Who is ACTUALLY cash flowing with these interest rates???

[Mark A.]

With interest rates at or near 7%, who is purchasing property right now (or in recent times at these rates) and actually predicted to cash flow after expenses (mortgage, taxes, repairs, maintenance, insurance, etc.)?  

Sure, you can cash flow if you buy a property that needs a full gut rehab, but I'm more talking about small/medium multifamily that may require none to some rehab (new floors/countertops/etc). Cap rates, at least in my analysis, do not have seemed to have dropped proportionally to rates.

I have been looking in a lot of markets, and the deals are sparse and people are still seemingly throwing money at properties assuming that rates will be 5% at the end of the year and rents will continue to grow in the fashion they did during the pandemic.  

My thinking is this - there are two likely scenarios in the near term, both of which lead me to NOT buy property assuming I will cash flow better in the very near future:

(1) Rates are dropped because of a recession.   With a recession, unemployment shoots up, which will be bad for rents and vacancy.   

(2) No recession.  Unemployment stays where it's at, we'll continue to have high inflation and rates will continue to be raised.  The argument could be made that rents will continue to increase with high inflation, but the data I've seen indicates that people are maxed out right now. Everyone seems to forget that interest rates don't just affect mortgage rates and business's ability to get loans, but your everyday tenant's credit card interest rate just increased also.  Wages are also not increasing at the same rate as inflation.  And if rates continue to go up, presumably we will see unemployment go up at some point leading back to scenario 1.  

The point is, it appears that the only way inflation goes away is with unemployment going up, at least at some point.  And in that case, I don't believe you will be in a better cash flow position.  

Where is the silver lining?  What am I missing here?  Is everyone just banking on appreciation like we saw over the past 3 years or a "soft landing" (where magically, inflation goes down and unemployment stays low). 

Mark

[Eliott Elias]

I am playing the equity game right now. 

[Gino Barbaro]

@Mark A.

It depends on what market you're looking in. You need to be looking at a lot of deals to find the one that will cash flow. We just closed a deal that is cash flowing day one, but has huge upside once repositioned.

There's a battle between sellers and buyers, and deal volume has dropped dramatically in January, and will continue to stay flat unless sellers drop prices. Only motivated sellers have to drop prices, and if rents do start to drop, we're gonna have a lot of motivated operators.

It's all part of the market cycle. This one is just taking a bit longer to play out.

[Mark A.]

@Gino Barbaro

So are you saying you believe cap rates will be forced to go higher in the near future?

[Gino Barbaro]

@Mark A.

I don't have a crystal ball, but I just don't see them going any lower. They will definitely go up in markets that pose more risk.

On a macro level, if demand for multifamily stays high, and money continues to flow to the asset, cap rates aren't gonna drop as much as we would like. We've seen private equity and syndicators pulling back due to the cost of capital increasing, which will help with pricing.

My focus is more on the market, creating a buy right criteria, and buying to hold for the longer term with fixed rate debt.

[Mike Dymski]

Yes, the lenders are cash flowing!

[Eric Bilderback]

Yeah it's hard to get too excited right now. Most of the deals I'm seeing need 40% down probably to work. There is up side but if CAP rates go up that could wipe out your value add.

Stupid Fed!

[Mark A.]

I’m just not understanding where the excitement is for buyers without cash flow is right now?

My mortgage broker tried to convince me last week that a 7% rate and 2.5 points is not that bad because I will refinance at the end of the year.

I’m not buying it.

[Chris Davidson]

@Mark A. still making it work. Just takes more effort than the buy something with 20 or 25% down using conventional financing and cashflow day one unless you are in C or D class.

With the Macro economics long term holds look really good from most angles. Don't bank on appreciation but to not include it in you calculations would be similar to buying an index fund and assuming it wont increase over a long hold period.

Best of luck!

[Patrick Mencel]

Quote from @Mark A.:

@Gino Barbaro

it all depends on how you calculate it. Remember Cap rates are based upon the homes current value. If rates drop and homes continue to appreciate..which is usually how it goes, then the cap rates will struggle to keep up. Unless rent can continue to be increased at the same rate, which is why I always suggest buying in strong markets. 

So are you saying you believe cap rates will be forced to go higher in the near future?

[Bob Stevens]

Always pay cash, and always get not less than 15- 20% NET caps..... 

[Patrick Mencel]

Quote from @Bob Stevens:

Always pay cash, and always get not less than 15- 20% NET caps..... 

 Touché, though many don’t have the liquid cash to throw at a property. 

[Bob Stevens]

Quote from @Patrick Mencel:

Quote from @Bob Stevens:

Always pay cash, and always get not less than 15- 20% NET caps..... 

 Touché, though many don’t have the liquid cash to throw at a property. 

Find it, partner with people, then you can refi cash out. But paying cash gets you the best deals, 

[Vicente Terán]

Hi Mark! Potentially check around the universities where students can pay higher cost per bedroom. We have had some luck recently in these markets.

[Russell Brazil]

Just increase your down payment to offset a higher rate.

[Carlos Ptriawan]

Quote from @Mike Dymski:

Yes, the lenders are cash flowing!

 :-)

[Sam Faas]

I would love to know this as well.  Looking into Central NJ, nothing is remotely close to cash flowing.  And this is not even accounting for the 10% vacancy and 10% annual maintenance expenses.  Arghh!

[Paul De Luca]

Quote from @Mark A.:

With interest rates at or near 7%, who is purchasing property right now (or in recent times at these rates) and actually predicted to cash flow after expenses (mortgage, taxes, repairs, maintenance, insurance, etc.)?  

Sure, you can cash flow if you buy a property that needs a full gut rehab, but I'm more talking about small/medium multifamily that may require none to some rehab (new floors/countertops/etc). Cap rates, at least in my analysis, do not have seemed to have dropped proportionally to rates.

I have been looking in a lot of markets, and the deals are sparse and people are still seemingly throwing money at properties assuming that rates will be 5% at the end of the year and rents will continue to grow in the fashion they did during the pandemic.  

My thinking is this - there are two likely scenarios in the near term, both of which lead me to NOT buy property assuming I will cash flow better in the very near future:

(1) Rates are dropped because of a recession.   With a recession, unemployment shoots up, which will be bad for rents and vacancy.   

(2) No recession.  Unemployment stays where it's at, we'll continue to have high inflation and rates will continue to be raised.  The argument could be made that rents will continue to increase with high inflation, but the data I've seen indicates that people are maxed out right now. Everyone seems to forget that interest rates don't just affect mortgage rates and business's ability to get loans, but your everyday tenant's credit card interest rate just increased also.  Wages are also not increasing at the same rate as inflation.  And if rates continue to go up, presumably we will see unemployment go up at some point leading back to scenario 1.  

The point is, it appears that the only way inflation goes away is with unemployment going up, at least at some point.  And in that case, I don't believe you will be in a better cash flow position.  

Where is the silver lining?  What am I missing here?  Is everyone just banking on appreciation like we saw over the past 3 years or a "soft landing" (where magically, inflation goes down and unemployment stays low). 

Mark

 Encountering similar problems with projecting cash flow right now. Some people are comfortable with more of an appreciation play if they get a strong location. Buyers are definitely sensitive to interest rate movements particularly when there is low inventory. The demand is there to buy homes, but relatively higher interest rates and low inventory make slim pickings.

I think rates coming down is more likely and more helpful than home prices going down.

[Blake Novotney]

I'm in a big vacation and second home market, so STR investors here are definitely cash flowing, although not as secure as LTR and much more involved. I almost never see anything these days on-market that could be purchased with financing and cash-flow as a rental. People who purchased investment properties at any point prior to a year ago are in a fantastic position, being able to offer competitive rents and still cash flow heavily. My focus is off-market and creative deals right now, it's very possible although hard to come by.

[Bud Gaffney]

There's deals that cash flow out there. They're just harder to find! Find that 1 out of 100 and jump on it.

[Carlos Ptriawan]

Quote from @Mark A.:

With interest rates at or near 7%, who is purchasing property right now (or in recent times at these rates) and actually predicted to cash flow after expenses (mortgage, taxes, repairs, maintenance, insurance, etc.)?  

Sure, you can cash flow if you buy a property that needs a full gut rehab, but I'm more talking about small/medium multifamily that may require none to some rehab (new floors/countertops/etc). Cap rates, at least in my analysis, do not have seemed to have dropped proportionally to rates.

I have been looking in a lot of markets, and the deals are sparse and people are still seemingly throwing money at properties assuming that rates will be 5% at the end of the year and rents will continue to grow in the fashion they did during the pandemic.  

My thinking is this - there are two likely scenarios in the near term, both of which lead me to NOT buy property assuming I will cash flow better in the very near future:

(1) Rates are dropped because of a recession.   With a recession, unemployment shoots up, which will be bad for rents and vacancy.   

(2) No recession.  Unemployment stays where it's at, we'll continue to have high inflation and rates will continue to be raised.  The argument could be made that rents will continue to increase with high inflation, but the data I've seen indicates that people are maxed out right now. Everyone seems to forget that interest rates don't just affect mortgage rates and business's ability to get loans, but your everyday tenant's credit card interest rate just increased also.  Wages are also not increasing at the same rate as inflation.  And if rates continue to go up, presumably we will see unemployment go up at some point leading back to scenario 1.  

The point is, it appears that the only way inflation goes away is with unemployment going up, at least at some point.  And in that case, I don't believe you will be in a better cash flow position.  

Where is the silver lining?  What am I missing here?  Is everyone just banking on appreciation like we saw over the past 3 years or a "soft landing" (where magically, inflation goes down and unemployment stays low). 

Mark

 Most experienced Class A MultiFamily GP now is at very minimum having 50% cash and 50% financing.
The rate is not an issue if you decrease the loan, but then if GP wants 50% cash infusion from the investor, they have to reduce their yield for themselves :-)

[James Hamling]

Yes @Mark A., your missing a whole lot. 

First, your entire premise is flawed. Your using an incorrect foundation that the insanely E-Z market of the last recent years where a person can all but blindly throw a dart at a MLS map and buy whatever and clear a 7+ cap yr1, that's flawed.

Those days were a "bubble". Call it an "E-Z Bubble". 

Things today, this IS a more normal market. Your holding an assumption in your mind of things going back to what it was, so your looking for how that happens. All indicators say it's not, for at least a decade +. Things would have to move back into an "E-Z Bubble". 

Reality is most properties in most times DON'T make a great net profit margin COC yr1. This is why it's called Real Estate INVESTING. It's investing, not buying a paycheck. Do you ever think of the stock market and ask why can't you just buy a solid stock and get a good cash-flow mnth, yr1? 

There is still good deals out there, tons of them actually, BUT one has to really work to connect with them, there not just falling from the sky like they have been for years. In 2020 I did buys people said were trash at the time, wait for the collapse they said LOL, and now today they say "oh wow, that's a cash-cow, I would have done that deal" NO, no they wouldn't because there constantly wearing blinders and not thinking INVESTING, there looking for an E-Z Paycheck to buy. 

All this focus on ONLY COC, ignoring equity accrual, ignoring appreciation, rent appreciation, your all missing it.

Read the data, unemployment is NOT going to skyrocket. Drive around, how many "hiring" signs do you see? The absorption rate for staffing is epic. That means ton's of people could get laid off and it would be a GOOD thing, because the economy is limping along on a skeleton crew right now. So you'd need enough unemployment to in-fill that hole AND than a huge # of unemployed on top of that.     This is why every legit forecaster is saying no risk from that at all.     What they ARE saying is what I have said for about a year, STAGFLATION. 

What's STAGFLATION mean in your instance? It means the barrier for entry will keep getting higher, harder. The longer you wait the harder it will be to get in. If you clear net-0 yr1 pat yourself on the back. How much equitable returns did you get? What tax advantages did you get? And what happens yr 2, 3, 5 as rents step up? As equitable returns grow? 

People need to STOP thinking REI is some golden ticket to just buying an E-Z paycheck, that's a get-rich-fast scheme. It's INVESTING, which means it's more like a savings account than a paycheck. And after FULL analysis, yeah I will take 17.4% ROI over any savings account.

REI is a Get-Rich-SLOW scheme. 

[Conner Olsen]

Cash flow is a defensive metric for me. My goal is to hold on to my properties as long as possible in Austin. The natural appreciation over the next 2 decades will do the rest for me.

[Brandon Gale]

@Mark A. I'm cash flowing pretty well on an STR, even with a 10% rate (DSCR Loan). Got a good deal on a great property in an awesome market. There's still good deals to ne found out there.

[V.G Jason]

Quote from @Mark A.:

I’m just not understanding where the excitement is for buyers without cash flow is right now?

My mortgage broker tried to convince me last week that a 7% rate and 2.5 points is not that bad because I will refinance at the end of the year.

I’m not buying it.

Your sheer cost of re-financing will eat away 3-5 years of marginal gains.

So the theory among the big institutional investors, and the reason I say theory is because this what they're talking about, is that the scarcity of quality houses in premium(sunbelt, west coast, texas) areas is incredibly important. The fundamental view is if you're not buying today because cash flow isn't present, you're going to lose that same cash in your downpayment when & if rates go down due to just buyer demand. If you're lucky, and by lucky I mean if you get the chance to even buy the property.

 For that purpose, go get that underlying asset and eat the lack of cash flow. The underlying asset is literally everything in this case. There's X amount of parcels to build property on and Y amount of people willing to build at Z cost. If you're able to procure a property that's relatively turnkey at land or slightly above value, lock it in. 

The simple math is a sunbelt city with a solid 1% growth rate population wise may have a solid 3br,2ba property for $350k out there that can sell at 7%, your DP will be $87.5k. When rates hit 6%, that property isn't going $350k it's going $400k minimum, call it $415k that's $103.75k downpayment. You'll be lucky to get it--there'll be a bidding war. We saw in January a small little flash of rates at 6-6.5% and in all months, January, things became a war. You just paid $16k more waiting on rates, you likely will lose $200-$500/mo in holding the property, that is 2.5 years of holding assuming no vacanies and rental property increases. At the end of the day, holding the asset is going to be worth it. 

The view of the last 10 years with historically and arguably never achievable again in our lifetimes low rates is a time of the past. You're going to see moderate rates(4.5%-6%) for the next 10-20 years, or until the next recession after this one(maybe 7-15 years). I hope my view is wrong, cause in that case all my assets can get re-fi'd and the appreciation in all of them will skyrocket. I sit pretty either way.

If you want to take a position in declining areas population wise, that's your risk. There might be cash flow there, in my opinion it's not enough to warrant the investment. It's better to allocate capital in the quality areas.  I think if you're the type to buy 3-5 properties a year, go for 1-2 and higher quality & a bit more down. Or same amount down and keep the cash aside against it. 

[Vicki X.]

@Mark A. I just wanted to say that you started a great discussion here. Very informative, so thank you!