Am I Supposed To Be Cash Flowing Negative?

Question

Background- I'm a new 25 year old prospective investor and am looking to buy and hold property to create retirement cash flow/income.

I'm looking over everything I'm seeing in my area (Reno, Nevada), and after I take into account a property management company ($100/mo), CapEx (5%), Repairs (5%), Vacancy (7.5%), Rental Property Insurance (+/- $500/yr), property taxes (.8% of assessed value), and a mortgage of 80% of the home's value, I'm cash flowing so negative that it's not even funny (problem couldn't possibly be fixed by managing the property all on my own).

I know that housing prices are abnormally high in this area relative to median household income (they have dropped quite a lot in the last few months), but rent is also sky high. I'm very hesitant right now when I look at these factors to make a jump into real estate investment at this time. Is this a symptom of a bad market or am I just not finding the right deals?

Sample Numbers -

INCOME - $1,400/moRental Price of a 3br, 2 ba property selling for $275k = $1,400/monthEXPENSES- $1,751/mo$220k on a 30yr fixed @ 5% mortgage = $1,181/monthProperty Taxes = $180/monthCapEx = $70/monthRepairs = $70/monthVacancy = $100/monthProperty Management = $100/monthProperty Insurance = $50/month

Jay Hinrichs · Answer

In that market and if you dont own a home already and you can handle it.. I suggest you house hack a 4 plex.

the numbers will work better.. you can use FHA financing.. so 3.5% down and after a year you can move out..

this is the number one way for west coast investors to get started  in my opinion.

@Randy Thomason while I like sub too for certain investors IE very cashed up investors.. out our way with as robust as the market is even though its slowed a little your going to find it quite difficult to talk a seller into this..

In super down markets it works well or markets that have a lot of rentals and burnt out landlords.. works better but on west coast pretty tough.. not that it cant be done i have done a ton of them.. but if your not tuned in.. its a tough one to start with..

Randy Thomason · Answer

You are looking at the wrong marketplace then.  Look for different neighborhoods at lower prices.  Look for motivated sellers with problem and trashed properties that you can buy cheaper and fix up and have equity in.  You have to adjust to different environments based on what the market is or look for different markets or strategies.

I know some markets are just that way like California. I would never choose to to negative cash flow.But there are exceptions.  I buy houses Subject to the existing mortgage. I have bought some, especially 15 year mortgages, that negative cash flow.  But a great strategy for that is sell the negative cash flow to someone else for part of the deal.  Meaning sell part interest to a doctor who wants to invest but needs no headaches.  If you negative cash flow 300 per month maybe sell the Doc half the deal for the $300 or maybe 400 per month and at the end of the payoff you sell and split the deal.  Everybody wins that way.  BUT you have to know your numbers.  This is not about real estate.  It's a financing game.  Newer investors won't get it usually but over time with continued education you get there.  We all started right where you are.  Just keep learning and networking.  Learn you financial calculator well. It should be your best friend.  BP is a good place to start as are your local REIA's.

Russell Brazil · Answer

Thats just a factor of the risk though. An owner occupant heavy neighborhood is going to carry less risk than a renter heavy neighborhood. I want to buy rentals in heavy owner occupant locations even though I sacrifice on yield. I want nicer neighborhoods. I want better tenants.  If its mostly owner occupants, thats likely a measure of higher demand for the location. Higher demand, means likely higher appreciation, higher rent growth, less competition from a ton of other surrounding rentals, which helps keep rents high.

The nicer asset classes, while yielding less, have a lot less headaches. But if the op needs more yield, hes got to take on more risk. The renter heavy neighborhoods will carry that higher risk, and thus higher yields.

(Btw, Jay knows this, Im saying this more for the benefit of others reading)

Theres nothing inherently right or wrong with the risk profile an investor wants. I prefer low risk, because yield doesnt matter to me. I have an income that is very high, so having more money right now doesnt matter to me. When I was younger, and had a lower income, I wanted greater yield and more income, so while still investing locally, (in a lower risk type market, DC) I reached for greater yield. (With mixed results) cash flow while leveraged was more important at age 30 than it is at age 40.

Jay Hinrichs · Answer

well the other thing is that owner occ neighborhoods like this one at that price point are just not rental properties you dont buy those for rentals you buy them to live in..

SFRs for rental purposes are just not the norm like they are in the mid west and rust belt cities.. renters live in apartments not houses basically.  only 10% of SFR's for example in the Portland market were i live half time are rentals where as many markets fully 50% of the SFR's are rentals.. and therefore the values are quite stable they dont really go up as the value is priced more like a Cap rate what an investor will pay for a given cash flow with the risk component.. we see that in the D class mid west all the time.. were folks get on here and say they bought a home for 20k that rents for 800.. its pricing for lack of any true appreciation and or its pricing for Risk

Jay Hinrichs · Answer

start looking at 4 plex's is my suggestion..

Heather Runge · Answer

@Zachary Chamberlain I am seeing the same thing in the Reno market, where I was initially looking, so we are looking into the midwest area.  I say - live where you want to live, but invest where the numbers make sense.  Get @David Greene 's book, Long Distance Real Estate Investing which is very thorough and helps you learn the way to build a team remotely.

If you can't make the math work, don't do it.  Aim for the 1% rule, EX a $125,000 home should rent for $1,250.

Hope this helps, and best of luck!

Tyler Kring · Answer

@Zachary Chamberlain I’m not an expert but If you are planning to hold long term and not flip I would generally shoot for a property that rents for at least 1% of the purchase price. So that house that rents for 1400 I wouldn’t pay more than $140,000, if you are planning on holding long term. With the 1% rule all your other numbers should shake out.

https://www.biggerpockets.com/blogs/7325/46689-the-1-rule-what-you-need-to-know

Christine Roberts · Answer

I have been in this business for 20 years and watched the trend also go up and down. It depends on how long you are going to hold the property. We buy and sell all over the United States and there are still deals out there. I hope this helps. Thanks

Russell Brazil · Answer

Yield is a factor of the risk inherent in the asset or market. If you want a greater yield, look at assets or markets with a higher risk factor than the subject property.

Jay Hinrichs · Answer

agreed where I see sub too get very wonky is the no money investor gets into a deal that barely cash flows.. tenant stops paying the underfunded investor cant make the mortgage payment the mortgage is in the original sellers name and their credit gets trashed..

there is a lot of abuse in that model.. but for property capitalized companies its a good way to control property.. I just never subscribed to the little equity deals.. I only bought them if they had big equity so that I could sell them within 6 months if I need to and get a nice big fat check LOL.  so the last 6 to 7 years at least in these markets pretty tough to pull off.  But for this young man starting out.. I like my advice on the west coast get that 4 plex with fha loans that's 4 doors for minimum down.. great way to start in my mind..  Advanced startegies are for when U get your experience bucket filled up.. not many investors are going to invest with someone with zero track record so for you to attract doctors that's one thing.. but for most its a non starter.

Am I Supposed To Be Cash Flowing Negative?

Most Popular Reply