Cashflow vs. Appreciation for short-term strategy?

Question

Hi Bigger Pockets Community,

I'm brand new to REI and have been consuming as much information as possible over the course of the last few months trying to determine what my strategy should be.  Would love any helpful insights/constructive feedback to my proposed strategy below:

What I want to accomplish: At this point, my ideal is to get to 10 units as quickly as possible by purchasing duplexe(s) and  four-unit properties that average at least at least $250/unit each month in cash flow right out of the gate, and then I would be looking to do several flips over a several year period to pay down the mortgages as quickly as possible (I realize a lot of investors say this is dumb because it makes me a legal target if I have equity in my properties and/or I'm not using any equity to its full potential. I'm not worried about those two aspects though).

How I plan to accomplish: In order to achieve this I'm looking out of state in markets like Cleveland, OH (open to suggestions for midwest and southeast) where I can find cheap properties that won't necessarily appreciate much, but will bring the cash flow I'm looking for.

Long Term: Once I get 10 units of this type paid down and am financially free, I figured I would then focus on looking more earnestly at properties that are in more expensive/higher appreciating markets that perhaps just bring more modest cash flow.

Any experienced investors out there who can provide feedback around things to consider, why it is or is not a sound strategy, etc?

James Wise · Answer

You need to set proper expectations. When you do a refi you have to keep 25% of the value in the deal. So a lot of people look at a BRRRR deal with the hope that they can buy something cash, renovate it & be all into it for say $75,000. Then they do their refi & want it to appraise for $100,000 so they end up with ZERO cash in the deal. Probably not gonna go down like that for you very often. What is a more likely scenario would be you being all in for $85,000-$90,000 & you get a $100,000 appraisal. Still a win on the BRRRR front as you end up into it for less than the $25,000 but you don't end up into it with ZERO cash out of your pocket.

James Wise · Answer

I would caution you against trying to flip in multiple markets. It's a very competitive business that requires a ton of knowledge, contacts, infrastructure, marketing & much more....To be successful at it you are going to have to beat out a ton of people & your best shot at doing that will be in the market you know the best & have the most robust set of contacts.....Your home market. From there you can reinvest your profits in rentals in most any market as that's a rather simple business so long as you buy low risk properties.

Broderick Graham · Answer

@James Galla: James, I really appreciate that insight about being a legal target regardless. That's a fair point that most people wouldn't be doing checks into my financial standing if they want to find a reason to go to court.

I definitely have been enticed towards those lower cost units but am trying to find a sweet spot of safe, up and coming neighborhoods where the costs are still reasonable. With a BRRRR approach in mind, I'm hoping to ensure the units are in relatively good shape from the onset, but will be mindful of the tenants I rent to in order to try and keep them in good shape. Thanks again for those points of consideration!

@James Wise: Thanks so much for that guide to Cleveland neighborhoods. It helped me rule out several properties that I was considering.

In way of flipping, I haven't done any yet. I'm conflicted between taking longer to scout out a deal or two here locally in Utah where I live in order to get my feet wet and a better overall process in place before going out of state OR just jumping in and buying the investment property in a market like Cleveland and BRRRing it (essentially the same thing from what  I can tell, minus having to sell it) to get familiar with the process. After I have several successful side hustle flips/BRRRs behind me, I want to transition over full-time to flips locally and in 2-3 other markets at a time as well.

@Antoine Martel: I appreciate you confirming that you have had good experiences in the Cleveland market as an out of state investor, and that my strategy sounds logical, on paper at least. I see you do turnkey properties, but if your company also manages any properties in Cleveland and are looking to add additional properties, I may be interested in chatting about that after/while I find properties to rehab and rent out. Thanks for the offer.

@Nicolas Carucci: You are right, sir. Definitely have not been punched in the face yet. Looking to get in the ring like you said about taking action, and hopefully I can start out with minor bumps and bruises as I look to get some momentum. I'll be sure to keep learning while taking action pretty soon here. Again, I appreciate the words of encouragement!

James Galla · Answer

Paying down properties is a fine idea. In fact, it's probably the more responsible way of handling investments that also allows you to enjoy the benefits of cash flow. Of course, you may not be able to expand as rapidly, but I'd prefer both an equity buffer and solid income over balancing a bunch of debt that barely cash flows (relative to units that are paid off). I'm not sure what this legal target talk is about because you'll be a legal target as soon as you rent to someone. From their standpoint, you're just another landlord, regardless of whether they are renting your first unit or your 20th. It's not like they are going to do a property search to see what you own. They will take advantage of you by doing damage to your unit.

An issue you may face with the Cleveland/any other rust belt market is that you may want to purchase those nice looking cheap properties, but you may get caught up in the subpar neighborhoods. Pro forma cap rates and cash flow are easy to do on paper, but when you face the realities of renting in these areas, you're going to lose out when it comes to your tenant experiences and property management that is ultimately forced to clean up the mess. With that in mind, it's important to diligently inspect your units to ensure they are in the best condition with longest life expectancy as possible relative to your acquisition cost.

I like your plan - it's definitely something you can accomplish, and with an equity/cash flow buffer, I reckon you'll be able to fight off most of the issues because cash makes problems go away. Again, be careful with both your tenants, who will destroy your property, and be careful with your property management company because their margins depend on your units being busted up and needing replacement parts they can upcharge to you (it's just part of the business).

Broderick Graham · Answer

@James Wise @Tom Ott: Your advice makes sense and is duly noted.

One clarifying question: Do you view out of state BRRRR's as the same level of risk as a flip since I would need to contract work to be done to force appreciation, or do you see the main risk being in the resale aspect of the property? I'm trying to pin point what part of the process you deem as the most potentially problematic.

Tom Ott · Answer

I'd be careful flipping from OOS. It can be VERY difficult unless you know a ton of people in the market. It becomes a full-time job for you and a headache if not done correctly. Purchasing a buy-and-hold property for rent is a much more preferred investment for OOS. They can be passive and earn you a nice steady stream.

Nicolas Carucci · Answer

Everyone has different ways to analyze their investments - bottom line is you have a plan and that's a start. Executing on the plans may not be as easy as we think due to some aspects already mentioned here but it's certainly a great start. Lotta folks want to be investors but haven't been punched in the face yet - it hurts - games not played on paper - just get started and never stop learning.

Antoine Martel · Answer

Welcome to BP. I invest in Cleveland it is a great market. Getting up to 10 doors and then paying down is a great strategy that I recommend to everyone with a W2 job.

I'd be open to chatting more and seeing if I can help in any way.

James Wise · Answer

Buying rentals out of state and flipping are two totally different animals. Flipping is more a less a full time business why out of state rentals is almost entirely passive. The rentals should be easy to do, no problem. Just don't buy in an area you aren't comfortable with. Check out The Ultimate Guide to Grading Cleveland Neighborhoods for more info on what we've got going on around town here in Cleveland.

As for flipping what skill set do you posses to get this business off the ground? Do you plan to do this locally or out of state as well?

Cashflow vs. Appreciation for short-term strategy?

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