Would you buy for equity but no CF? Please advise!

Question

Hi BP,

I am analyzing a deal that I am interested in, almost turn key, ARV: $150; asking price: $115K, closing cost: $2K, repair cost $7K.  All in cash for $124K.  Assume I can refinance and get back $112.5K (75% of $150K), my cash out would be around $12K, equity gain would be: $25K

My diploma is this after I deduct all expenses including PM, commission, mortgage, tax, hoa, insurance...I end up with almost nothing ($500 a year is my number).   I am still interested because it almost doesn't need any work (even though the seller quote $7K for paint and clean up), I can take advantage of the equity built up through tenant paying mortgage, depreciation.

Am I off base here?

Thank you much in advance for your input.  I know the experience investors would not but I am a newbie, still trying to learn and built up my rental portfolio by having tenant pay my mortgage.  No CF now so the only thing I can count on is the benefits of having a rental or decide to sell after 1 - 2 years?

Jason Hirko · Answer

@THU NGUYEN I used to do this all the time when I was still investing in SFRs, specifically when I could get the property with $0 out of pocket. I figured the rent was paying down the note, thereby building equity, and any cash flow I did get, just paid down the note faster. Eventually I owned a property outright with none of my own money. Cash flow is over rated.

Jay Hinrichs · Answer

depends on where your investing I have always been in CA  OR WA high appreciating markets were cash flow while nice is not the driver at least for me.

other markets that have stagnet appreciation numbers .  that s a whole different thing.. you MUST have cash flow other wise why buy the property.. cap ex over time will kill you if you have no appreciation and no POSITIVE CASH FLOW

Joshua Martin · Answer

@THU NGUYEN Good question, interesting answers. Yeah I think it'll depend on the investor. As posters have mentioned, they've done well with the long term play (buying for equity and appreciation), but I'm a short term player, I'm going for cash flow (because I don't currently have a job I like and want to stay in).

Best of luck,

JTM

Jay Hinrichs · Answer

depending on where it is  that is primarily how I have invested the last 40 years.. appreciation being one cash flow down the list.... but that's just me and that is contrarian to many's thought process's but I am also in the business so I don't need cash flow my day to day real estate activities provide all the cash flow I need...

Chris T. · Answer

Besides the points that were mentioned before.

1. Ask yourself, what if your unit is vacant for several months, and/or you have to evict a tenant? Do you have enough reserves ? If you don't have several months of reserve, I would highly recommend against it.

2. Did you account for everything including capex, vacancy etc ? If you did not, your cf may be negative if you have an unexpected expense. You mentioned hoa. Some of them do have special "1 time assessments".

3. What happens if the prices start going down instead of appreciating?

Everything depends on your risk tolerance.

THU NGUYEN · Answer

Thank  you much for your input.

Curt Davis · Answer

In my market cash flow is king while appreciation is low at best.  I put most of my properties on 15yr notes and by doing so makes cash flow much lower then it would have been on a 30yr note.

If you dont need the cash flow to live on then go for it if the appreciation is high.

Good luck

Clayton Mobley · Answer

@THU NGUYEN I'll second what many have said here already - if you don't need the flow right now, then having tenants pay down your mortgage so you own it outright without too much out of pocket is always a great plan. Our clients often use leverage to purchase multiple props at once and just let tenants pay down the notes, devoting all flow to payments instead of taking the income. This strategy results in fully owned portfolios in a relatively short period.

Cash flow is great, and for those who need the income to supplement a W2 etc, it can be a deal breaker, but it isn't how wealth is built long-term. I would never advise someone to buy a property based purely on appreciation (that is, buying at prop under the assumption it will be worth more later without considering holding costs) because you do need income to keep it from being a liability rather than an asset (as was pointed out above). But if your rental income covers all your costs and pays down your mortgage, then you're basically just letting someone else pay for your investment, which is right where you want to be. And if you are refi-ing to pull out cash to reinvest in another property, you're building your portfolio quickly, letting your tenants pay it off, and setting yourself up nicely to have free and clear props that do nothing but flow when you actually need the income to live off of after retirement.

If the property is solid, the neighborhood is good, and it TRULY is turnkey ready (not just aesthetics) and numbers add up to a net positive flow, even a low one, you're still getting a good (and increasing) total return because of the equity build up over time. The only consideration I would have is whether or not you could use your cash on hand for the down payments on several props, using financing to build your portfolio more quickly, as in the strategy above. Either way you're out the same amount and have other people footing the mortgage bill....

Best of luck!

Clayton

Mark Kao · Answer

cash flow is investing, appreciation is speculation. If it costs you money to hold, it's a liability, if it makes you money it's an asset

THU NGUYEN · Answer

@Jay Hinrichs...Thank you for your feedback.  I do not need to CF to pay bills either.  It would be nice of course but from reading and listening to podcast, it seems like CF is the key driver for rentals.  I just want to make sure I am not making mistakes.

Would you buy for equity but no CF? Please advise!

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