Savannah First Rental Property - Numbers Aren't Working, What Am I Missing?

Question

I am looking to make my first real estate investment purchase in Savannah, GA in the next 6 months. I've been looking at small multi-families and SFRs between 270-500k. My original strategy was to use my VA loan to house hack a small multi-family, but I have since broadened my financing options to conventional rental property investment and conventional second home financing.

I have been doing my homework for a few months now, I read Brandon Turner's "The Book on Rental Property Investing," I listen to the BP podcasts, built a relationship with an investor friendly real estate agent and lender in the local area, and built my own rental property cash flow analysis spreadsheet that includes everything from P&I, taxes, insurance, maintenance, vacancy, PM, lawn care, legal, and miscellaneous on the expense side, and rent to price, rent to payment, CoCROI, gross rent / $1000, cash flow, break even price, etc on the analysis side.

Only problem is the numbers aren't working.

From what I can tell, it seems like the P&I is eating up all of the rental income even before expenses. I considered short-term / executive rentals to drive up income, but the added PM and utility costs seem to negate any of the benefit. Because of current interest rates, my general inexperience pushing me toward newer properties with little to no fix up required, PM, and Savannah's appreciation potential, I acknowledge and accept that the cash flow potential may be minimal. I am also willing to put down a moderately sized down payment if that's what it takes to make the numbers work (within reason, I don't want to expend all my capital into my first property). But I don't want to purchase a liability that ends up costing me money every month when its fully rented out. Where is the line?

My overarching goals for my first property are to minimize risk, maximize longevity, build my team, learn the market, and get into the game.

Is there something that I'm missing or am I thinking about this the wrong way? Am I looking in the wrong market, is now just a bad time to buy?

Matthew Tregoning · Answer

If P&I already eats the rent, you aren't missing anything. The deal just doesn't work at that price and rate. A VA house hack can still make sense because it replaces your own housing cost. I used my VA loan too. Just don't force a bad rental because you're ready to buy something.

Michael Eskenasy · Answer

I actually think your spreadsheet is working.

It’s telling you something you may not want it to tell you: the deals you’re looking at don’t work at today’s price, rent and cost of capital.

One thing I would not do is keep increasing the down payment until the cash flow turns positive. That can make the monthly number prettier while hiding the actual problem. You’re essentially prepaying years of negative cash flow by trapping more of your capital in the property.

I’d calculate the return on every additional dollar of down payment. If putting another $50K down only improves cash flow by a couple hundred bucks a month, ask what return that $50K is actually earning you.

The VA house hack is a different animal because part of the return is housing expense you no longer have to pay elsewhere. A property that looks mediocre as a pure rental can make complete sense when one unit is replacing your own rent or mortgage expense.

But if you switch to a conventional investment property, I’d make the property earn its way onto the spreadsheet without giving it credit for hoped-for appreciation.

You said your goals are minimizing risk, learning the market, preserving capital and staying in the game for a long time.

Those goals do not require buying something in the next six months.

That may be the biggest lesson your first deal teaches you before you even own it:

Sometimes underwriting correctly means discovering that the best property to buy today is none of them.

let me know if you want to connect

Jimmy Lieu · Answer

Great question and welcome to BP! I actually think you’re approaching this the right way, especially for a first deal. If the numbers don’t work after using realistic rent, vacancy, maintenance, management, and financing assumptions, I wouldn’t force the deal just to get into the game. A bigger down payment can create cash flow, but I’d be careful about using too much capital to make an otherwise weak deal look good. I’d work backward from the minimum return and cash flow you’re comfortable with, keep enough reserves for surprises, and only buy when a property clears that bar. Since you have VA eligibility, I also wouldn’t give up on the house hack idea too quickly. Even if the property doesn’t look amazing as a traditional rental today, reducing your own housing expense while learning to operate a property can change the math quite a bit. I’d also compare Savannah against a few other markets before deciding the problem is simply interest rates. I moved from Portland to Columbus in 2020 for similar reasons and found that changing markets opened up price points and rent ratios I wasn’t seeing elsewhere. There are still areas where properties around $120K–$180K can get much closer to the 1% rule, so sometimes the answer isn’t finding a creative way to make a deal work, it’s looking where the fundamentals fit your strategy better. Six months gives you plenty of time, so I’d keep underwriting deals and let the numbers tell you where to buy rather than feeling pressure to buy quickly. Happy to connect and answer any questions you have!

Joseph Zimmerman · Answer

Your expense list looks complete, so the spreadsheet probably isn't what's wrong. At current rates, most on-market deals stop cash flowing once financing and full management are in the numbers, and that's what yours is telling you.

Property management is the biggest single lever left. I self-manage both of mine from out of state and track the actual costs, so I know how much that line carries. Rerunning your model without it will tell you whether this is a bad deal or a deal that needs you to do the work.

Greg Scott · Answer

Without seeing all your numbers, I can't dig into how you are doing your underwriting, so I can only provide high-level ideas.

When we were analyzing the purchase of an apartment, my wife always wanted me to make every metric and line-item more conservative.  In one way that is great. I want conservative underwriting.  I want there to be a much higher chance my actual performance will exceed my underwriting than fall below my underwriting.  The main problem with being too conservative is you might never buy anything.

It is more art than science to find that balance.    People that let their emotions push their underwriting to be more aggressive so they can buy a deal, eventually get hurt.  People that let their emotions constantly push the underwriting to be conservative, might never own anything.  What seemed to work for me is underwrite the property.  The next day come back and look at your numbers.  I noticed that depending on my mood, I might be more aggressive or more conservative.  If you look at a property over several days you will observe yourself going back and forth.  Find the balance.

While I've never done a househack, the main idea is that you get to live much more inexpensively than if you rented.  I'm not sure what your numbers are showing.  Just because it shows negative cashflow is not a bad thing.  If it is negative $200/mo, that is much cheaper than $1500/mo rent.

I've not seen your spreadsheet.  From your description of it, you may have built a Ferrari when all you really needed was a Chevy.  I always chuckle when I hear people get into an argument about metrics.  People can be passionate about whether IRR or EM is the best metric.  The problem is they are arguing about decimal places  (and which model is better) when the underlying information is a FORECAST.  The one thing I know about a forecast is it will be wrong.  The one thing you said that peaked my interest was that you included legal fees.  Except at purchase, I don't think I've ever seen anyone include that in ongoing operating expenses.  That had me wonder how much stuff you've thrown into the spreadsheet out of conservativeness.

FWIW, without seeing any of the data, you probably would be better off using the VA loan and keeping cash in the bank.  It is always good to have reserves for a rainy day.  Real estate is a very forgiving asset class.  You almost always make money, with one big exception.  If you are forced to sell when you don't want to, you will likely lose big.  What causes you to sell when you don't want to?  It could be a lot of reasons, but the most common is running out of cash when a big expense happens.

Good luck

Shiloh Lundahl · Answer

@Cameron Whiteside I think that you are floundering a little bit with not knowing what to do because your strategy isn't absolutely clear.

When your strategy is clear it becomes obvious if a deal is going to work for you or not. If your strategy is wealth conservation and you've made a bunch of money and you want to conserve it in Real Estate then you buy properties that are at market value and have a property management company watch over it and you may not cash very much on it but it will likely conserve your wealth, and it will go up with appreciation.

If your strategy is get cash flow through real estate, then you need to be very particular as to what to buy and how you are going to run it so that you can maximize your cash on cash return. You may consider house hacking like you mentioned, or short-term renting. You may get the property closer to you so you can run over there and get things fixed with it rather than spending a lot of money hiring a handy many.

If your strategy is to build wealth in real estate then you may do things differently. Your focus may be on how you will acquire the property and how you plan to exit the property. Will it be a quick 3-7 month flip to generate capital to be redeployed into real estate? Will it be buying something that you can trade up within a couple of years. If so, the negative cash flow you may have during the project may just be part of your carrying costs that you need to take into consideration during the life of the project until you sell the property.

Currently I am flipping to generate some capital to pay off some debts. But usually my strategy is to buy and hold real estate and then to sell it on a lease with the option to buy to a tenant buyer that I bring in at the beginning.  For my strategy to work well I have to buy the property at a high discount in order to create enough equity at the sale to where it is worth all of the coordination of the investment. So for me, I buy properties under market value from wholesalers, I will either fix them up or not depending on the property, and then I bring in a buyer on a lease option to sell them the property within a 3 year time frame. At the sale I usually get a $60,000 - $70,000 gain that is worth more to me than the cash flow I get over the 3 years I own the property.

So I would encourage you to start with what you want real estate to do for you, then choose a specific strategy in real estate that will help you get there.