Can't find cash flowing property. Is the market over-saturated?

Question

Hello all,

I'm a first time home buyer looking for a duplex/triplex around Philadelphia, and I'm becoming very confused as to how many houses will leave me with a negative cash flow. It's becoming next to impossible to find a house that will net me a positive cash flow while also being located in a somewhat decent area.

Take this property for example:

Asking price:  $230,000   Rents: $1,400

Expenses:

• P & I (based on 5% down): $1,100
• HO Insurance: $90
• Mortgage Insurance: $130
• Property Tax: $220
• Vacancy and Property Management: 10% of rents each
• Repairs: 1% of purchase price per year

This leaves me with a whopping negative $615 per month, and a cap rate of 3.5%. I realize MLS numbers are typically high, but this seems ridiculous. I would have to offer 55% of the asking price to even have a positive cash flow.

This is a more extreme example, but almost no houses I have looked at have had positive cash flows, and I've been looking for months. Also, houses are still being sold.

So, my question is: is the market really this over-saturated and seller-friendly, or am I doing something wrong? Are my estimates too conservative?

Any help would be very much appreciated. Thanks!

Derek

Paulette Midgette · Answer

@Derek Badgley, I am in Philly and am a buy and hold investor.  I must say that I disagree with your assessment that there are little to no multifamily units in Philadelphia that will return a positive cash flow.  I ran some numbers just last night on 3 properties and all cash flowed, even with factoring in a mortgage.  I currently have two properties that are cash flowing very one.  A condo in Old City (purchased 10 years ago when no one was really interested in investing in Center  and a duplex in the Burholme section of the city, purchased last year for less then $100,000.

The one problem with Philadelphia right now is that there are so many investors running around the city buying up anything and everything...not running the numbers properly or looking at what it really takes to run their business (such city taxes and fees).  They are driving the prices way up, practically MFH.

Since you live here you Philadelphia is a big city with a lot of neighbors.  The majority of the people in these neighbors that investors are ignoring are good  working class people who have and well continue to keep this city stable.  These are the neighborhood I suggest you target. If I am paying $250,000 for a MFH it will be 5 units or more.  If it is a duplex I won't pay more then $100,000-$125,000 depending on the neighborhood.  Average rent for Philadelphia for a 1 bed/1bath is $650 - $750.  Run these numbers against a $100,000 purchase with an average monthly rent of (1 bed/1 bath duplex) of $1350 and you can cash flow.  I assumed a 10% down payment (in order to better your cash flow you need to put more money down if possible) and 10% vacancy and a 7% management fee (10% is too high).  Take a look at my assessment below:

Asking price:  $100,000   Rents: $1350

Expenses:

• P & I (based on 10% down): $422
• HO Insurance: $60
• Mortgage Insurance: $56
• Property Tax: $202
• Vacancy and Property Management: 10% of rents each
• Repairs: 1% of purchase price per year
• Various City expenses (trash collection, water, etc).

P&I (plus PMI) total = $740 per month

Expenses (estimated on know factors and experience) total = $325.00 per month

Monthly rent of $1350 - $740 - $325 = $285 cash flow per month.

I would encourage you to take hard look at how to bring down the cost of your purchase and up your down payment.  Also, look at properties that need a little TLC, this could help to bring the purchase price.  Philly is notorious for small houses and it won't take much money to brighten up these spaces.

Cash flowing properties are out there, it may take you expanding your search to neighborhoods you think may not be "good".  Take a drive, you may find that there are more good neighborhoods in Philly than you previously thought.

Frank Chin · Answer

I attended the NYU school of real estate some time back, and they have guest speakers that comes from time to time to talk about what they do. One spoke about doing call calling to do deals before it goes to MLS.

What he does is he goes thru the public record, looks for people who owned their properties for 30 or so years, cold calls, and ask if they need his service. His family runs a real estate office. He concentrates on small mixed use properties, a store with one or two apartments above. For these, he offers a triple net lease. He loves these, because he has an option to buy. And the logic is he targeted old tired landlords, waiting for someone to take properties off their hands, besides getting paid.

I saw both the seller and buyer side as in the 1980's, my dad owned a property since 1963, and got cold calls, and ask me what to do. On the plus side, folks are offering $250K, 10 times what he paid for it. Then I asked him, did you check with realtors what it's worth, and have plans where to move to? The answer was no, and when he checked, its worth much more than the $250K, and he plans to rent a place. So I told him, it's stupid, you're living rent free, and you're a young guy of 65. The end result was he didn't sell, kept it till two years ago when both my parents deceased, and it was sold for $1.1 million.

A few years ago, a neighbor was planning to move to Florida, another neighbor heard about it, offered him $450K. The man couldn't believe his good luck, ready to sell, till his wife and daughter insisted on him checking with a realtor. He checked, and the broker said it's worth $500K. He didn't believe it till a bidding war broke out and it was sold for $539K.

I guess you worked hard, you can get hold off properties before MLS. But around here, I wonder if you're taking advantage of oldsters? I bought properties at the bottom of the last cycle at auctions from banks, and don't feel guilty about it. So what if the bank got screwed.

It's very coincidental I received a cold call last night from someone who asked if I need his real estate services. I said I didn't and he mentioned I had the house for a while, and if it's OK to check back in a year. I said, that's fine.

I laughed to myself, somehow the public records show me to be an old tired landlord.

Scott C. · Answer

Good, positive info. Thanks @Paulette Midgette

Joe White · Answer

@Derek Badgley I see cash flow properties a lot. I was just selling one that will likely cash flow over $1k a month - after debt, vacancy rate, cap ex, ect. You just need to keep your eyes open!

Steven Stokes · Answer

@Derek Badgley I don't live in Philly but I do live in San Francisco which is currently the highest price market in the country. There are some things you can do:

1. Look for duplexes and four-plexes these are still considered single family homes. FHA will finance these with as little as 5% down.

2. Widen your search area. I'm talking about different city and towns.

3. Consider investing out of state. I wouldn't recommend this to new investors but if you pick a state, drive to that state and that market to get to know the area, then once you feel comfortable that you know the area you can start networking and contact some RE brokers in that area to get the process started. This is not for fixers, this is for buy and hold or wholesale.

You have plenty of options it will just take a little more work.

I hope this helps.

Stephen

Derek Badgley · Answer

Thanks for the replies. I have a very wide search radius across four counties in and around Philly, so I'm thinking the entire Philadelphia market is just too seller-friendly. Now I have to consider taking a worse deal, maybe one that just breaks even, or continue renting.

To be honest, I'm not sure how to find the homes that aren't listed on MLS besides driving around. How do you guys usually find these properties?

The thing that confuses me is that most of these houses are still getting sold. I figured being in the multi-family market would insulate me from higher prices and from buyers making emotional purchases when the numbers just aren't there. But again, these houses with high GRMs and negative cash flows are still selling. So I'm wondering if these investors are really ok with just a 4-5% cap rate, or if they are maybe banking on appreciation? Supply vs demand certainly is pushing the prices up, but I didn't think it would push the prices to this point.

David Dachtera · Answer

What is the availability of off-market properties in your area? ... those not yet listed on the MLS, for whatever reason?

Residential multis in most markets will be tough to cash flow unless you can find a motivated seller who will cut you a deal on the price. Those get snapped up quickly once they're listed. So, ya gotta catch 'em before they "go public". Once it's listed, EVERYBODY sees it!

Can't find cash flowing property. Is the market over-saturated?

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