Investors looking for cash flow properties?

Question

To all,

How many folks are looking for cash flow positive properties? Something around the 1% rule (12% per year in gross estimated yield)?

There are deals out there. Sometimes more than I can take down. Other times less than I want to buy. What are others seeing?

John Corey

Timothy W. · Answer

The 1% rule kinda works on some areas where taxes are low and you're doing 10-20% down.  It used to be the basis of where I would begin taking the time to analyze deals.  Honestly though, after having researched the opportunity out there more, you can do better than the 1%.

Real positive cashflow really isn't that hard to find if you simply go to where it is.  Problem is most people are fishing for bass in a trout stream.  You need a rental market if you want cashflow.

Tim

Peter Stewart · Answer

Mike -

I hope that most RE investors are in the business to make money.  Although, how they make that money can be very different from the strategy that you outlined.

For example:
- Buying a property (at market value) in an area that is up and coming.
- Buying a property (at market value) and performing a land use change.
- Buying a property (at market value) and developing the land around it.

These are just some examples of how you can buy an investment at market value and make money (assuming you know what you're doing).

I appreciate your knowledge and experience in the investing field.  I'm not trying to downplay what you do but offer ways for investors in higher priced markets to invest.

- Peter

Michael Rossi · Answer

John,

I'll concede that you have absolutely nothing to do but post all day and all night long.  That is evident.  If you don't have anything to do, come to Ohio and I'll let you paint one of our houses.

So, let me get this straight.  Your idea is to overpay for your investments; have negative cash flow; and pray that appreciation or luck bails you out?  I'm sorry, but THAT IS THE WORST plan I've ever heard!!!

THANKS ANYWAY!  That does not sound like a good plan to me.  I actually run a full time rental property business.  It provides the cash that allows my family to eat, go camping, etc.  It allows me to work 3-4 hours per day, 4 days a week.  It has also allowed me to build a substantial net worth in a relatively short period of time.  I'm quite certain that my wife wouldn't be too happy if I followed your plan and we ended up with less than zero at the end of each month and started praying for appreciation in 20 years.

That said, I'm not against anyone following your plan.  Overpaying for properties and losing money each month is an option and it's a free country.

I think I'll stick to my plan:  Only buy properties that provide both a positive cash flow and equity.  I'M IN BUSINESS TO MAKE MONEY, NOT LOSE MONEY!

Mike

Account Closed · Answer

Point taken. I stand corrected. You have two main criteria as noted above.

A bit of a mistake then in your post.

That you make money is not the absolute way to think of the issue. You are setting a minimum when you say you want 30% equity when you buy. Less than 30% is not good enough.

You are also implying that when you make money matters. You want your profit when you buy and not at some point later (the 30% equity at the time of purchase). Not to say that future profits are not welcome. Just that you have set a time constraint so whe matters to your statement What matters with an investment is whether you make money...

There are folks who buy and have a negative cash flow for the whole holding time. They make a ton at the end if the value of the asset has risen through appreciation of a change of use. Commercial developers commonly have this issue.

You are claiming that is it as simple as saying if you make money. My example and your criteria for your deals confirms that is is not as simple as just making money. How much, when, how the money is received all seem to matter in your deals.

I can understand your position. I can clarifying for others that there is more than one way to invest profitably in RE. Your model works for you and works in your market. Other people make money in ways you would not consider. Simple as that.

I have seen deals where people over paid and yet it came good in the end. Call it luck if you need to. Or they held long term and it all worked out in the wash (not optimal but still they made money).

Staying that if someone overpays they will lose money is a generalization that does not hold true 100% of the time. It is not that simple.

A story that might make this a thread a bit more fun and illustrate a point...

An older RE investor from GA once told me a story. He pointed out that he is not the brightest; a learning disability held him back in school. Since he had been investing in RE for 30 years he observed a few things.

RE is the only investment that he knew (focus is on him) where you can buy for $100K, rent the property, sell for $50K and end up with a profit. $50K more than you started with.

His point if you can buy with zero cash, have the tenant pay off the mortgage plus running costs, sell at a lower price than you purchased for and walk away with $50K more than you started with. You do not need the market to rise to make money with RE. If the market happens to rise over the period so much the better. Note this example is really a cash flow example given the 100% leverage.

His model worked for him and he was rather wealthy. Many RE investors have a style or a model that works for them. There is no reason that we all need to follow the same style. There is no reason that one style is always better in all markets. Some styles do lead to problems while other styles are more conservative and prone to success.

Time to move on?

John Corey

Account Closed · Answer

The underlying question gets asked a lot on forums where people invest in multiple different things. One problem with the question is how people compare investments.

For the most part people use averaged and index. One investment class went up by X while RE went up by Y. Most of the time the investor does not buy an index or average for either asset class so the comparison is a bit false. Also there is the way that someone invests such as when you use leverage for RE. Though the stock market allows margins RE has no margin calls so the two are hard to compare.

A bigger issues arises that gets more to the heart of the matter.

People are generally specialists when it comes to how they make money. Most people do not grow their own food, make their own electricity, produce their own steel, etc. They do one thing that is pretty narrow and then trade to get all the other stuff. They develop skills in a narrow range. It is called having a job that pays more than entry level.

Most investors like specific asset classes and become skilled at investing in those specific asset classes if they are successful investors. Buffett is a famous example. He sticks to sectors he understands and chooses not to learn about other sectors. It seems to work for him even if he is missing out on some alternatives.

RE investors tend to focus like everyone else.

One last thing. RE investing as discussed ini this forum is not a passive investment. It is closer to starting and then operating a business with all the hassle, liability and upside. If people were looking at starting companies, opening gold minds, painting for profit and producing wine then we would be comparing things on a more like for like basis in terms of various asset class businesses.

John Corey

Peter Stewart · Answer

Ahhh.... But you are thinking inside the box.

You have to adjust your strategy to fit what the current market is offering.  The solution isn't to run away from your market but adapt and adjust.  Smart investors make money no matter where the market is going.

My point was simply that the 1% rule isn't feasible in my market right now.  Flipping houses isn't a great option either.  But I'm still investing in homes...  I'm just using a different strategy.

Peter Stewart · Answer

Mike,

I think your investment strategy is valid and obviously works well for you.  I agree with John that the investment strategy may need to be altered slightly depending on where you are investing.

Where I live the rents are relatively low and the home prices are moderately high.  The median sales price for a SFR in my city is $300k and the average rental amount for a 3bd property is $1,300.  You won't be finding owners willing sell their $300k property for $130k so the 1% rule works.

The appreciation in my city has been consistent over the past 9+ years at 9-10% growth per year.  Even this year where many markets are going backwards, we are over 9%.  While you can't fully depend on appreciation it's definitely a nice factor for the properties I own.

I completely agree that most investors fail by paying too much for their property.  Buying under market is the way to go!

- Peter

Peter Stewart · Answer

You make an excellent point.  - Invest your money where you can get the greatest return.

As far as my RE investment goes:

I should easily double or triple my investment within a year.  If the market continues to appreciate that will be an added bonus.

MATT WARDEN · Answer

Am I really thinking inside the box by suggesting that it is silly to limit yourself to REI when there are better options in your area?

No one is saying you can't make money. Of course you can make money. The only question is whether your $x is best put into RE or some other investment. That is the question real smart investors ask.

And earning better than 10% on your investment, right?

MATT WARDEN · Answer

I am generally confused when things like this come up, and they come up a lot around here.

If I were thinking of opening a Starbucks, because they sure are money makers, but my immediate location was a horrible market for a Starbucks, I either:

(1) would open it elsewhere (and accept associated headaches with remote mgt), or
(2) not open a Starbucks.

Why is the real estate business any different? It almost seems like people are dead-set on being a REI regardless of whether it makes financial sense.