All Forum Posts by: Megan Silver

Can anyone explain to my why it's so important to worry about cash flow or cash on cash ROI when you have a property with an excellent cap rate? Why should the initial returns matter so much to buy and hold investors?

Here's my concern:

If I put 10,000 into a mutual fund this month and $50 each month after that (total of $9k), in 15 years I would have about $34,000. No one I know would consider this a "bad idea." (Though, there are certainly better ways to invest your money.)

However, if I put $10k down on a $180,000 multifamily property that has even a -$5 monthly cash flow due to a 15 year fixed rate loan, the consensus on this site seems to be it's a "bad deal."

Now I agree that it's not a perfect deal, but if I can secure it with low money down and seller financing, I feel like it would be excellent to spend a couple bucks out of my own pocket each month (if I even have to, since I run my numbers so conservatively) to have a multifamily property that is entirely paid off in 15 years. The cash flow after that point would be great and the whole property (minus a few repairs) is paid for by tenants.

I have a day job that I enjoy and I have other cash flowing properties already that more than make up for one that doesn't. We're not trying to retire tomorrow.. but would maybe consider it 15 years from now.

Bonus Question:

If I were to get a 15 year loan and plan to use an exit strategy of refinancing for a 30 year at some point, what kind of deals are available to refinance? I assume I'll need equity of least 20-25%. My typical lender sent over these refinancing requirements, and I'm not sure they are typical:

1.You must have 6 months in reserves for the subject property and an additional 2 months reserves for every other property you own.

2.You can have a total of 6 properties financed.

3.On a refinance the loan-to-value must be below 75%.

4.There is a minimum loan amount of $50,000.

Let me know if I'm way off base or seem to be missing something.

 Thanks a bunch! I am also a fan of mid-range properties. The hardest properties to rent (in my own experience) are the best house and the worst house on the block!

I think @Julie McCoy is absolutely right that since we can't afford a mid-range property, we aren't going to get the best rates and occupancy. @Mark S. also makes an excellent point that we probably don't even want to deal with the vacationers taking the cheapest options.

@Wendy Schultz - If I could devote more time either to the management or fixing a place up, I'm sure I could make the numbers work, but I suppose that what I'm really looking for is a cool place to vacation, not a new project. I think our limited options due to cash constraints would likely force us into the "wrong property." We were primarily looking at condos because of the amenities that WE would be interested in, not because they would bring in more money. That should have tipped me off that I wasn't properly balancing the investment potential with our vacation desires.

I think I will keep an eye out for a gem on the coast in the future, but I don't think I'll pass up a deal here at home in the meantime.

Also, I may need to hit the beach this weekend!

The biggest problem I'm having is accurately running the numbers. I'm looking at property management fees ranging from 10-30%, miscellaneous fees/costs at varying intervals (cleaning, furniture replacement, special assessments), nightly rental rates ranging from $50 to $150, and totally unknown vacancy rates that vary drastically from building to building. The only numbers I would know with any reasonable accuracy are costs for utilities/phone/cable, insurance, property taxes, HOA fees, and mortgage payments.

I suppose the best way to do it is to start requesting information from the listing agent and the condo association for each of the properties we are looking at, but I'm so used to being able to do my own analysis on properties before reaching out to anyone. 

I realize that I could be making more money doing real estate if I spent more time getting into a totally new niche, but I’m pretty happy in my day job for now, and I’m not ready to give that up. I’m willing to venture out a bit, but I don’t have the time to go all out into a new career. I could certainly benefit from learning more about buying foreclosures, but don’t have much time to fix anything up (other than a weekend project here or there) so I’m not able to buy anything sight unseen. I have bought a short sale before and that worked out quite well, but we’ve tied up quite a bit of our cash for now, so buying properties with cash isn’t likely in the cards for us right now. 

As for 30 years.. With our current debt snowball plan we will be debt free on all of our existing rentals in just over 7 years (even if we never increase the rent - which we of course will be doing). That’s not too bad for a part time gig.

*An additional consideration is that we WILL be financing the deal with only 20% down. That alone may preclude us from cash flow. It is my understanding that for investment condos, we can expect 6%+ interest rates if we insist on a 30 year fixed rate from the few lenders who will even consider non-warrantable condos.

TL;DR: We are good at long term rentals, but we want a beach house. Is that a bad idea?

Background: My husband and I own a few (mostly local) long-term rentals that all have a positive cash flow. While I'm not finding the amazing numbers that some might find in other areas, I run very conservative numbers prior to purchase and usually get a better return than I anticipate. 

We know our own area well, and can almost always find deals that we'd like to pull the trigger on, but until we accumulate more cash, we can probably only purchase another $100-120k in property before we slow down and wait for our debt snowball to catch up (pay down the HELOC and eliminate the cheapest mortgage to open up standard financing options again).

Here is the conundrum: Another local long term rental (or two) would be a great decision, BUT a beach house sounds like a lot more fun.

Specifically, we are 2 hours away from Panama City Beach, and we are curious to get into a new type of real estate. We have the cash to get 1-2 places locally, or get a tiny beachfront studio that we could occasionally make use of. My husband would definitely want to use it once per month (even in winter) since he is a reservist in the coast guard there.

Do we boost our retirement fund by taking a more conservative approach at home, or do we get a property in PCB that allows us to pretend we're already retired for 2-4 days a month?

Considerations: 

- It's hard (maybe impossible?) to find a short term vacation rental property that will cash flow - especially of the small 350-700 sq. foot studios we can afford right now. (Any advice on this issue would be most helpful!)

- There are so many fees/costs and restrictions to consider. I am not excited about trying to accurately estimate the expenses or cash flow, but I am interested in becoming an expert in a new niche. (I've already begun work on spreadsheets, but finding out the specific fees and management rules for each condo/condotel is daunting and I don't want to start actually shopping until I know a lot more about each condo association).

- I am totally aware of the problems with condos. I plan to thoroughly vet each association, but there's only so much that you can do to ensure they stay on track.

- Use restrictions and potential profits during the busy season may prohibit us from getting the best use out of the place.

- Appreciation will likely be better on the beach. Or a hurricane will ruin it. There's really no way to know for sure.

- I may be too practical to let myself purchase a mediocre deal and I am not interested at all in a bad deal.

I realize this is an emotional and impulsive desire to have something flashy instead of another safer, practical rental, but I want to hear from you guys: Is it possible to find a cheap beachfront studio and make enough cash to consider it an investment, or would I just be throwing money away for a slightly brag-worthy deed?

Just FYI (as it may be helpful to someone out there), here is my list of questions for consideration regarding short term vacation rental condos:

What kind of short term rentals are allowed? (minimum/maximum nights, pets, etc.)

What kind of rental income does this unit generate?

What kind of rental income do other units similar to this one generate?

What kind of management does the association provide?

Are the rooms assigned rentals randomly or based on some sort of specified system?

Are we permitted to manage our own unit’s rentals?

What fees and restrictions does the condo assn impose on rentals?

Is there a maximum number of days of residency per month/year, etc?

Does the association provide water, electricity, high speed internet, cable, etc?

What kind of passes/permits/wristbands etc are required to access the amenities?

What kind of local regulations are there on short term rentals?

Has the association voted to waive funding of reserves at any time in the condo’s history?

Are the reserves fully funded currently?

Do the governing documents permit the association to waive funding of reserves?

Are there any special assessments in recent history or are any pending?

Are all advertised amenities in working order? (All pools are usable etc.)

What are the typical costs of utilities, property taxes, insurance and the cost of furnishing the property in a manner consistent with the rules? Who pays for damage to the furniture, missing dishes/utensils, etc.?

Are there rules for interior furnishings/decor?

What kind of preparations are provided by the management for storms/hurricanes?