All Forum Posts by: Ethan M.

Thank you all so far. These different ways of thinking about it are all very helpful. I guess one point of clarification I am wondering about is this. It makes a lot of sense as several of you have said to ask: am I okay owning this property and not getting any income ever? However, one way in which I do expect a kind of return, even if it is not realized any time soon, is through appreciation. 

Maybe we never sell the place, and that's okay, but part of the calculus here is that we are building up considerable equity just in case. Moreover, I also do hope that I can use the equity we do build at some point in the future to pull out cash for a downpayment on something else. I talked with a lender who said that this should be possible (nothing is 100%) but that doing that doesn't require positive cash flow on the property in question; it is more a function of one's general finances, appreciation on the property in question, and of course interest rates -- i.e. can you afford the new mortages.

I'm curious if any of you have thoughts on whether my hopes/expectations regarding appreciation and future financing seem accurate to you all.

I am considering the possibility of buying a property through unlisted channels that would cash-flow negative. To be precise, my analyses show that it would cost somewhere between $20-25K per year while renting. So that's not great. 

But here are the reasons I'm considering it:

1. My hope would be to rent this property part of the year and occupy it during the summer. It can be a place to enjoy. It also has meaning for my family. I.e. it's a place we would use and that we want to own for non-commercial reasons.

2. My goal would be to make improvements to the property. It's a property with a great view, but with a house that could be improved. So I think there's room for forced appreciation. 

3. In about five years, my hope is to be able to do some kind of cash-out refinance to buy another property, holding onto this one. 

What I wanted to ask here is related to the negative cash flow. That level of negative cash flow makes me a bit nervous. It does mean that if things turned bad in the market in ways that affected me I might be forced to sell. I'm aware of this risk. I know that the purely safe play would be to buy in some out-of-state market, but like I said this is a property in which I have interest and I'm trying to gauge whether it's a reasonable risk to take.

So what I want to ask here is: what kind of questions do people here ask themselves when considering deals that have elevated risk like this. (I imagine that this question might be more generally interesting to people here given that so many people are likely in an environment in which it's no longer realistic to break even or cash-flow positive in so many markets). 

I thank you in advance for any thoughtful answers. Also happy to provide some more detail if needed.

I've also been looking at Rochester lately as a place where the RTP is a bit better than in many other markets. I am a first-time investor and am looking for a location (hopefully) where I can get decent appreciation while not having the risk of crazy negative cash flow (like one sees when doing the math on opportunities in Seattle, for example). How would people here assess future appreciation in Rochester? Has the pandemic driven more interest in the city?

@Taylor L. are there any specific faults you see in their data connected with that particular business? I don't immediately see any reason that their basic home value and rent indexes should be considered fundamentally flawed based on that connection. I can think of a lot of reasons a particular business initiative might fail other than flawed data, and these indexes are more fundamentally part of their core business that seems to have done quite well. Of course, any dataset has assumptions built into it...and I admit I'm not sure what those are in this case. 

I recently did some data crunching on Zillow's public datasets. I wanted to see what markets have both a relatively high rent-to-price ratio and high appreciation. I came up with this list:

I'm somewhat confident in the data, but not 100%. It's my first time working this data. I'm very suspicious of the numbers for New York and the appreciation for Lakeland, FL looks like a funny outlier. I don't have much actual experience with many of these markets. I'm curious what other people think of this list. Does it line up with experience? Does it look radically off? What questions do people have? 

I generated the list by combining Zillow's smooth, seasonally adjusted home value dataset (ZHVI) with their rent index (ZORI) for metro areas. Then separately I calculated the appreciation against each home value observation in the ZHVI dataset against its value 10 years earlier for each month. The numbers listed are the mean of the values for the twelve months ending this January.

@John Clark your language seems unnecessary shrill. I think you misunderstood my meaning, which may be understandable given what I wrote. Really, instead of "local markets that make sense for me are all coastal" I should have written: "the markets that are local to me are all coastal." I've got nothing against locations in the midwest, except that my ability to understand those markets is limited by lack of personal exposure and contacts (though I have lived in the midwest). With respect to wanting "creme de la creme appreciation", I don't think I have a high standard there. What's been immensely valuable about the comments of so many on this thread has been the detailed discussion of the various ways of understanding the relationship and relative importance of cash flow and appreciation. That's what I've been learning from on this thread, and I feel quite thankful for all the careful observations people have made so far. 

Thank you all for the helpful discussion. I'm finding this counter perspective to the cash flow approach useful given my needs. It makes sense to me that appreciation on leveraged assets is a powerful combination over time, even if cash flow isn't great. I wonder is there some sort of formulaic guideline that one could use to gauge what is a reasonable amount of negative cash flow for a given property. Maybe something that captures its relationship to potential or expected appreciation? Does such a measure exist?

@James Burrow

I have been wondering about this dilemma as well. So far in my area around Seattle there is absolutely no chance for positive cash flow. Most properties I see have a 0.3-0.45% rent-to-price ratio. That usually translates into pretty severe negative cash flow predictions on the order of $500 to $1600+ per month. Not good.

So my question has been how do we think about investment now. You can go out of state to chase the 1% rule but so far I have struggled to identify markets where this rule can be applied.

I found an article on here that arues that the 1% rule no longer makes sense to apply in most markets. Instead, it says we should aim for individual deals with rent-to-price above 0.7%. Of course that's also not possible in the Seattle area unless you are super lucky. But maybe lowering the standard helps make more markets viable. Here is the article: https://www.biggerpockets.com/...

What I don't understand though is that objectively using 0.7%+ as a rule involves taking more risks that a deal won't be beneficial perhaps especially if you are just starting. But how can we understand these risks and mitigate them? I guess the point is that at that rent-to-price you will need to subsidize the living costs of whomever rents the property and that can be worthwhile to build equity. The benefits of appreciation are great enough that it's worth entering into such a deal....?

I'm just think out loud but I am curious what you or others here think about this article... Is it reasonable and wise to adjust the 1% rule in this way, or is it just a rationalization of bad deals that allows us to continue to participate but at greater risk. Maybe the first time investor needs to be more wary of this approach?