How important is Cashflow?

Question

Looking at a property in a northern suburb of Indy. Its an off market listing. Purchase price is 48k. From the looks of it, it is in good condition, and can rent without doing too much (B-C neighborhood). Planning a rehab budget of $7500. Looking at other properties in the area, I feel that it can possibly appraise for closer to 70k if not more with some paint and new flooring. It will rent for $750/month.

I put the numbers into DealCheck:

the COCR is 4433.5%,

ROI is 7508.9%.

Total cash that will be left in the house after refinance would be $197.

The only downside I see is that the cashflow is at $71/month.

This would be the first rental property, and I am VERY GUILTY of analysis paralysis. Is this a good deal? Should I be concerned about the lower cashflow? Anything I am missing when looking at properties?

Any help is greatly appreciated!

Shiloh Lundahl · Answer

@Justin Krautkremer If this property is the property that gets you in the game and you have enough cash reserves to handle things if they don’t go as planned, then cash flowing $71 a month is fine. My first buy and hold maybe cash flowed $100. But when I sold it I gained 50k from the sale and I had confidence to buy more properties. Now I am

Able to buy properties that cash flow several hundred dollars a month and I am able to gain 70k or more on their sale within a few years.

Your first property doesn’t create financial independence. Your first property is your practice property to learn what it feels like to be an investor so that when a really good property comes along, you already have a system in place that allows you to jump on the new opportunity quickly and get the deal.

Evan Polaski · Answer

@Justin Krautkremer, if your reserves were $500+ per month on a newly built property and you still cash flowed $70/month, after those reserves and management (don't forget leasing too, unless it is built into your management contract) and you refi'd all your cash out in 12 months, then I would say cash flow isn't the end all be all.

The couple big things I am wondering: We are in an insane RE market.  I am not saying you didn't find a good deal, but I would be going over the structure of the house very closely if you think you are getting a house for $45k, that is worth $70k with essentially no rehab.

Secondly, how long do you think you will hold this house?  $200/mo in repairs, Capex and vacancy is very low.  On top of being a $750/mo rent, so presumably you will have $750 in sec deposit if the a tenant does a lot of damage.  But a new range will cost you about $600, a new roof will cost you probably $6,000.  Again, I don't know the house or condition.  I know what "off market" houses mean in Cincinnati, and I know what $45k gets you here.  Combine these two and I can't help but assume you are going to be underwater with big repair bills coming almost immediately.

Joseph Hummel · Answer

@Justin Krautkremer

If you shoot so low you can even hit yourself in the foot.

My advice is keep planning and saving for something bigger.

It’s not paralysis you just aren’t ready and don’t get hung up on numbers just make sure your gross rent exceeds all your expenses by whatever cash flow you want.

Banks typically won’t finance under 50k loans either - so like I said aim a little bigger.

Joe Villeneuve · Answer

There is no way a property can have that high of  a cash on ash return with only $71/month in cash flow.  It's not mathematically possible.

Simple math, running the numbers backwards says the following:

1 - Appraisal at $70k2 - REFI at 70% of $70k = $49k cash back3 - Cash flow at $71/m = $850/yr4 - Total Cash back = $49,850

This means, in order to get a 4433.5% (I'm laughing hysterically now) CoCR, you would have had to have only paid $11 out of pocket, in cash, for everything.

Aside from the questionable math, if in the end you only get $71/month in CF, don't buy the property.  That sound you hear in the background is a dog...barking.

Andrew Syrios · Answer

Cash flow is nice and $71/month is tight, but I don't think cash flow is the end all, be all of real estate investing. The big thing is building equity over time by buying right, appreciation and principal paydown. Cash flow makes it so you're not doing a pyramid scheme and don't have to feed your investments (plus some extra cash is nice). Not until you pay off the loans will the cash flow be a lot. The biggest thing with cash flow is that it cash flows enough to hit the DSCR ratio most banks have (usually 1.2). That would be my biggest question with this property.

Justin Krautkremer · Answer

I am very new, and I appreciate your responses. Upon looking at the figures again, I forgot to say that I am hoping to get the property for 45k, and will be paying cash for the purchase. The COCR was WAY OFF. Not sure what I was thinking or looking at. It should be 266.9%.

Planning on leaving 20% in the home and taking 80% out. Refinancing $56k before refinance costs added on. I am assuming a 4% interest, but that might be too low.

Also, putting aside just over 25% of the rent towards future repairs. I guess you can say that the total of CapX, Vacancies, and misc expenses during ownership amounts to just over 25%. I like round numbers, so I rounded it to a full $200 Also planning on using a prop manager 10%.

rent =750

Management = 75/ month

property tax = 79/month

Insurance = 60/ month

Vacancy/CapX/repair fund = 200/month

Loan = 267/ month

Cashflow = 69

Again, I appreciate your responses.

Jay Hinrichs · Answer

my concern would be a 48k property north side of Indy and thinking its a B  area.. it for sure C or lower given the price point.

and why not look in Kokomo there are areas just to the east of downtown that are very affordable for first time buys..  I have a rental there I can sell you that will cash flow at my price to you and not need to take risk on fix up.

Ben Miller · Answer

$71 in cash flow could be eaten up incredibly easy with a repair or extended vacancy.  If that is the most likely outcome given your other assumptions, no matter the return % you came up with, I suggest passing. Wish you luck though!

Daniel Smyth · Answer

@Justin Krautkremer

I think your numbers are off.

If you cannot get $200 cash in pocket after all expenses per door, the deal is not in your favor.

Find out the math issue in the figures. Look to see the numbers that can be changed with negotiation or financing.

Poor cash flow is not investing, but collecting.

Brent Coombs · Answer

@Justin Krautkremer, $71/m may not seem much, but, when it comes off the back of zero of your own dollars left in the deal, it's $71/m free money!

ie.  That's "infinite returns" in action.  Good luck...

How important is Cashflow?

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