How much cash flow could one get with $150k starting capital?

Washington, D.C. · Member since 2014 · 35 posts · 9 votes

One of my friends who has had to listen to my incessant ranting about REI had a question for me the other day, and I felt sheepish that I had no idea how to answer him. My plans are largely centered around SFH buy and hold, long-term investing, and my knowledge ends there. He is well-to-do and has money saved up, and was curious about how much cash flow he could get with it in the short-term.

So, my question is this: if you had $150k in capital to blow, were just starting out, and you were mostly concerned about getting the max amount of cash flow in the near future (and if possible setting yourself up to get some more long-term benefits) what would you do?

Two extra criteria.....he lives in the Washington DC metro area, so things are pricey (but probably willing to look farther out) and seems averse to house flipping.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

12y

@Joe Villeneuve you're claiming that ALL Expenses, ALL vacancy and ALL capital amount to $330 out of $975 of rent. That's 33%. You may well have seen those sort of numbers. Two very large datasets that have been posted here in the past that covered hundreds of thousands of units do not support that number. That number is unrealistically low. That's the kind of number turnkey sellers use to sucker in naive investors who don't know better. Building a business based on that number will result in failure when the cows really come home and those big capital items start hitting. If you're building a portfolio of properties you WILL be replacing roofs, appliances, furnaces, and sewer lines on an ongoing basis. You WILL have tenants that wreck the place. You will have lengthy and expensive evictions.

First time I every shot craps I started with $200 and walked away with a purple, $500 chip. But I'm not naive enough to think that's a normal outcome.

So, @James Z. use whatever assumptions you want when making investments. I personally do not use a number like Joe's unless I'm willing to manage the property myself and willing to contribute that labor for free. No matter what assumptions you make up front reality will be whatever it will be. If you have just a few properties you may get lucky like I did at that craps table and have very low expenses. Or you might have a really big expense like I did on one of my properties last year where I spent over 50% of the year's rent just replacing a sewer line. This business is chock full of property listings that say "this cash flows" when all the seller or their agent really means is "if you put 20% down and get a 30 year fixed rate loan the PITI will be less than the rent."

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
@Joe Villeneuve you're claiming that ALL Expenses, ALL vacancy and ALL capital amount to $330 out of $975 of rent. That's 33%. You may well have seen those sort of numbers. Two very large datasets that have been posted here in the past that covered hundreds of thousands of units do not support that number. That number is unrealistically low. That's the kind of number turnkey sellers use to sucker in naive investors who don't know better. Building a business based on that number will result in failure when the cows really come home and those big capital items start hitting. If you're building a portfolio of properties you WILL be replacing roofs, appliances, furnaces, and sewer lines on an ongoing basis. You WILL have tenants that wreck the place. You will have lengthy and expensive evictions.
First time I every shot craps I started with $200 and walked away with a purple, $500 chip. But I'm not naive enough to think that's a normal outcome.
So, @James Z. use whatever assumptions you want when making investments. I personally do not use a number like Joe's unless I'm willing to manage the property myself and willing to contribute that labor for free. No matter what assumptions you make up front reality will be whatever it will be. If you have just a few properties you may get lucky like I did at that craps table and have very low expenses. Or you might have a really big expense like I did on one of my properties last year where I spent over 50% of the year's rent just replacing a sewer line. This business is chock full of property listings that say "this cash flows" when all the seller or their agent really means is "if you put 20% down and get a 30 year fixed rate loan the PITI will be less than the rent."
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Account Closed
Investor · Waynesville, NC · Member since 2014 · 408 posts · 121 votes
12y
I completely agree with @Jon Holdman on the expenses. Properties will look great in terms of cash flow after a renovation and few things are going wrong. 5 or 10 years down the road you start having problems with refrigerators, stoves, heat pumps, gutters, frozen pipes, dead beat tenants, and everything else in the world. There is absolutely NO WAY around it. Yes, things look great on paper when you only consider the short term. But if you are seriously wanting to make a living doing this you better use realistic numbers or you will be in for a rude awakening.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
So Joe, while I am still not doubting the existence of your funding source, I have to say I agree with the others on your expense accounting.
I went to your website, and looked at the things you have for sale. 5413 Robinson, in Dearborn Heights. You are asking $75,000. Estimated rent is $1050 a month. Not great, for $75k, but not awful. But you state NET cash flow of $810 a month, after taxes and insurance of $240 a month. That is ZERO for maintenance, capex, property management and vacancy. ZERO. That is absurd, and if that is what you are teaching your students, or pitching to your buyers, you should be ashamed.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
And it gets worse. I downloaded the flyer PDF, and looked up a few of what you are claiming are comps. They're absurd. A house 45 years newer 2 miles away is not a comp.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
You list 3907 Detroit Street as a comp, with a sale price of $69k. That's a 3/1, 1000 sf ranch about a mile away. But there is a 3/1, 1000 sf ranch just around the corner, at 5386 Zeigler, currently listed at $49k. And another 3/1, 1000sf ranch at 5394 Zeigler, listed at $42k. Both far closer to your listed house.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
And how could you miss some of the recent sales, all much closer than some of the ones you list? Like 5445 Robinson Street, just what, 3 houses down the road from your house at 5413? And a 3/1 with 1300 sf? That sold on December 6th, 2013 for $27,500.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
So at the end, I guess your private lending source must be, frankly, an idiot. Because he is lending at an actual LTV of something over 100%.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
I'm sure this comes as a nasty shock, but it turns out that the rent on your listing must also be a typo. Because a quick glance at the properties currently for rent in Dearborn Heights reveals that $1050 cannot possibly be right. Maybe it was supposed to be $950? Or maybe even $850? Because $1050 in rent gets you newer, larger houses in nicer neighborhoods.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
It's tough, doing the math on the real estate stuff. And I find it is really, really tough to determine how good an investment is with any significant number being wrong. And when it is more than one? Wow. I really have to hand it to anyone who can evaluate a real estate investment with bad numbers for maintenance, capital expenditures, property management, vacancy, FMV and market rent. That's a pretty special skill.
I mean, if I were trying to do that evaluation, I have to admit I would basically just be pulling numbers out of my bu ... out of thin air.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
12y
Richard, How do they treat foreclosures as comps in Colorado.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Terence Wang
I do it every day of the week and its all Mezz... and I do far better than 15 to 18% for my investors.
but to answer the 150k question I think one of the best and quickest ways to create cash is to build new construction IF you can get bank financing on the vertical.
So take my market of Portlandia Oregon. my bank will finance 90% of my projects at 1 point and 5.5% So a 300k all in project I need 30k.. and we make about 12 to 16% net on the project so about 36 to 60k per home.. and we do it in 9 months or less per home.
And occasionally you get much better deals and I know guys on the east coast do way better than we do.. So I joined them out there. And I have 6 projects going in the Carolina's currently and the numbers are stupid good. One my cash out is 45k and my profit is 105k and its presold.. So that how you make bigger dollars in the RE game.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Jon Holdman
could not have said it better about the false representations that sellers be them TK private or whatever promote... But people want to believe. your dead on on this point.
my experience with mid to lower end rentals and I have owned hundreds of them is expenses are easily 40 to 50% over time and sometime worse if you have a trashed unit.
If you buy A type properties in low tax environments you can maybe get to 35% or IF you SELF manage that number comes down.. But going the TK route you will never ever hit anything much less than 40 to 50% OVER TIME.. there is always the honeymoon period IE the first year or two... Then reality sets in and we never hear from the investor again :)
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Joe Villeneuve
IF ARV is 180 k why can people buy them everyday of the week for 20 to 30% less than ARV.. I submit that ARV is a figment of everyone's imagination.. and that the true value is willing buyer willing seller or what your paying for the property IE much less.
And banks are falling back into the trap that got them in hot water again.. Loaning on ARV that are not real.. and when people walk banks get hosed.
So I would like you to explain why if your paying 130k for property why its worth 180k and not the 130k you just paid for it. all things being equal.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Richard C.
your spot on .. in the day us HML use to use ARV.. I would not even consider it today. Its cost lend on cost not ARV.. If you lend on ARV you are definalty taking a huge risk. in this asset class.. that being lower end rentals. And to compound it the borrower had no skin in the game and is 100% leveraged another idot idea and one I would not partake in.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Richard C.
your my new hero.. thanks for calling BS when you see it sometime I feel like the lone ranger here on BP :)
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
12y
We have a lot of foreclosures in the area. Just that simple. There are a lot of what you see as low comps, that are just the most recent foreclosures sold. Those properties need a lot of work. When done, those are the properties you see sold with the higher comps. You are correct in your overview of what the normal market presents. I don't live in a "normal" market. That 180 comp, is based on 135 cost...which includes the rehab we had to do on a house that we bought for 60. The numbers you see are all facts of life in this area. Like I mentioned in an earlier post. This area is what could be described as the perfect storm of foreclosures, new renters, property values that have dropped like a rock, but are climbing steadily (slowly though). We have the Banks, HUD, FM, etc... sitting on a number of foreclosures...just letting them out in small enough groups to not bounce the market up and down. The results are what I posted. Properties that can be bought low, and when rehabbed can justify the higher sales comps on them because they are basically a new house.
JV
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Joe Villeneuve
And how many of these homes are being bought by investors and how many by home owners? its the same message in all markets in that asset class....
If the properties are such great deals and rentals WHY is it a foreclosure CLUSTER.. there are reasons for this... ONe landlords are failing left and right because of ongoing management issues and being sold on how EASY it all is when in fact it is not. And because anyone who can afford a 150k house is not going to buy in an area that is predominatly rental the schools are usually poor etc.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
Even if I were to grant your point on the foreclosure comps (which I don't) please explain how having a lot of foreclosures in an area results in zero maintenance expenses, zero capital expenses, zero management expense, and zero vacancy. Because those expenses need to come off the top if we're talking (as you do on your site) about NET cash flow.
Also explain why if I wanted to rent a house in Dearborn Heights (something I cannot imagine ever doing) I would rent the one you have listed at its purported rent of $1050 a month when 5 minutes on rentlets or craigslist uncovers dozens of larger newer houses in better neighborhoods at that price point, or similar houses in similar neighborhoods for $200 less?
I find it telling the thing is being marketed to prospective landlords. I strongly suspect a cash sale will be required, because an appraisal will never support that price. So I suppose O/O are out.
The only number that looks even close to good on that whole sheet is $240 a month for taxes and insurance. Which I kind doubt, actually.
If what you are training people in your courses is how to slap some lipstick on a pig and sell it to newbie investors on the basis of made-up numbers, you're certainly not doing the world any favors.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
Originally posted by @Jay Hinrichs:

@Richard C.
your my new hero.. thanks for calling BS when you see it sometime I feel like the lone ranger here on BP :)
I'm strictly small time as a real estate investor, but I'm not an idiot. No one with any experience at all could believe those numbers, which is why Joe clearly does not believe those numbers. Hell, if that house will really cash flow $840 a month with an investment of maybe $40k, why would he ever sell it?
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
12y
OK. You found houses on CraigsList...a fine site that we use to find deals on. I have one really basic questions though for those who doubt my numbers. How many of these houses that you are using to shoot down my numbers have you walked through and verified their value and condition? I don't mean similar looking ones in your states. I mean these actual houses?
JV
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
12y
As far as why would I sell it? I have partners that got into it with the idea of selling it. That was the game plan from the beginning. When this is sold to one of the people already interested in it, my profit will be used to move onto the next house.
JV
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
12y
@Joe Villeneuve
give it a rest man... the hood is the hood end of story. ARV is an allusion that out of country owners and out of state investors fall for.
why would anyone sell a property that is worth 180k for 130k on a public forum.. this whole idea of buying form TK operators with BUILT in equity is just such a farce.
Its worth only what a willing buy and willing seller will settle on no more no less
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
Originally posted by @Joe Villeneuve:

OK. You found houses on CraigsList...a fine site that we use to find deals on. I have one really basic questions though for those who doubt my numbers. How many of these houses that you are using to shoot down my numbers have you walked through and verified their value and condition? I don't mean similar looking ones in your states. I mean these actual houses?
JV
Still waiting for the explanation of how you run rentals with no maintenance, capex, management or vacancy. Or in the alternative, your explanation of what the word "net" means.
Is there something special about Dearborn Heights, Michigan that causes houses there to never require maintenance? Or property managers to work for free? Do people in Dearborn Heights not use water or sewers? Is there such a shortage of housing that there is never vacancy? And if so, why has no one told the landlords trying to rent their houses, or realtors trying to sell them?
I don't need to walk through your house. Even if accept your rent number, I know the cash flow you are advertising is fanciful. I know that even if you just replaced the roof, it will need to be redone in 20 years. I know that a new boiler isn't much less in Michigan than it is here. I know that property management costs money.
Your numbers are realistic only in a land where leprechauns commute to work on unicorns.
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Richard C.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
Originally posted by @Joe Villeneuve:

As far as why would I sell it? I have partners that got into it with the idea of selling it. That was the game plan from the beginning. When this is sold to one of the people already interested in it, my profit will be used to move onto the next house.
JV
Your partners (and yourself) are that willing to pass on 25% returns?
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Tara Piantanida-Kelly
Investor · Caledonia, NY · Member since 2013 · 114 posts · 41 votes
12y
So many options if/when you have $150k... It depends on how active or passive you want to be...
Be the bank (very passive): offer it at 10%-12% interest for a year (or two or three...) to active investors to do their deals. The note, secured by real estate, would generate $1250 - $1500 per month mailbox money with the entire principal ($150,000) returned at the end of the term.
Be the landlord (less passive, even with property management in place): use it as the down payment and closing costs on a $600,000 apartment complex. Depending on the property, if you have a 13% cash on cash return, you would get about $19,500 annually in cash flow (not to mention the principal paydown, appreciation and tax benefits). Or, rather than buying one $600,000 property, you could use it to make 25% down payments on multiple properties. Or you could buy one (or two or three) turnkey properties for cash. Returns would vary.
Be the flipper (very active): use it to purchase, rehab and sell your own property deals. The returns would vary based on the deals.
Another strategy (but one that might require some education): buy notes and/or property tax liens. These strategies would put you somewhere between being the bank and being the landlord.
If he wants to be the bank, have him give me a call!
Cheers~
Tara
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