Does IT Matter What You Pay, As Long As it Cash Flows?

Question

David Faulkner · Answer

Yes, it matters a lot. Things do not always go according to plan. You need multiple profitable exit strategies in order to mitigate risk and maximize profits. If you over pay, even if it cash flows, then you have eliminated one of your exit strategies and painted yourself into a corner. Now, if your cash flow projections don't pan out or something else unexpected happens and you need or choose to sell, then you are stuck ... the only way then to exit will be to bring cash to the closing table or let the bank take it back, neither of which are attractive options for you. On the other hand, if your projections are correct, then paying less will make the cash flow even better than it would've been by over paying or paying full blown turnkey retail price. Heads you win big, tails you win small, but the house always wins and you are the house. If you can't stack the deck in your favor in this and/or other ways, then you should not be playing the game.

David Dey · Answer

Short answer:  it might or it might not!!

Explanation: I have always had my own saying, every opportunity can be a good deal if you look at it the right way.

Back to the basics:  there was a game that I loved to play as a kid called othello.  The tag line was very catchy, "a minute to learn, a lifetime to master."

Real estate is the same.  It is not rocket science.

There are only two ways to make money in real estate.

Buy and sell or Buy and hold.

In buy and sell: very simply, if you sell the property for more than you spent in the acquisition and preparation of sale, then you made a profit.

In buy and hold:  if your income exceeds your outgo, you made a profit.

That's it!!  I just unraveled the mystery of real estate!!

(Of course, the intricacies of how you get to either of those profits is what will take a lifetime to master.  I know, after 19 years and over a thousand deals, I'm still learning it.)

So, to your question, if you paid 1 million dollars for a wood frame duplex in the heart of my inner city, that is rented for $500 per month per side (long term tenants) with taxes and insurance at around 200 per month and maintenance at an average of 100 per month and 100 per month for management, would it be a deal?

(Here's a hint, the answer is yes)

Heck yes it would, if the terms for the $1 million were: $0 down and $0 interest, non recourse, non qualifying, non qualifying assumable, no balloon and fully transferable owner financing, with payments at $1 per year for a million years.

With those terms, the million dollar price tag is just an arbitrary number.

Bottom line is, it boils down to ROI of money out of pocket and of cashflow of income that matters.  Many times terms are as important if not more so, than the price.

Anyway, hope this helps!! 😀

Mike Cumbie · Answer

I agree with @David Faulkner on this one.

You need to keep your outs in place. The best way to ensure you have outs is to have a property in your possession that you owe less than it's worth. The less you owe the more outs you have. You can sell it with owner financing, sell it outright, pull equity from it to use on something else, rent, donate, condemn and take a tax write off. If you owe more than it is worth all you can really do is hope that someone reliable enough keeps paying your note.

Good Luck!

Brian Gibbons · Answer

Los Angeles is not Cleveland is not Houston is not Tacoma.

Expenses and repairs and what is habitable-rentable is sooooo subjective, and enforcement varies.

I like lease option assignments in great schools and great safe streets.  People will put up with things like outdated kitchens and bathrooms, with the intention to rehab and renovate down the road.

Buy and hold?  I like paper over properties.  Notes over tenants and toilets.

I have a friend that is a property manager in Cleveland OH.  He owns over 200 properties that rent for $700 to $800 a mo, all Section 8 Govt Housing, single family houses, all valued between $20K to $30K each!  Hows that for diversification?  Cash on Cash?

But in Los Angeles, CA, a $600K 4 B is going for $2200 a mo in rent, a good use of capital?

@Steve Vaughan may want to comment.

Ned Carey · Answer

@Michael P. of course it matters. Price matters. Imagine you go out to dinner and the waiter says, "You look like you have more money so I am going to charge you more than anyone else here tonight."

As @David Faulkner says it adds to your risk and limits your options if you overpay. If you are paying more than the market is willing to pay for that cash flow, you are paying to much. Cash flow is only one part of evaluating a deal. it is a very important part but only one of may factors.

David made a very good comment about evaluating properties here

https://www.biggerpockets.com/forums/88/topics/450...

Now I know someone who does this and does it successfully. He buys shells does complete rehabs and is into them for more than he could sell them. They cash flow great and he is happy. He is also the rare exception.

The above is only 1/2 the story. My friend has many units including some commercial properties. Many of these he has owned for well over a decade and have appreciated and has had mortgage pay down. He has lots of experience with the kind of tenant he will get and the neighborhood he is in. He also knows and understands the risk he is taking.

Brent Coombs · Answer

@Michael P., if (through ignorance) you ACCIDENTALLY paid too much, but don't find that out until later, then an argument can be made for: "oh well, it should still cash flow - if my OTHER analysis numbers were right - but, I'll try NOT to be ignorant next time".

But if you KNOW in advance that to get a specific property, you have to pay too much, then my suggestion is to rather: let someone ELSE pay too much for it (per @David Faulkner's reasons)!...

Tom Ott · Answer

Not always. I would say it depends on the market you are in as well. Cashflow is very important for turnkey type Midwestern markets. If the cashflow a month hits what you want than it might be worth it. Let's say for example you are purchasing a property that is just under $100k and it rents at $1,100 a month compared to a property that is $80k and rents at $1,000. The more affordable property might seem more appealing, but why is the one more than the other? Maybe the first property had a lot of work done to it and you will not really see any major maintenance for the first 5-10 years (not accounting for tenant's mistakes) That might be a much greater payoff in terms of cashflow than a property that has a lower sticker price BUT needs some maintenance right away. Just something to consider.

Matt R. · Answer

Yes it matters. Figure you will lose anywhere from 20% to 50% of todays cash flow value every 10 years due to inflation. And fyi with Brian Gibbons example , you will not find a 600k valued LA place renting for $2200 today.

Steve Vaughan · Answer

Of course it matters.  That 'cash-flow' you are counting on to trick yourself into thinking value doesn't matter could be gone in a snap from an eviction, damages, mother nature, cap-ex, etc.   Also, over-paying because the seller financed it could cost you in the end as well.

Sure- if the seller will take $1/mo for 1,000 years - the value won't matter as much.

Ask the poor Memphis TK buyer that can't sell for what she owes on several properties.  Sabrina from CA.  She's in and has been in a bad nightmare for months.  Think value doesn't matter?  Hint - if the cash-flow was so good, she wouldn't be selling.  She's a smart lady with a career.

Big surprise a TK provider says it doesn't always matter.  So does the used car salesman.  LOL

Thanks for the mention @Brian Gibbons

Michael P. · Answer

@Tom Ott I agree with that. Thanks for the reply.

Does IT Matter What You Pay, As Long As it Cash Flows?

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