All Forum Posts by: Nathan Hui

Hey Nathan,

Brandon's input is spot on. Also, PMI for a $190K loan will run you around $140-$160 a month. Eating further into your cash flow.

I also think your property tax expense is off by a substantial amount. The current property tax the owner pays, even if it's a 2018 tax year record, will often be based on the appraisal/purchase price that the current owner bought it at. If the current owner bought it several years ago at a significantly lower price, then appreciation occurred, the property taxes they are paying will be substantially less than what you will be paying. In my area, a purchase of around $190K will result in about $3,500 of property taxes a year. Cutting even deeper into your cash flow.

- Lucas Duce

Unfortunately, this is a pretty ugly deal as it currently stands.  This doesn't make matters any better but items such as vacancy, capex and repairs should all be increased a few percentage points higher, 8% being one I commonly see.  You'll also want to account for your exterior maintenance for lawn and landscaping.

If there are any common areas within the complex (i.e a shared entry, hallway with mailboxes, laundry room, etc.) you'll also need to factor in utility expenses for electric and likely gas.

Even without all the increases, the property is too much and/or the rents are too low in order to obtain a good return.  The cash flow is pretty atrocious as many investors would like to see at least $4,800 ($100/door) the first year, and in your scenario, you wouldn't see that until almost year 15.

Your cap rate and CoC ROI don't look bad, but they are likely artificially inflated by the financing structure you have laid out. Unless you have been quoted for an interest rate of 4% and a minimal down payment, you're more than likely going to be staring more at something in the 5%-6% range with 20%-25% down, which will completely kill the aforementioned metrics. In order to get that down payment, you may have to house hack it which then reduces you revenue by 25%.

I would start with checking the rent against comps in the area to see if there is any room to raise them.  If not, I'd simply move on, but if you can and/or the seller would be flexible on a lower price, it may warrant a second look.

Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

Cashflow allows you to retire, but growth rate lets you build an empire.

One of the best posts I've read in a very long time!!!

@Nathan Hui cash inflows are nice, but true wealth is built from growth. I have TK's that cash flow, but if I could go back in time, I wouldn't do any of them again. The only person to whom I would recommend TK's is someone who wants to spend a minimal amount of time with their real estate investing and will be happy with 4-5% returns (don't believe the 9% rosy figures they try to pass on to you). You're making other people rich if you invest in TK's.  

I feel as it is common practice for most investors who are just getting started to be attracted to the "cash flowing/cash cows."  I was definiltey one of those investors.  Finding/ buying anything that would "allow me to retire by the age 30" and I personally think that is the one negative about Biggerpockets.  It had me so anxious to chase cash flow.  

BUT.....

Buying those properties taught me great great lessons and I still own all of them today, and has allowed me to progress in my investing career.  I will eventually sell most of them and do 1031 Exchanges once the time is right, but the fact of the matter is , I have to wait for the forced appreciation and the slow slow equity pay down from my tenants to do this for me.  These lower income rentals that are "cash cows" will never appreciate, and could potentially depreciate.  So I am collecting the cash flow now, allowing my buying power to slowly increase due to Net Worth Increase and experience build up, which is allowing me to purchase higher "value" property.

I think it all comes down to reaching your NOI goal. How you get there is up to you. IF you want / need lets say $250,000/ yearly income , then you have to find a way to generate $250,000 NOI / year. Whether that is through 500 rentals, 50 rentals, or 1 unit (maybe you own a high end AirBnB somewhere), again everyones strategy is different.

Good luck and happy investing!  

 Were do you wanna start? I have a lot of stories.

• Have had tenants set cars on fire at my motel
• Have had a tenant try to set my personal house on fire
• Have had tenants throw couches out a 3rd story window
• Had to evict a tenant 5x's
• Evicted a tenant who drove off in an Escalade
• Had a tenant crash his car into the house and then beat his girlfriend
  
• Have had more overdose deaths than I can count
• Have had gunshot to the face suicide in the apartment
• Have had hanging suicide in the apartment on christmas of 2018