Struggling to make properties work in my area

[Joseph M Limpert]

Since I signed up for my BP membership, I have been pretty diligent about trying to evaluate at least a few properties every day.  Originally, just to get reps in I was utilizing the rental calculator for everything just to try and validate my preconceived thoughts on if something was going to cashflow or not.  It basically all but confirmed for me that anything that doesn't hit at or is really close to the 1% rule is just not going to cashflow... at least not with the inputs I am using, I could manipulate things to "make it work" but the assumptions were based on deep discounts, getting into a lower interest rate down the line, or 0'ing out things like property management.

In order to run through a lot more properties I have recently transitioned to doing a bulk scrape by zip codes of the MLS to look for anomalies in $/sf and to do a 1% rule check. Anything that is a 0.9% I will run just in case. Ultimately what I have found is that I can get a lot of properties close but nothing I have found so far will actually cashflow at least not with what I am evaluating off of.

My general inputs have been the following:

Purchase Price: Input list and manipulate down from there. 

Closing costs: 1.5% of purchase price.

Down payment: 20%. (Cashflow doesn't get better if I go lower)

Interest rate: 6.5% to 7%... basically whatever the rate is that day.

Loan terms: 30 yr

Income: depends on the BR/BA configuration but I am checking with BP and rents available on various listing sites based on comparable properties.

Property Tax and Insurance: taking from what my realtor's software is providing me as an estimate.

Repairs / Vacancy / Capex / Management: 5%/5%/5%/8%

All other expenses are on the tenant.

Is there something that looks wildly off with my inputs?

What is a reasonable % discount to shoot for off list?

Should I start assuming that I will make the seller cover closing costs based on the market?

Should I accept short term negative cashflow knowing that right now I don't have a mortgage payment and getting a property gets me off the sidelines and at least paying down something with someone else's money.  The other expectation being I might eventually be able to get a better interest rate down the line.

Do I need to move on from MLS searches and transition to a wholesaler or doing my own direct mail? I don't have the capital to be a cash buyer unless I took money out against my primary residence which I would prefer not to do.

Really trying to figure out where I am missing the boat, so I appreciate any feedback.

[Randall Alan]

@Joseph M Limpert

It's probably not you... it's the market conditions.

I'm over in Lakeland and can tell you that at 7% interest, very little will cash flow well at all.  I don't think that will change until the mortgage rates get back into the 5's or so... which I have been told could be toward the end of this year.  It's a double edged sword though... the Fed jacked up the rates, and then property values have just run up with inflation.  It's a losing combination.  The Fed is doing their thing to drive the prices back down... so hopefully we see improvement on both fronts.

One suggestion for you on searching.  Redfin is one of the few websites that lets you sort properties by $$/sf.  This is at least a way to see the cheaper properties in the market.  It doesn't tell you their condition... but you can quickly figure out that $200/sf at 7% interest isn't going to work on an investment property, so that is 90% of the properties you don't have to even glance at in the listing - and the fact that they are presented in price order is pretty convenient. 

Asking if you should accept short term negative cash flow is a no-go for me... unless you know you can raise rents that are for some reason are low to get your cash flow positive.  By saying "yes" to negative cash flow, with the thought "Oh, I can always refinance later" neglects the fact that it will cost you at least $3,000 to refi your property.  It takes YEARS worth of payments to pay down the loan by $3,000... so in my book that is a losing proposition.  You are just managing the properties for free in the meantime and paying repair expenses you don't have to because it isn't going to get you ahead.  I get that it gets you the property... but if negative cash flowing, it is costing you every month to own it, you have to manage it (your time), and when you refi you go $3,000 further upside down.  Makes no sense.  You don't get into the game to lose money every month and to lose more money when you finally say, "Ok, now I can start making money".  If market dynamics hold true, higher interest rates should force housing prices lower, so you should find properties cheaper the longer you wait with higher interest rates.

All the best!

Randy