substantial work. Thus far I am finding

-Even with the current rates houses are moving very quickly off the market and they are going for the asking price.

-The average monthly rental income, even from higher MTR amounts, is producing at best a minimal positive cash flow and a very poor CoC.

It seems that housing prices in the current market (mortgage and monthly costs) are exceeding what the going monthly rental rates are in many areas which translates into unimpressive cash flow.

Am I missing something? Thoughts?


 Absolutely. I just picked up 10 more doors ALL with 20%ish net caps. However, I am a cash buyer. I am sure they still will cash flow with a loan. Its all about knowledge and your network, 

All the best 

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Replied Jul 27 2023, 13:45

Hello @Meir Preis ,

[Good comments @Arn Cenedella]

There are cash flowing properties, but probably not at +7% interest rate with 25% down. In this post I will explain how we deliver cash flowing properties to our clients.

Our investor services business is located in Las Vegas. Therefore, the examples and comments provided in this document are specific to Las Vegas. However, they are likely to be applicable in other locations as well.

Before I talk about specifics, I want to explain the importance of cash flow.

All return calculations predict is how a property is likely to perform under ideal conditions on day one. Return calculations tell you nothing about the future. Our clients plan to hold their properties for the rest of their lives and then pass them to their children. So, what happens the first month or year is not as important as the long term performance. When it comes to long term performance, everything depends on rents keeping pace with inflation. If rents do not keep pace with inflation, your time off the daily worker treadmill will be limited.

For example, suppose every week you buy the same basket of groceries and today’s cost is $100. If inflation is 5%, below is a table showing how much less groceries you can afford in the future.

In 10 years, $100 will only buy 63% of the goods that you could buy today for $100. in 15 years, 49%, etc. You will only have financial security if rents keep pace with inflation. You need an longer focs than just day one cash flow.

All the above said, how are we consistently delivering multiple properties each month to clients with positive cash flow?

The Right Property

High-performing properties that will cash flow (with reasonable down payments and interest rate buy-downs) are available, but they are difficult to find. In Las Vegas, less than 0.4% of all available properties are even worth considering. What makes it even more difficult is that good properties go under contract in about 2 days. This means that we must evaluate a large number of properties to find a very small set of potential investment properties and make an offer within one or two days after the property comes on the market.

The only way we can consistently get some properties under contract include:

  • We use data mining software to quickly find 10 to 20 potential properties from the thousands available in just a few minutes.
  • We have a team of people who evaluate each property. If any team member does not agree, the property is eliminated.

Using the above method, we are able to bid on the few good properties within 1 day of it coming on the market. This enables

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Replied Jul 27 2023, 13:51

You can also pick up some properties 'subject to'. Look for expired listings, driving for dollars, water shut-off lists, etc. These leads are popping up more than ever these days. If they have a rate locked in during the 2-3% days, good luck -not- cash flowing lol. 

That being said, do your research. Subject to is preached like crazy but not too many people talk about the "due on sale" clause. 

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Replied Jul 27 2023, 16:10

✴️✴️✴️ This time the entire post! Sorry about that. ✴️✴️✴️

Hello @Meir Preis,

[Good comments @Arn Cenedella]

There are properties that generate cash flow, but it's unlikely to find them at a +7% interest rate with 25% down payment. In this post, I will explain how we provide cash flowing properties to our clients. Before I discuss the details, let's talk about cash flow.

Real Estate Investing is a Long Term Investment

Return calculations only predict how a property is likely to perform under ideal conditions on day one. They provide no insight into the future. Our clients plan to hold their properties for the rest of their lives and pass them on to their children. Therefore, short-term performance is less important than long-term performance. In the long run, everything hinges on rents keeping pace with inflation. If rents fail to keep up with inflation, your escape from the daily grind will be short-lived.

For example, suppose every week you buy the same basket of groceries and today’s cost is $100. If inflation averages 5%, below is a table showing how much less groceries you can afford in the future.

In 10 years, $100 will only buy 63% of what you can purchase today for $100. After 15 years, $100 will only buy 49% of what it can today. Only if rents keep pace with inflation will you have the additional dollars to pay inflated prices. It is important to have a long-term focus; do not evaluate properties based only on day one return.

All the above said, how are we consistently delivering multiple positive cash flow properties each month to clients? It is a combination of the property and the financing.

The Right Property

High-performing properties that will cash flow (with reasonable down payments and interest rate buy-downs) are available, but they are difficult to find. In Las Vegas, less than 0.4% of all available properties are even worth considering. What makes it even more difficult is that good properties go under contract in about 2 days. This means that we must evaluate thousands of properties to find a very small set of potential investment properties and make an offer within one or two days after the property comes on the market.

The only way we can do this is:

  • We use data mining software to quickly find the 10 to 20 potential investment properties from the thousands available in just a few minutes.
  • We have a team of people who evaluate each property. If any team member does not agree, the property is eliminated.

Using the above method, we can bid on properties within one day of coming on the market. This allows us to secure three to five high-quality properties for our clients each month.

The Right Financing

The way we do financing has changed. Below is a diagram showing how financing worked in the past. You got a pre-approval and closed with that loan.

Today, we still get a pre-approval because this is needed to make an offer. Where it changed is once we get a property under contact, we solicit buy-down rates from multiple lenders. We then move the loan to the lender with the best deal for the specific client. Below is an example of one interest rate buy-down option.

If you look at the acquisition cost line, you'll notice that by spending $4,046, you can lower the rate to 6.75%, which will increase the cash flow by $120 per month. The payback period for the buy-down is ($4,046/$120) = 34 months or 2.8 years. In my view, this is a viable option.

Another consideration is how long before interest rates fall. I have asked many clients and most guesses range between, “the next presidential election,” and three years from now. No one knows when rates will actually fall. But when they might fall makes difference on what buy-down makes sense.

For example, if you believe interest rates will fall to reasonable levels within five years, choosing an interest rate buy-down with a 15 year payback period makes no sense.

Summary

The days of easily buying positive cash flow properties with 20% or 25% down ended at about 4 1/2% interest rate. Today, it takes a combination of the right property, the right financing to have a positive cash flow. This can be confusing which is why we put together a multi column spreadsheet for each client so they can understand the various options.

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Replied Jul 27 2023, 16:44

Thank you for the detailed insight!

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Replied Jul 27 2023, 21:39

@Meir Preis There’s still cash flowing deals. Keep looking. Keep analyzing. For every 100 deals you analyze you may make 10 offers and get 1 deal accepted. It’s a numbers game. Stay positive. Keep trying. You’ll find a great deal! But it may take a while!

Right now in my market the cheapest SFH is $329,000 where I'd need it around $169,000 to work, and there are no Multi family deals at all. I know of some that will be listed eventually, but they're being renovated.

I can wait and continue to build my cash reserves.

Don’t force a bad deal you’ll later regret just to get into the game it’s a huge mistake. Have patience!

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Replied Jul 27 2023, 21:48

Well said, Thank you. I think I am just a bit excited and want to jump in. 

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Replied Aug 9 2023, 13:07

Of course it's more difficult for property to cash-flow. One of your expenses (mortgage expense) is higher.

But that's all it is, one of your many expenses. You can still find deals that fit your criteria they're just harder to find. 

The problem is when interest rates are low everyone complains how there are 17+ offers on deals and they're going 20% over asking.

Pick your poison. It's never going to be the absolute optimal time to purchase.

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Replied Aug 9 2023, 13:27

What cash on cash return are you looking for?

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Replied Aug 9 2023, 13:54

What are you trying to do-- build wealth or try to hit quick singles and pocket $100-$200/mo?

CoC, ROI, etc., are all ******** for this. Forget what anyone says, it's all about how much risk you're willing to take, and what your goals are. Real estate isn't a financial instrument, it's a physical investment.

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Replied Nov 7 2023, 11:46

There are only a few markets in the country that consistently cash flow. 

It comes down to price/rent ratio (and a few other variables like taxes)

Only some locations consistently have the ratios that work.

Here is a snapshot of my portfolio cash flowing $100k+ in Metro Detroit where most deals were purchased off the MLS in the past 2-3 years.

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Replied Nov 7 2023, 12:10
Quote from @Austin Paige:

have you been finding off market deals or are these numbers from properties already on the MLS?


 gary indiana is still markte that you can cash flow 24 hours by seven lol

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Replied Nov 7 2023, 12:22

Plenty of realtors will tell you there are :)

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Replied Nov 7 2023, 12:29
Quote from @Alecia Loveless:

@Meir Preis There’s still cash flowing deals. Keep looking. Keep analyzing. For every 100 deals you analyze you may make 10 offers and get 1 deal accepted. It’s a numbers game. Stay positive. Keep trying. You’ll find a great deal! But it may take a while!

Right now in my market the cheapest SFH is $329,000 where I'd need it around $169,000 to work, and there are no Multi family deals at all. I know of some that will be listed eventually, but they're being renovated.

I can wait and continue to build my cash reserves.

Don’t force a bad deal you’ll later regret just to get into the game it’s a huge mistake. Have patience!


"Right now in my market the cheapest SFH is $329,000 where I'd need it around $169,000 to work"

That would sound about right. But how can you say it's a numbers game and deals are still out there with that kind of a gap?

There would have to be examples of it happening, with a certain amount of regularity, for that to be any more than just optimism.
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Replied Nov 8 2023, 11:32

@Meir Preis

When investing in areas they don’t really know, investors should research the different property Class submarkets. If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

Our OPINION for the Metro Detroit market (always verify each area for yourself!):

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.