Offer prices for buy and hold single family rentals
Southeast Michigan · Member since 2023 · 23 posts · 13 votes
Offer prices for buy and hold single family rentals
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One of my most profitable deals was negative $800/mo cash flow. A lakefront townhome on lake Minnetonka. It was still making about $1,000/mo in profit because it was paying down the loan $1,800. Every year the rent went up and the percent of the payment that was interest went down.
Honestly. Anyone that NEEDS $100/mo positive cashflow isn’t ready to invest in real estate. Bad fridge? There goes a year, bad water heater, there goes a year, insurance claim, there goes a year, ac unit, there goes 4 years, roof, there goes 6 years. In real life it should not matter if it’s positive or negative $100. That’s all relative and it’s all temporary.
It also matter if it’s negative $100 and the rent is $600/mo or $3,600/mo. Are you raising the rent $25/mo per year or $200/mo. If you plan to own the property for 10-20 years it’s stupid to look at year one numbers, to put it kindly. When you start assuming capex for an eventual roof and an eventual ac and eventual other things. Why are you calculating future expenses but only current income? Start calculating future income. At least use a “first 5 years average” at least.
You will look back 8 years ago when the payment was $850/mo and rents were $1000 and say, why didn’t I buy them all? My parents barebones 1400sf starter home was a mind boggling $25,000 when they bought it 50 years ago. The only reason they got it is they inherited $500. 50 years later it’s worth north of $400k. And that’s only 4 doubles. 6%/year. If you’re young enough to be alive in 50 years imagine your homes being worth 8x as much. Life changing money.
Most of us will be alive to see a million dollar average home price. That used to be mansion pricing. I’ve said it before. I bet the top regret of the average BP member that has bought more than 5 houses is the one they didn’t buy. It’s not any one of the properties they bought.
12 Replies
- 3yJonathan Taylor SmithBusiness MemberRental Property Investor · Durham / Raleigh (Triangle), NC · Member since 2015 · 841 posts · 803 votes
Cash-flow is certainly important, but it's not the only way you make money from rental properties - there are at least 4 others. Also, it should be called "first year cash-flow", as you can raise rents, get better priced insurance, dispute taxes, rehab the property to lower future repairs and capex, negotiate property management fees as you bring more properties onboard, improve processes and marketing to lower vacancy expense, refi when rates decrease, etc... And for me, the tax benefits alone may still make a property worth buying even if cash-flow is -$500/mo. So, to answer your question, I do not look at cash-flow alone... I consider all 5 ways a given property makes money to determine if it will be profitable overall, along with what cash-flow is likely to be 2 or 3 years out.
Blue Chariot Realty & Management4.915 Reviews - Southeast Michigan · Member since 2023 · 23 posts · 13 votes3y
Just to clarify, by cash flow I mean your profit after all expenses are accounted for. PITI, cap ex, vacancy, etc.
- 3yJoshua JanusBusiness MemberRealtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
Quote from @Michael Kotylo:
We all know retail prices are high, what criteria are you using when writing and presenting offers on single family homes? Currently I'm finding the number that will cash flow $1 after mortgage and variable expenses and making that my highest and best offer. Starting with what will cash flow $100. For contrast, I'm finding most list prices negatively cash flowing around -$180/mo. Maybe I should be starting with the number that cash flows $200/mo and ending at the number that cash flows $100/mo. Interested to hear what everyone else is doing.
In Cleveland, Ohio after all PITI + reserves for PM, maintenance and capex the goal would be to get $300 monthly net cash flow off of a 80-120k Single family.
- Southeast Michigan · Member since 2023 · 23 posts · 13 votes3y
Quote from @Joshua Janus:
Quote from @Michael Kotylo:
We all know retail prices are high, what criteria are you using when writing and presenting offers on single family homes? Currently I'm finding the number that will cash flow $1 after mortgage and variable expenses and making that my highest and best offer. Starting with what will cash flow $100. For contrast, I'm finding most list prices negatively cash flowing around -$180/mo. Maybe I should be starting with the number that cash flows $200/mo and ending at the number that cash flows $100/mo. Interested to hear what everyone else is doing.
In Cleveland, Ohio after all PITI + reserves for PM, maintenance and capex the goal would be to get $300 monthly net cash flow off of a 80-120k Single family.
This makes perfect sense, especially in a correcting market. I don't understand how anyone could make negative cash flow situations work. Perhaps it works for a certain type of investor with other existing income from rentals to cover the negative cash flow in the short term.
- Columbus, OH · Member since 2023 · 427 posts · 254 votes3y
Quote from @Michael Kotylo:
Quote from @Joshua Janus:
Quote from @Michael Kotylo:
We all know retail prices are high, what criteria are you using when writing and presenting offers on single family homes? Currently I'm finding the number that will cash flow $1 after mortgage and variable expenses and making that my highest and best offer. Starting with what will cash flow $100. For contrast, I'm finding most list prices negatively cash flowing around -$180/mo. Maybe I should be starting with the number that cash flows $200/mo and ending at the number that cash flows $100/mo. Interested to hear what everyone else is doing.
In Cleveland, Ohio after all PITI + reserves for PM, maintenance and capex the goal would be to get $300 monthly net cash flow off of a 80-120k Single family.
This makes perfect sense, especially in a correcting market. I don't understand how anyone could make negative cash flow situations work. Perhaps it works for a certain type of investor with other existing income from rentals to cover the negative cash flow in the short term.
Could maybe make sense for a BRRRR or if you're banking on long term appreciation covering short term losses. Otherwise keep underwriting with the goal of seeing positive cash flows.
- Southeast Michigan · Member since 2023 · 23 posts · 13 votes3y
Quote from @Jonathan Taylor Smith:
Cash-flow is certainly important, but it's not the only way you make money from rental properties - there are at least 4 others. Also, it should be called "first year cash-flow", as you can raise rents, get better priced insurance, dispute taxes, rehab the property to lower future repairs and capex, negotiate property management fees as you bring more properties onboard, improve processes and marketing to lower vacancy expense, refi when rates decrease, etc... And for me, the tax benefits alone may still make a property worth buying even if cash-flow is -$500/mo. So, to answer your question, I do not look at cash-flow alone... I consider all 5 ways a given property makes money to determine if it will be profitable overall, along with what cash-flow is likely to be 2 or 3 years out.
Hey Jonathan, thanks for your reply! Could you elaborate on how you're able to make -$500/mo cash flow work on a rental property? I don't think something like that would be feasible for most with one or two properties. Certainly doesn't sound like a wealth building strategy to me, but maybe I'm missing something important.
- 3yJonathan Taylor SmithBusiness MemberRental Property Investor · Durham / Raleigh (Triangle), NC · Member since 2015 · 841 posts · 803 votes
@Michael Kotylo - Everything depends on your situation and the specifics of the property. For me, when I first got into REI, I was paying ~$14K year after year in ADDITIONAL federal taxes beyond what was already being deducted from the paychecks of my wife and I. We bought our first two rental properties (one on December 30th of the year) and upon filing our taxes in the following year, we got a refund of $6,000! So that is a $20K difference in our tax situation. Now they didn't - but would they not have still been good purchases for us on taxes even if they had negative cash-flow? And we also got a state tax refund on top of that. Plus, both of those properties currently rent for about $600/mo above what they originally rented for... Now I am by no means telling you to IGNORE cash-flow or to proceed with a negative cash-flow deal. I am simply suggesting that year one cash-flow should not be your only determination of what is or is not a potential good deal. There are also other aspects that should be considered. I missed out on a LOT of what today would be excellent properties to own because the YEAR ONE cash-flow was not good enough for my calculation at the time - and today they would all be strong cash-flow performers... Just my $0.02.
Blue Chariot Realty & Management4.915 Reviews - Southeast Michigan · Member since 2023 · 23 posts · 13 votes3y
Quote from @Jonathan Taylor Smith:
@Michael Kotylo - Everything depends on your situation and the specifics of the property. For me, when I first got into REI, I was paying ~$14K year after year in ADDITIONAL federal taxes beyond what was already being deducted from the paychecks of my wife and I. We bought our first two rental properties (one on December 30th of the year) and upon filing our taxes in the following year, we got a refund of $6,000! So that is a $20K difference in our tax situation. Now they didn't - but would they not have still been good purchases for us on taxes even if they had negative cash-flow? And we also got a state tax refund on top of that. Plus, both of those properties currently rent for about $600/mo above what they originally rented for... Now I am by no means telling you to IGNORE cash-flow or to proceed with a negative cash-flow deal. I am simply suggesting that year one cash-flow should not be your only determination of what is or is not a potential good deal. There are also other aspects that should be considered. I missed out on a LOT of what today would be excellent properties to own because the YEAR ONE cash-flow was not good enough for my calculation at the time - and today they would all be strong cash-flow performers... Just my $0.02.
Oh absolutely, and my plan is to live in the property for 1-2 years to utilize a lower down payment. So year 2 is what I'm really looking at, but with year 0 being negative cash flow, it doesn't improve much in year 2 from what I'm seeing. It might reach $61/mo on most of the deals I'm crunching numbers on at 10-12% below asking price. Thanks for pointing out a few of the other aspects that help to keep everything out of the red!
One of my most profitable deals was negative $800/mo cash flow. A lakefront townhome on lake Minnetonka. It was still making about $1,000/mo in profit because it was paying down the loan $1,800. Every year the rent went up and the percent of the payment that was interest went down.
Honestly. Anyone that NEEDS $100/mo positive cashflow isn’t ready to invest in real estate. Bad fridge? There goes a year, bad water heater, there goes a year, insurance claim, there goes a year, ac unit, there goes 4 years, roof, there goes 6 years. In real life it should not matter if it’s positive or negative $100. That’s all relative and it’s all temporary.
It also matter if it’s negative $100 and the rent is $600/mo or $3,600/mo. Are you raising the rent $25/mo per year or $200/mo. If you plan to own the property for 10-20 years it’s stupid to look at year one numbers, to put it kindly. When you start assuming capex for an eventual roof and an eventual ac and eventual other things. Why are you calculating future expenses but only current income? Start calculating future income. At least use a “first 5 years average” at least.
You will look back 8 years ago when the payment was $850/mo and rents were $1000 and say, why didn’t I buy them all? My parents barebones 1400sf starter home was a mind boggling $25,000 when they bought it 50 years ago. The only reason they got it is they inherited $500. 50 years later it’s worth north of $400k. And that’s only 4 doubles. 6%/year. If you’re young enough to be alive in 50 years imagine your homes being worth 8x as much. Life changing money.
Most of us will be alive to see a million dollar average home price. That used to be mansion pricing. I’ve said it before. I bet the top regret of the average BP member that has bought more than 5 houses is the one they didn’t buy. It’s not any one of the properties they bought.
- 3yJonathan Taylor SmithBusiness MemberRental Property Investor · Durham / Raleigh (Triangle), NC · Member since 2015 · 841 posts · 803 votesOMG, Love It... Preach!
Quote from @Bill B.:
Honestly. Anyone that NEEDS $100/mo positive cashflow isn’t ready to invest in real estate. Bad fridge? There goes a year, bad water heater, there goes a year, insurance claim, there goes a year, ac unit, there goes 4 years, roof, there goes 6 years. In real life it should not matter if it’s positive or negative $100. That’s all relative and it’s all temporary.It also matter if it’s negative $100 and the rent is $600/mo or $3,600/mo. Are you raising the rent $25/mo per year or $200/mo. If you plan to own the property for 10-20 years it’s stupid to look at year one numbers, to put it kindly. When you start assuming capex for an eventual roof and an eventual ac and eventual other things. Why are you calculating future expenses but only current income? Start calculating future income. At least use a “first 5 years average” at least.
You will look back 8 years ago when the payment was $850/mo and rents were $1000 and say, why didn’t I buy them all? My parents barebones 1400sf starter home was a mind boggling $25,000 when they bought it 50 years ago. The only reason they got it is they inherited $500. 50 years later it’s worth north of $400k. And that’s only 4 doubles. 6%/year. If you’re young enough to be alive in 50 years imagine your homes being worth 8x as much. Life changing money.
Most of us will be alive to see a million dollar average home price. That used to be mansion pricing. I’ve said it before. I bet the top regret of the average BP member that has bought more than 5 houses is the one they didn’t buy. It’s not any one of the properties they bought.
Blue Chariot Realty & Management4.915 Reviews You're playing checkers when you should be playing chess. Location is the most important criteria. That and the value of the subject property compared to the surrounding properties. It's hard to find high initial cashflow in a good location these days, but this is where property values and rents go up faster, which results in higher cash flow after a few years as rents appreciate not to mention much more overall wealth-building profit from property value appreciation, tax benefits, and principal pay-down.
Forcing appreciation (buying the worst house on a good block and improving it to the condition of the other properties, then raising rents according to the improved condition) is a much faster way to build wealth than buying purely for nominal cashflow like $200/month and waiting. However even without an active value-add strategy, if the property is in a good location then it will do well from natural appreciation and you will have good cashflow over time through rent appreciation. In less desirable locations the initial cashflow may be higher but property values will be flatter and rents will only increase on pace with inflation if that.
You're looking at SFRs as if they're commercial or multifamily (the income approach to valuation). Single family properties are valued based on comps and others will buy them at fair market value according to supply and demand. What a potential buyer's projected cash flow might be or what their spreadsheet calculator magic ball says doesn't factor in to the sales price typically (unless in an area where only investors buy). I'd recommend making offers based on all the facts of the property and looking at the big picture, primarily focusing on location instead of current cap rate. Properties in good locations will usually do well for a buy and hold investor even if initial cashflow is low. Properties in bad locations, not usually as much even if the day one cashflow on paper is high.
- Southeast Michigan · Member since 2023 · 23 posts · 13 votes3y
Quote from @Steve K.:
You're playing checkers when you should be playing chess. Location is the most important criteria. That and the value of the subject property compared to the surrounding properties. It's hard to find high initial cashflow in a good location these days, but this is where property values and rents go up faster, which results in higher cash flow after a few years as rents appreciate not to mention much more overall wealth-building profit from property value appreciation, tax benefits, and principal pay-down.
Forcing appreciation (buying the worst house on a good block and improving it to the condition of the other properties, then raising rents according to the improved condition) is a much faster way to build wealth than buying purely for nominal cashflow like $200/month and waiting. However even without an active value-add strategy, if the property is in a good location then it will do well from natural appreciation and you will have good cashflow over time through rent appreciation. In less desirable locations the initial cashflow may be higher but property values will be flatter and rents will only increase on pace with inflation if that.
You're looking at SFRs as if they're commercial or multifamily (the income approach to valuation). Single family properties are valued based on comps and others will buy them at fair market value according to supply and demand. What a potential buyer's projected cash flow might be or what their spreadsheet calculator magic ball says doesn't factor in to the sales price typically (unless in an area where only investors buy). I'd recommend making offers based on all the facts of the property and looking at the big picture, primarily focusing on location instead of current cap rate. Properties in good locations will usually do well for a buy and hold investor even if initial cashflow is low. Properties in bad locations, not usually as much even if the day one cashflow on paper is high.
Thanks, Steve. This is probably the bulk of analysis paralysis with new investors. Getting comfortable with the concept of buying for appreciation vs cash flow. Everyone wants both, and it sounds like you do get both eventually if you buy in the right location.
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