Offer prices for buy and hold single family rentals

[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.

[Bill B.]

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.