How to Cash Flow With Current Interest Rates

Question

I am brand new to real estate (other than having my own home) but am currently reading The MultiFamily Millionaire and the concept of multifamily intrigues me.  I would like my husband and I to invest in a property (likely a duplex) in 2024 and move up from there as the examples show in the book.  I was blessed to refinance during the Pandemic and have a 2.6% interest rate.  Running #'s just looking at properties in and out of state (I live in Las Vegas), I do not really understand how pure cash flow (even a small amount) is possible given these current loan interest rates unless you find the deal of the century.  I am still working through the book so maybe it will enlighten me but just curious about your experience.

Bill B. · Answer

Cash flow isn’t your path to wealth, it’s just a kind of safety net for people just getting in to real estate but don’t have any spare income. Personally I think if you NEED cash flow you probably aren’t ready to invest in real estate. So many people talk about $100/$200 mo. But what if it takes a month to get your first tenant? There goes 10 -20 months of cash flow. Or 6 months after you buy the ac goes out, there goes 50-60 months. Heck, what if the government declares an eviction moratorium and your tenants don’t pay for 2 years? That could be 10-20 years of cash flow gone.

I think if you ask the most successful BP members where their wealth came from it was mostly appreciation and the rest was long term holds with rent increases exceeding expense increases. It wasn’t from talking the seller down $10,000. Or getting a 1% lower mortgage rate. If they’re anything like me their biggest losses/regrets are the properties they didn’t buy because it “wasn’t a good enough deal”.

Arn Cenedella · Answer

@Jennifer Wood

1. One can find cash flow but at this time, but one needs to put 50% down to do so.

2. For me, I am OK with little or no cash flow year one and maybe even two if I see a clear path to cash flow and appreciation over 5 to 10 years. The current market and debt requires a long term perspective.

Doug Smith · Answer

It's much, much harder now. Taxes and Insurance is skyrocketing too. We tend to be more conservative with our numbers, but putting more down is really the only way I'm seeing people get the positive cash flow numbers on a regular basis. It's a different environment than it was 24 months ago. Your math will have to change with it.

Michael Smythe · Answer

Who says you have to pay what sellers are asking?

25+ years ago was told by several investors, also read in expert's books:

you may have to make 100 offers

to get 10 responses

to close 1 deal.

How committed are you to put the work in to find a deal?

Brad S. · Answer

To rephrase what @Arn Cenedella said1. Everything cash flows ...it just depends on how much money is put down. But, obviously, then the returns are affected. I just met someone who put 75% down on a property, in order to cash flow comfortably! And you know, that is perfect for them, since it fits with their situation, goals and comfort level.

We are in a current real estate cycle where the "easy" cash flow of yesterday is elusive, and the creative, skillful investor has the edge. In my decades of experience, the past few years have been an anomaly (exception to the rule).  Not long ago, there was no such thing as dscr loans, rates were only moderately suppressed at times, and much real estate was undervalued-(affordability-wise) still equalizing from the downturn, oh, and we didn't have a global situation which caused widespread disruption and general concern. Many beginning investors had an easy time throwing a dart on a map and finding cash flow properties they didn't have to qualify for. They looked like geniuses! And good for them! Now they can use their new found wealth in more conventional ways to continue their growth.

But, unfortunately, for the newer enthusiast, it may take some more understanding, acquiring knowledge and skill, resources, and creativity to strive for the similar results of yesterday. It is possible, but the tide has shifted and some people may find themselves with skimpier bathing suits.

So, with that little reality check, there are still ways to find cash flow.

* lease-options or "subject to" - find motivated sellers that want out from their property responsibility and are willing to allow you to take on (subject-to) their existing low interest rate loan, which may open up cash flow possibilities.

* Value-adds - the obvious-add value to a property (i.e. additions, rehab, build or convert adu's, develop vacant land), etc.

* Look for areas that still cashflow - There will always be areas that cash flow, you may have to just turn over more rocks to find them, or alter your criteria.

* Look at bigger MF properties - Larger multi-family properties will typically cash flow more then sfr's, since they are traded based on investment return. You may need to find money partners for this.

And you can combine those strategies also. You can do some value-adds, like find good developable land, plan a build, raise the money, finish the project, sell for a hefty profit and then put it all down, or exchange, into property which cash flows now, since you put down your new found money from the flip. I realize it isn't that easy, but you asked.  :)

ok...that's what I got on that at the moment.

And then to reiterate what @Bill Brandt said. IMO and other experienced investors opinions, much wealth is created by appreciation more than cash flow. Cash flow may've been their vehicle to get the properties which eventually appreciated, but, in and of itself, the cash flow alone is a tougher hill to climb. I have used cash flow to support other non-cash flowing properties which had more favorable appreciation potential.

Like Bill said, my first couple of properties cash flowed great on paper (%-wise), but only to be wiped out by one moderate expense in a year.

Anyway, hopefully this stoked your mind gears somewhat productively!

David M. · Answer

@Jennifer Wood

If you want, here is a VERY long thread about cashflow:

https://www.biggerpockets.com/forums/48/topics/1131066-cash-flow-is-not-king

Now that rates are normalizing --- no, they aren't high.  Investors may need to go back to the "tried and true" strategy of going for appreciation.  Just like how the ultra low rates have enabled "too many" people to become homeowners, its created this flood of investors who couldn't invest before to use enhanced cash flow to enable them to invest and attempt to scale.

While I haven't read the book you cited, I'm guessing it started with appreciation for wealth generation, then you switch over to larger apartment buildings for cash flow for your retirement.  You keep swapping "up" as the scaling technique.  I've found that to be a somewhat common approach to developing a retirement plan, i.e. the large multi-family generating cashflow per door.  Personally, I like to think other investing strategies can also be useful.

Sorry can't give you a more positive / uplifting answer.

Would be happy to chat if you'd like.  Good luck.

David M. · Answer

@Jennifer Wood

Good to hear.

Another aspect to consider is perhaps not investing in real estate right now...  With these economic conditions there are many other assets with strong investing opportunities.  Good luck.

Jennifer Wood · Answer

Thank you to all who responded.  To clarify, while I would never turn down cash flow, I am not really looking specifically at that as a reason to invest.  I am more interested in the appreciation of the property.  That being said, I would prefer to at least break even.  Not sure how many of you read this book (it is a Bigger Pockets book), but it advises to start small with duplex, fourplex, etc. and then work your way up once you have more experience.  When I do invest, I can put 50% down and maybe even self-fund if needed (depending on what property), so maybe thats what I end up doing.  For now, though, every financial scenario I run shows me in the negative.  I am determined though so I will be as smart as I can on this nd ultimately do what looks and feels best based on research and talking to great folks like you.

Evan Polaski · Answer

@Jennifer Wood, why do you want to be a landlord?  Or why didn't you want to be a landlord prior to reading a book?

At the end of the day, real estate is a long term play. Cash flow, over a long term hold (talking decades, not years) is possible, but not terribly likely.

And like any investment: if you are in a rush to jump into something, you will likely lose money.  Right now, you have prices that are still very high with financing costs that are much higher than recent history.  While I don't see this correcting in the next year to 18 months, rates MIGHT come down.

But more importantly, when you are looking at 2-3-4 unit buildings, you are competing against many, many retail buyers that want to house hack.  These buyers are typically not real estate investors, and will overpay (at least compared to those that are purely looking at investment).  To get out of the "unsophisticated buyer" pool, you need to be looking at 15+ unit properties.  Ideally larger.  In this space, you are still going to have buyers that will pay more than you, but it becomes a more apples to apples analysis, where the buyers are considering things like: vacancy, capex reserves, comparable financing costs, maintenance and repairs, etc.

Ali Nichols · Answer

As everyone mentioned... it's not easy in a levered situation right now. Unless you are employing some of the strategies mentioned above in specific markets.

For me, it'll go back to fundamentals. Location, location, location. Asset quality. Chasing $300 cash flow/mo in a tough area is not worth it. I would rather find an asset in a more solidified area and hold for the long term. Take advantage of time, rental increases, appreciation, tax advantages, principle paydown.

How to Cash Flow With Current Interest Rates

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