Why would high-cash-flow multi-family properties sit on the market?

Question

Newbie here, hoping to buy something later this year or maybe next year. Not quite ready to spend the money yet. For now I'm perusing the market as a kind of hobby to see what's out there.

Cash flow options seem pretty slim in my area, south of Seattle.

However, when I look around the country, there are comparatively ridiculous-seeming options. For example this place claims to be able to rent for $6,000, and with 25% down that would be a $4200 payment, so $1800 cash flow (not yet factoring any sort of maintenance and whatnot of course, so just the mortgage/rent diff):

https://www.redfin.com/SC/Columbia/1921-Pickens-St-29201/hom...

Or to a lesser extent this place at $400 cash flow:https://www.redfin.com/SC/Columbia/1035-Kinard-Ct-29201/home...

Not asking for free research here, but why in general terms would a place like this just sit on the market? It seems so much better cash flow than properties listed in my area, where you're lucky to get a couple hundred bucks.

Example of break-even in Tacoma, WA:
https://www.redfin.com/WA/Tacoma/3734-S-M-St-98418/home/2978...

What am I missing that these seemingly ridiculous cash flow properties are available in other areas in the country? Shouldn't investors be snapping these up?Thanks in advance for any tips!

Alecia Loveless · Answer

@Josh Aljets This is why you need to get super familiar with the market you have chosen to invest in and not just buy random things you see all over the country.

I invest in a relatively small market. There are properties that probably have 2X-3X the cash flow my properties have and are comparable in price but given their location and tenant history attract a much worse group of tenants and have much higher expense ratio relative to repairs and maintenance and general wear and tear on the property because of the type of tenants they attract.

I like to buy properties that I would feel safe and comfortable living in personally if I ever needed to live there. They may not be as nice as I like when I buy them but after the first round of renovations the majority of the work has been done and most run pretty much on auto pilot after that.

Once you pick your market, get down and dirty and learn as much as you can about it. You will reap long term benefits by doing so.

Mike Dymski · Answer

You likely answered your own question...rent - mortgage is not equal to cash flow.  Have to factor in vacancy, PM fees, maintenance, repairs, turnover, cap ex, etc.

Greg Scott · Answer

Compared to Washington, the center of the country will look cheap and rents will be high relative to the price.

Why does any property sit on the market?  Whatever reasons you come up with could apply to properties that cashflow.

It could also be that the cashflow is fiction and the locals know that a property in that area will not deliver.  Or, it could be that the cashflow you are seeing is great for Washington, but terrible for that area.

Adam Bartomeo · Answer

LOL!

That seemingly lucrative deal of $1,800 will be eaten up in expenses quickly. You will want to use some of the free calculators to help you with expenses, NOI, and cash flow. A deal that has $1800 for expenses is a deal that will fail. Just in maintenance, PM, and vacancy expenses the $1800 is mostly gone... not to mention landscaping, snow removal, insurance, prperty taxes, cap ex, etc...

Evan Polaski · Answer

@Josh Aljets: you have all your answers.

To summarize, in my experiences being in a "high cashflow" market of Cincinnati:

Major deferred maintenance/immediate capital needs.  Maybe the foundation is slipping, the roof is needing full replacement, the plumbing backs up every time you are draining the tub and try to flush the toilet...  Listing photos can often hide the true condition of the lot of things.

Second is like Alecia noted: locals MIGHT know that the area is only going to attract subpar tenants.  As Gino recently noted on another forum, real estate is all about ROE: return on effort.  Class C properties, not saying these are Class C (I don't know), require a lot of EFFORT, but beyond that, lower end properties tend to have more turn over, higher wear and tear expense, and longer vacancy if you hold your tenant requirements firm.

Lastly, it is simply overpriced.  Let's assume that first one you note really does cash flow $1800/mo.  But, people familiar with the market know that is a $500k property.  So you pay $700k, and start making your $1800/mo. You have to hold that property 9 yrs and 3 months, just to start actually making money.  My math: you are underwater $200k the day you buy it.  You make $1800/mo, or $21,600/yr (before taxes, and of course assuming no unexpected expenses arise).  200k/21.6k - 9.26 yrs.

Joe S. · Answer

Probably because the sellers representation doesn’t match reality. Also, interest rates are higher these days.

Gino Barbaro · Answer

@Josh Aljets

Cash flow is great, if you can collect it. These places are not in great areas, and the buildings are probably very old with a ton of deferred maintenance. These areas you are describing rarely appreciate, so the pricing is low and you can cash flow, but, as I said, at the end of the day, it is very hard to manage these types of properties.

Robert Rixer · Answer

In general, anywhere across America right now with interest rates as high as they are, there are very few deals that will cashflow with 75% leverage. Those that claim to cashflow well are either a) full of it or b) old and in a class C area where your probability of being able to achieve those cashflows are low.

Brandon Vukelich · Answer

@Josh Aljets  I am familiar with the deal on M St in Tacoma. The Seattle-Tacoma market isn't great for cash flow day one, assuming you're trying to acquire for 25% down. Yet even if you pay cash, your CoC return is going to be sub 6%, give or take. Plus most of these are owned by small mom-pop landlords that little to no debt and have kept their rents low. It take 6-18 months to stabilize most properties due to the regulations on rent increases, etc. They will eventually cash flow but depends on how the deals are managed. Investors buy here because of strong jobs, strong rent growth, strong appreciation and the future cash flow but honestly many of my clients are playing the long buy and hold, appreciation game. They just want to break even-ish for the first 6-12 months. I know it sounds crazy or ridiculous but to each their own strategy.

Also, the duplex and triplex space in our area is filled with house hacker types. Their numbers don't need to work like non-owner occ investors like us. Any investors buying those are playing the long game, which most of us should be doing anyway.

Best wishes on your investing journey!

Why would high-cash-flow multi-family properties sit on the market?

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