Is this a good time for first time investor?

Question

Hi all,

I am looking to start investing in multi family around Boston area. Specifically in Dorchester, Roxbury, Quincy, Chelsea and Everett. My plan is to invest in a 3 family home as primary residence. I am looking at 1M or lesser value properties in these areas. With the current interest rates and taking into account all the operating expenses, all I see is negative cashflow for most properties.. Is it even reasonable to expect to break even since day 1? Or is this bad timing for first time investors?

Randall Alan · Answer

@Apoorva Paruchuri

It is absolutely reasonable - and I would argue NECESSARY - to break even from day one.  I would concur with your analysis that "All I see is negative cash flow for most properties".  This is because the Fed's rate hikes are attempting to slow down the economy (in general), which is definitely impacting real estate.  When I started investing in 2018 (age 47) my target positive cash flow was 'at least $300 per door'; and I was able to easily find that with investment interest rates in the 4-5% range.  Since then - housing prices have skyrocketed - pretty much doubling where I'm at, and interest rates have gone up by 50% since that time.  It's just not a combination that is functional from an investment point of view.  Homeowners can opt into those payments, but if you are trying to make money in real estate, you will be hard pressed.  With that said, I do find properties that will cash flow - but poorly, relative to previous years.

Others may argue that it is totally possible to cash flow negative and make an appreciation play - but in my book that makes little sense in today's market.  2 years ago - sure, housing was on fire - but even then I personally would never have bought something that wouldn't cash flow.  There are three 'legs' to profiting on most real estate investor's stools... 1 - cash flow; 2 - appreciation; and 3 - mortgage pay down that is done by your tenant.    Each makes you money.  Appreciation being the biggest money maker.  But it takes cash flow to hold onto the property while appreciation takes place.  So without cash flow you are going backwards on your investment waiting on the market to appreciate.  And in today's market, if the Fed's actions have their desired effect, appreciation will be going negative as well.

So until the markets settle back down, and interest rates come down, and (hopefully) housing prices come back in line (with at least interest rates) it is really an uphill battle to try and buy into most properties today.  In short, your last answer is correct: it is just bad timing to be a first time investor.  Which only means you need to continue to learn, analyze, and be sure to be smart when you make your first investment.  You need a number as a guidepost as to what a good investment is, so you will recognize it when you see it.  $50/ month / door isn't it.  I would say $300 is a descent number still.  But to put it in comparison... in 5 years of investing, I have mine up to over $650 / door.

For clarity though - part of that is through rent appreciation (increasing rents as the rental market has gone up), as well as making moves with properties that let me maximize my income by shedding debt.  Example:  We owned 27 properties.  With high appreciation, we were able to sell a property for $275,000 - which we paid $125,000 for it 3 years earlier.  While we could have used those proceeds to buy more properties - we were happy with the 40 doors we had (as we self manage) and instead went for an equity play and used the proceeds to pay off 2 other properties entirely.  The increase in cash flow by losing the mortgages on the 2 properties was in excess of the rental income we lost by selling the one property.  So by downsizing we actually increased cash flow.  Obviously, we lost an asset along the way, which means we also lost future appreciation - but for where we were at it was a great move... the property we ditched was one we hated - far away, and always had tenant issues.  So there are often multiple factors playing into your decisions.

So - be patient, learn along the way, and always be looking.  Real estate, like most investments in cyclical... good buys will come back around.

All the best!

Randy

Billy Daniel · Answer

I don't think positive cash flow is necessary while you are house hacking.  You do want to make sure it makes sense if it was fully occupied with tenants though.  You don't want to be in a situation where you have to move and now it's negative at 100% occupancy.

It's unrealistic to buy a triplex and expect positive cash flow at 66% occupancy on day one, in my opinion.  The caveat being that it required a great deal of renovation.

Markets are incredibly uncertain right now.  There's an equal chance that you pass on the deal and end up saving yourself a headache of a bad buy and you buy the deal and enjoy the investing lifestyle.  If it were me and I could have a tenant-subsidized mortgage payment, I'd take it (assuming paragraph 1 is met)!  Good luck!

Sean Kelly-Rand · Answer

@Apoorva Paruchuri - I would wait to see if you can hit breakeven. To be fair you need to ask yourself is this an investment or a primary residence - if it's really a primary residence and it's just about having a little extra rent to help with the mortgage than breakeven matters less, more important is it a house/location that you want to live in - if this is your key stepping stone into buying more than you really need to buy the first one right.

It's hard now with rates to make rental numbers work but I suspect that prices will soften later in the year (they are typically lower in winter regardless - seasonality etc...).

Hopefully it's useful thoughts,

-Sean-

Julien Jeannot · Answer

It's always a good time to buy. If I had applied all the "rules" and listened to all the experts, I would had never bough my first duplex. Apparently I overpaid for it, the cash flow was dismal, it was in a suboptimal area, and the list of reasons kept going.

Fast forward 5 years, cash flow is up 100% and equity 2x. What I learned is that its better to get started and figure it out along the way. Work with an experienced broker with who invests, put in the work and it is likely to succeed.

Better buy an ok deal then sit on the sidelines for years awaiting for the unicorn.

John O'Leary · Answer

I'd start with creative financing solutions, and partner with a good lender to help evaluate these types of deals. Smooth waters don't make for skilled sailors so getting into investing now will provide you with so much knowledge on how to navigate a down market in the future. Don't have any knee jerk reactions and force yourself into a bad deal, just find the right opportunity.

Good Luck, you will 100% crush it!!

Bud Gaffney · Answer

@Apoorva Paruchuri start now :)

Sam McCormack · Answer

@Apoorva Paruchuri

Unless it is in a warzone or the best deal of your life, it won't cash flow. But you will save a lotttttt, with househacking

Colin Kelly-Rand · Answer

@Apoorva Paruchuri

I do think you need to find a property that breaks even with you living there and not paying rent, and makes money when you move out. Yes, its hard to find now . I would continue to look so you are ready to pounce when a property that meets your criteria hits the market and you can get in an offer that same day.

Also - I do not think you should be looking at only 3 families - consider condos as well that are mispriced (developer needs to sell before his lender forecloses type of mispriced).

In general - be opportunistic - get your finances in order (what can you afford, what type of loan do you plan to use) and once that is in order - start reaching out to brokers and letting them know your criteria. Perhaps you will get an advance notice about a property that will be hitting the market (or an off-market listings).

The greatest benefit when buying a cash flowing property with high rates, is you benefit when rates fall and refinance. I can imagine 5% rates coming in a few years, I am having trouble imagining 2%-3% rates in the near term (so anyone who has a 3% now is rather limited in their refinances).

Xavier Mazza · Answer

Great and very in-depth analysis! I have been wondering for some time what an appropriate amount of cash flow would be on a rental property. Thank you for sharing your experience sir.

Hamp Lee III · Answer

There are always deals out there. Keep watching the market and adjust your strategy as needed. In our market, we have a lot of overpriced multifamilies on the MLS, but there are some four-places that will cash flow. Not so much with the tri-plexes and duplexes.

I wish you all the best.

Is this a good time for first time investor?

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