Going against the grain. Investing with low cash flow.

[Michael Costanzo]

I am a newbie to the investing world. I have read many books on the topics, talked to many brokers, etc. My specialty is in real estate insurance so I know a little bit, but from a different angle. The holy grail that I see held up on this site is cash flow. My question is a bit nuanced. 

I am looking into house hacking. The problem is my market does not allow for that when investing for the type of returns I hear about on this site and podcast. When I read books like "Investing in Duplexes, Triplexes, & Quads by Larry Loftis or Buy and Hold by Schumaker they tend to hold different philosophies about long term investing in real estate. I am not in it to cash flow 87654% a year and quit my job tomorrow. So lets get down to hard numbers. Looking at a duplex in a very hot emerging market. Here are the stats

Purchase price 340,000

Each unit has 2 beds and 2 baths

Units rent for 1350 per unit- has been fully occupied for the past two years (I would be the other tenant)

Financed with an FHA Loan - all in mortgage and insurance payment of $2100.00

Constructed in 2008 with literally nothing left to do on the property- it is in phenomenal shape.

Tenants pay all their own utilities- this property was built to be rented. 

Even if I put away $250.00 per unit per month for vacancy, repairs, maintenance, cap ex, at the end of the year we have $1200.00 left. With an 11k dollar investment that is over a 10% return. This property carries a high monthly mortgage insurance of 230ish dollars which when we refi the property 3-4 years from now will drop off and we will be looking at $4k a year from this property before taxes without raising rents etc (they are rising around $25 per year for the last 3 years). 

Thanks for bearing with me on this but I am trying to see the downside to this. Its either do this deal or rent for 1450 per month. Sure this isnt cash flow city but it gets me started and has to be a step better than purely renting until i find some unicorn deal. 

Please pick this apart! I want to know what I am missing. 

[Samuel DeMass]

Michael,

It sounds like you're heading in the right direction.  First a couple observations that might help vector your efforts:

1. Property Tax needs to be considered as a normal operating expense.  Income tax is something else entirely.  The reason I mention it is when you said "we will be looking at $4k a year from this property before taxes without raising rents etc (they are rising around $25 per year for the last 3 years)."  I don't know what the taxes are for this property, but I'd ballpark ~3-4K?  That means you'd possibly be paying out pocket for this expense.

2.  When analyzing the deal, I would suggest acting as if you were not planning on living there.  This lets you look at the property objectively, and plan for the future when you decide to move on, but hang onto the property.

3.  The decision to purchase with low or no cash-flow is something I dealt with recently when deciding to continue renting or purchase a property. What I came up with was figuring out which scenario was going to build me more wealth.  I used what I was paying for rent ($1500) as my baseline.  In other words, I analyzed the property using $1500 as the current rent for the property even though I knew the property I was purchasing would rent for 1600.  Then I built a couple simple excel tables to compare the numbers.  I suggest building your own so you understand what each cell means, but feel free to check out and play with my product here: Rent vs. Own.  I've changed the numbers around to help analyze your situation, but the variables could be off and need to be considered.  You'll have to do a little admin work if you want to look at an example where you stay for more than 2 years.  However, it looks like a ~8% cash on cash.  That's very respectable if the rest of the variables are the same.

4. Owner occupied is the only scenario where I think low cash flow is more reasonable. I would always prefer more cash flow. Period. That said, when you're house hacking, you can use the owner occupied products like FHA loans to get in the property for low money down. I don't want to live in a C type multifamily. I've moved beyond that stage in my life. In fact, I probably will never live in a multifamily again. However, while you can make it work, you can probably get your foot in the door for some great properties by taking advantage of the owner occupied products!

The things I feel like you need to answer are:

1.) Make sure you're accounting for all the basics when you do the cash flow formula, which I think you're probably tracking based on your readings, I just can't see your work.

2.)Why is this an emerging market?  What indicators are you seeing?

I hope this helps.

Good luck out there!

Cheers,

-Sam