Investing without cashflow - Austin MTR
Most Popular Reply
Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesI don't think its bad - the correction has hurt some values here in Austin last year, but I have no doubt we will see a roaring back of appreciation soon - I think still smart to invest here
Harpoon Capital514 Reviews
60 Replies
- Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes2y
@Gil Segev - the reason you really need to make sure a rental cashflows from day 1 is not so much the money you make off it each month but the padding it provides. If you calculate $250/month cashflow and you're off by $250 because you can't get the rent you thought or taxes go up or repairs are more than you thought... then you break even. If you buy something that breaks even and you're off by $250, how long can you afford to lose $250/month? You'll also have a hard time financing it now and refinancing in the future. Rentals are a long term play. They are a GREAT way to generate wealth over many years. The cashflow component is what will make the difference in being able to hold them long term or needing to sell them after a few years.
- Investor · Richmond, VA · Member since 2023 · 459 posts · 474 votes2yThis principle is even more important if you have a large portfolio or do not have alternate income. You want every property to be able to carry itself and help carry other temporarily non-performing properties.
Quote from @Salvatore Lentini:
@Gil Segev - the reason you really need to make sure a rental cashflows from day 1 is not so much the money you make off it each month but the padding it provides.
Cash flow from day 1 of min $300 is one of the inviolable criteria for purchase decisions for us. It means that we have to pass on a lot of "deals", it also means our stress level stays low when we have vacancy. - 2yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
@Gil Segev what is your PITI and what expense assumptions are you making?
The Moorhead Team5140 Reviews - Austin · Member since 2018 · 108 posts · 47 votes2y
Quote from @Alyson Gordon:
Quote from @Gil Segev:
The 8% management fee and cost to furnish came from a real estate agent that offers this service here. Re. vacancy rate I agree.. Maybe I'm trying to force this to work when it really doesn't :(Quote from @Alyson Gordon:
I think that an 8% management fee and 5% vacancy rate is too low for MTR. I have STRs and MTRs and have not seen anything this low. I also would consider that you'll need more than $15k to furnish a 3BR home, likely closer to $20k if you want to get the best pricing.
I would try connecting with some local MTR operators / managers in Austin to get additional perspective before you move forward. As with anything, a lot of this will depend on your goals. If you're doing MTR short-term and plan on holding onto the property for a long time these numbers may matter a lot less to buy an investment property in a good market.
Possibly! I don't want to discourage you but I think 20-25% for MTR management is more of a going rate for someone that will work to maximize revenue and occupancy. I also think that vacancy would likely be no more than 30 days in a year once you get your first guest moved it. But I think to run realistic #s I would be a little more conservative than what you initially shared. It also might mean you need to be pickier about the property you buy but the strategy is otherwise solid.
I would try FB groups and see if you can get a second opinion from someone operating MTRs in your market because they'll have the best insight. Jesse Vasquez has an active MTR group that may be a good place to start.It's a combined type arrangement where they find and place the tenants and I handle the maintenance since I'm close by.
- Austin · Member since 2018 · 108 posts · 47 votes2y
Quote from @Jordan Moorhead:
@Gil Segev what is your PITI and what expense assumptions are you making?
For the 520k property example I shared the PITI is ~$3520: Mortgage $2465 (6.5% 25% down) + property tax $856 (rate 1.975%) + Insurance $200
To this we'd need to add vacancy, capex, MTR PM and utilities that come up to another $800-1000
- Austin · Member since 2018 · 108 posts · 47 votes2yIf I'm perfectly honest with what the numbers are showing, I'll likely be $250 in the red with the properties I've seen so far even after I negotiate 10-15% off asking price. I can afford ($250) a month? but in my view it makes a relatively "safe" investment in cash flowing real estate into a gamble on appreciation.
Quote from @Salvatore Lentini:
@Gil Segev - the reason you really need to make sure a rental cashflows from day 1 is not so much the money you make off it each month but the padding it provides. If you calculate $250/month cashflow and you're off by $250 because you can't get the rent you thought or taxes go up or repairs are more than you thought... then you break even. If you buy something that breaks even and you're off by $250, how long can you afford to lose $250/month? You'll also have a hard time financing it now and refinancing in the future. Rentals are a long term play. They are a GREAT way to generate wealth over many years. The cashflow component is what will make the difference in being able to hold them long term or needing to sell them after a few years.
- 2yAxel MeierhoeferPro MemberRental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
Quote from @Carlos Ptriawan:
Quote from @Axel Meierhoefer:
Quote from @Carlos Ptriawan:
Quote from @Justin Vogelgesang:
Outmigration from Texas dropped around 50% for 2022, and 2023 is still TBD of course. It has remained at the top for inbound migration for longer than that though. So Texas seems to be one of the most promising markets for the years to come I think. With all of the appreciation in the recent years, it's difficult for rent rates to keep up so there is a natural lag there.
Would you be managing the property yourself? If not, then some other areas in TX would be far more feasible for rentals and you wouldn't have to resort to out of state then.
Buying locally is always better regardless the state, it develops the business skillset
Curious, why is the business skillset better if I am running a company locally versus operating in a location away from where I live? I have been in business for 18 years and have always done business activities where the clients and the market is, not where I live.
when I invest locally I know which contractor is good, which market and which strategy is beneficial for me. When I invest out of nowhere in NowhereVille I only make few hundred per month. Now when I rehab locally I made hundred k or more per deal.
I agree but there is a huge difference between flipping locally and having professional property management far away from home. I was only referring to the latter.
- 2yAxel MeierhoeferPro MemberRental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
Quote from @Gil Segev:
Quote from @Axel Meierhoefer:
@Gil Segev Remember that I said how important goals are?
If your goal is to make monthly payments for an anticipated appreciation of 10%, then investing in real estate in strongly appreciating markets is a good idea. I am not sure that Austin is that market but it could be one of them.
You are right that the cash flow markets I invest in appreciate closer to 3% or maybe 4%/year but I don't have to pay anything for it, get the tax benefits and the depreciation, spread my risk across 2 or 3 properties, and because TK providers manage them I have no work and don't need to furnish them.
A CD is a very poor example as it shows that you don't seem to look at all the other aspects residential real estate provides you, regardless of whether in the Austin deal or my deals. My friend Keith summarized it this way:
- Appreciation. You are aware of that
- Cash Flow. Your rent income minus all the monthly expenses (mortgage, property tax, insurance, property manager, repairs, vacancy, etc.) leaves you with $600 of residual income.
- Loan Paydown. Unlike your own home where you pay this, your tenant pays the monthly principal portion of your loan on this property! That means the balance goes down a little each month which adds equity to your proeprties.
- Tax Benefit. We’re talking about both the mortgage interest deduction and something called “depreciation” that you can typically use as a tax write-off against your income.
- Inflation-Hedge. This fifth way is one that even some advanced investors fail to consider. Just like inflation erodes the value of your lump of savings, it erodes the weight of your mortgage debt balance just the same. Your loan today has its “drag” diluted over time as more & more dollars circulate in an economy. Basically you pay the same amount each month but teh value of that money goes down over time.
You can add those parts together in % terms and probably end up in the area of 16-20%.
Funny side note: On the 6% of interest you get from the CD you see as an alternative you have to pay income tax so depending on your income it might only be 5% or even 4%.
In case you really mainly looking for a gain in value, you could also invest in stocks. If you had bought Tesla stock in Jan 2023 and sold it today your $150K would have doubled, so the gain would have been triple your appreciation of the $500K property in Austin.
The appreciation goal is a much shorter-term goal than my cash flow goal, where tenants buy me houses, create long-term passive income, and develop a portfolio I can turn over to my daughter when the time comes.
It's all in the goals you have.
@Axel Meierhoefer of course I see the benefits of owning real estate or I wouldn't be here :)
You are correct that following the example you provided of buying 2 TK properties, I was only making a point on the ROI of cash flow (3.5%) and equity built by loan repayment (2.2%) for the near term. I also wouldn't put all of my investment funds into a single CD for the long term..A better comparison would probably be what the funds would yield in a 20+ year prediction of SP500 vs. 2 TK properties being slowly paid down and appreciating. I personally believe real estate wins since we claim the whole appreciation while leveraging the bank's money for the initial purchase.
Would you mind sharing which market you are currently investing in that sees $300 per door for TK LTR? It's definitely something I'd like to consider.
I am investing in the Quad cities and in the Dayton/Cincinnati area. I am happy to share my providers if you re up for a call to talk about it. If you DM me I can send a link to my calendar. That's how I help my clients, either direct referral or referral plus mentoring.
- 2yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
@Gil Segev I wouldn't do that deal. You would be losing money. There are MTR deals that work here but that's not one of them
The Moorhead Team5140 Reviews - Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes2y
Quote from @Gil Segev:
That's fair. I am looking at several 3/2 ~1400sqf properties requiring minimal rehab that are listed between 420-450k. In this market I am hoping to close under asking but don't know for sure yet.Quote from @Axel Meierhoefer:
@Gil Segev I don't think you are rationalizing a bad strategy.
What is missing is specificity.
My numbers:
PP: 420k, 25% down (105k), 6.5% interest rate already pre-approved
PITI + HOA: $3100
MTR managed by a 3rd party: 8% / $300
CapEx: 8% / $300
Vacancy: 5% / $175
Rent range provided by trusted 3rd party: 3.5-3.8k
At the lower range of income and higher range of expenses I will end up $300 in the red, unless I manage buy lower. I could try taking up managing MTR myself but this company has relationships with renters and insurance companies that I assume bring higher rents than I can get myself with Furnished Finder. I could add STR to cover some of the vacancy cost but honestly I'm not ready to this this on as a job rather than semi-passive investment.
The Vacancy rate is too low for MTR. I would use 15 - 20% minimum. Some experts won't buy a MTR unless they can make the payment at 40% vacancy. I'm shocked that somebody will manage a MTR for 8%. Thats a good deal for LTR but for MTR they are going to be getting clients in 4 times a year. Are they charging you half of the first months rent?
I'm concerned that you have not mentioned the location. You want to be with in 15 minutes of a large hospital to accomodate medical professionals.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.