Does an exclusive focus on cash flow lead to a bad place?

Question

Based on advice provided here at Bigger Pockets and elsewhere I've been looking into multi-family with a concentration on cash flow.

I found a 3FAM with 3brs each for $250,000 in Worcester, MA where there's zillions of 'em. It looks solid. It's rented, but it's in a neighborhood with no off street parking surrounded by homes that are all the same, postage stamp lots so small a kid can't throw a ball and houses so close and tall the sun doesn't reach the ground.

Rents in Worcester probably get 12-1400 month easy for a 3br. Conservatively, assuming $1,200 each of the three units the house should easily bring in $3,600/month.

City Water and Sewer, separate utilities and Worcester property tax is reasonable, so PITI comes to just $1,871 for 100% financing which would mean $1,729 positive cash flow just for taking the thing. This seems almost too good to be true, even at $250,000 so it's tempting, instant cash flow, like you would need to be crazy stupid to pass it up.

Here's my concern, I visited the property today, and given the neighborhood, I would NEVER choose to live there or see someone I care about live there.

If I took it, I would feel like I was making a buck off of the misfortune of those that didn't have the wherewithall to get themselves out of that place.

Is this typical of where a concentration on cash flow leads?

If that's the case, I guess I don't have the stomach for it. I'd rather see the thing knocked down.

Is this an accurate conclusion about the nature of cash flow investing to the exclusion of appreciation? I'm not opposed to efficient urban housing, I just don't want to get rich perpetuating a slum. If this is about right, then I guess I need to adjust my focus away from an exclusive focus on the cash flow, no?

Are there strong cash flowers that can be gotten in decent neighborhoods that you would be proud to live in?

Is this example not representative of where a concentration on cash flow investing leads?

Brian J Allen · Answer

Amen to @lisakatternhorn . Worcester rentals have destroyed a lot of outsiders.  You need to know street by street what you are investing in.  Sometimes the "blue chip" stocks work better long run then the high flyers.  You can make $1200 on a 3BR in Worcester in almost any neighborhood as that is the going rate, but you can make $1500 in better neighborhoods and not worry about getting your rents.  Many of the landlords in Worcester go for Section 8 rents as they are more stable, but then you are subject to inspectors determining if your house qualifies for their programs.  When you look at places for sale you will often see (below market rents) but those tenants likely have been there for a while and pay their rent and the current landlords are only selling since the projected rents are higher then actual rents.  Let me know if you want an insiders tour of Worcester 3 Deckers.

Mary M. · Answer

Cash flow is a function of how much cash you put in the deal any property will “cash flow” with no mortgage.

You will, iin general,  potentially get higher returns the more risk you take.

I also made the decision to invest in a higher class of property as I am just not ok with profiting off the poor (yes, i know they need houses to live in and there are folks that provide safe affordable housing)

It is ok to invest in any class of property you want. You are the one that needs to sleep at night

Mike Duran · Answer

Hi @Jack Moran it sounds like you were on Mott st. I started out my investing in similar types of areas in Worcester and it has worked out wonderfully. My opinion is that targeting the less nice neighborhoods in this market is the best way to get some nice cash flow. At $250k your average 3 decker should put around $800-1200 a month in your pocket once everything's paid assuming you fix it up nice after you buy it and put in good tenants(which can be found in any area, it just takes a bit more screening to find them in the areas you described, you could hire a good property manager to handle this part). Some of the best properties I've ever bought match the description of the place you mentioned. I love the no parking because you don't have to maintain a parking lot and tenants don't fight over parking spaces. It's likely close to a bus route so the tenants can still make it work.

Lisa Kattenhorn · Answer

Also, please keep in mind that it’s only a “cash cow” if your tenants actually pay the rent.  Good luck getting a tenant with a good credit score and a decent income to live in a bad area.  Why would they when rents aren’t that much higher in the nice areas?  Anyone can promise to pay but after chasing them around month after month and paying for multiple evictions, especially in a tenant friendly state like MA where evictions can take 6 months, are you really coming out ahead?  Plus, from what I have seen, many of those cheaper three deckers have problems with asbestos, decks that aren’t up to code, electrical that needs to be redone etc.  all of which will become your problem. Then there is the vandalism and theft that can occur in those areas.  Lastly, although they may yield better cash flow if all goes the well, they will not appreciate the same way as a three decker in a nicer area might.  For me, personally, it was not worth the headache and I would rather save up a bit more and buy a property I might actually want to live in.  I don’t really find it to be an issue of morality because you aren’t tricking anyone into living there and some people may feel the headache is worth it...but yes, higher cash flow usually comes with bigger risk.  If you decide to move forward with a property like that, get a really thorough inspection and a good eviction lawyer!

Adam Sankowski · Answer

Hey here’s my take on it from buying some cheaper stuff out of state and getting semi- burned.  Don’t believe the cash flow numbers if you’ve visited the properties and you couldn’t picture yourself there.

Those numbers might look amazing but I promise they are not real. When you get random repair calls for the same sink faucet three times in a month or they sneak in a pit bull or sooooo many other situations they have happened to me.

Just go a few steps up in quality... you’ll still cash flow on paper and even more in real life because you can’t put a price on quality, sane, and consistent tenants. Keep looking at slightly more expensive multis and you’ll find the right blend. And although it always needs to cash flow you can do a lot with a property that has a chance of appreciating down the line too. Trust me your gut is correct! If you wouldn’t want to live there yourself then keep looking because even though it looks good on paper the cheap properties with non stop tenant issues is what is going to make you want to sell within a year... which you then can’t do because the property hasn’t appreciated at all ha.

Worcester has a ton of great areas for a bit more money! Unless these were bottom level college rentals. College kids will live anywhere :) also the previous advice is very too true. It’s only a slum if you don’t take care of it.

Mary M. · Answer

And yes, you can find properties that will give good returns in good neighborhoods. But they may take time to develop. Ie buy a property that needs renovating and force the rents higher by the renovations.  Buy in an area with quickly increasing rents. In a year or two your returns will increase!   Etc etc

Roger Smart · Answer

I hope you can decipher as I reply in line to some of what you are saying.

PITI comes to just $1,871 for 100% financing which would mean $1,729 positive cash flow just for taking the thing.

Seems like you haven't factored in maintenance, cap ex, lawn care, property management, or vacancy. 50% Rule says $1,800 in expenses additional to your mortgage payment. So you would be looking at $100/door which is still reasonable cash flow. I'm assuming your insurance and taxes are about $300/month (included in your PITI as well as the 50% rule expenses). So the deal is not as home run as it seems, though still a solid investment if you don't have to knock out a bunch of capital improvements right off the bat.

Is this typical of where a concentration on cash flow leads?

By this you mean, do you feel bad providing housing to people in the areas that create cashflow. The simple fact is, all real estate investing should be profitable, and everyone needs a place to live. If you are providing them a place to live, they will be grateful, you are doing them a service. Even if it feels below your standard of living, someone else will love it and thank you for providing quality housing in the neighborhood.

Is this an accurate conclusion about the nature of cash flow investing to the exclusion of appreciation? I'm not opposed to efficient urban housing, I just don't want to get rich perpetuating a slum. If this is about right, then I guess I need to adjust my focus away from an exclusive focus on the cash flow, no?You are not perpetuating a slum, per se. If you don't screen your tenants, don't take care of your property, and don't care what goes on, then you may turn into a slumlord. You still need to be making the repairs, maintaining the building, and staying involved with your tenants. Your cash flow might take a hit, but it's never okay to operate as a slumlord, and I do not believe you have that in you from your post. Operating a high quality building in a low quality area does not make you a slumlord.Are there strong cash flowers that can be gotten in decent neighborhoods that you would be proud to live in? To be honest, no. At least not in my budget. If I paid cash for homes where I would want to live they would cash flow, but the rents in those areas don't usually outclass the payments even with 20% down. Cash flow is a strong indicator of performance, but you can make almost any property cash flow if you own it free and clear. I think cash on cash return is a better indicator when comparing classes of neighborhoods.

I hope this has answered some of your questions, and I look forward to your thoughts.

Jack Moran · Answer

Thanks for the discussion guys.  I'm learning a lot and grateful to have this venue and you all to bounce these thoughts off of.

I feel like I'm coming to terms with my own comfort level including my own standards.   I'm also reminded of the three rules of Real Estate, LOCATION, LOCATION,  LOCATION.

If a property is surrounded by a slum, it doesn't matter what you do to it, it's never going to improve.   If it's in a nice place, surrounded by nice homes, now you have something you can work with.  I think for my comfort level, standards and budget, I just need to take it away from old high density housing in the city, be patient and ready for an opportunity in lower density more desirable neighborhoods.

Lisa Kattenhorn · Answer

Also, please keep in mind that it’s only a “cash cow” if your tenants actually pay the rent.  Good luck getting a tenant with a good credit score and a decent income to live in a bad area.  Why would they when rents aren’t that much higher in the nice areas?  Anyone can promise to pay but after chasing them around month after month and paying for multiple evictions, especially in a tenant friendly state like MA where evictions can take 6 months, are you really coming out ahead?  Plus, from what I have seen, many of those cheaper three deckers have problems with asbestos, decks that aren’t up to code, electrical that needs to be redone etc.  all of which will become your problem. Then there is the vandalism and theft that can occur in those areas.  Lastly, although they may yield better cash flow if all goes the well, they will not appreciate the same way as a three decker in a nicer area might.  For me, personally, it was not worth the headache and I would rather save up a bit more and buy a property I might actually want to live in.  I don’t really find it to be an issue of morality because you aren’t tricking anyone into living there and some people may feel the headache is worth it...but yes, higher cash flow usually comes with bigger risk.  If you decide to move forward with a property like that, get a really thorough inspection and a good eviction lawyer!

Roger Smart · Answer

If you're gut says "no" don't try to outsmart it. It says that for a reason.

Does an exclusive focus on cash flow lead to a bad place?

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