Quote from @Stuart Udis:
Cashflow is primarily emphasized by beginner investors...."I want to reach XYZ monthly cash flow to replace my W2" or "I want to accumulate XYZ doors to replace my W2 income" with a monthly cash flow number attached to each door they look to purchase. It's a narrative that's pushed through social media, sales brokers, turn key operators etc. It's gotten to a point where C/D located properties in the Midwest are now referred to in these forums as "Midwest Cash Flow Properties", as if a new asset class has been created.
The problem this creates is that of expectation. Many who are buying these properties have an expectation their properties should cash flow xyz per month without understanding the true operational costs because the true operational costs are dismissed by those advising them to make the purchases. Making matters even worse, the properties most are buying (the lower tier properties) are disproportionately impacted by operating costs and cap ex. The consequence of the unrealistic expectations: buyers becoming terrible operators of their real estate....failing to keep up with cap ex, going the cheapest route on repairs etc. just to maintain the cash flow they expected. Unfortunately this only leads to greater problems down the line because its not sustainable.
Nothing exemplifies this better than an interaction I had yesterday in the forums with a fellow poster who bought a $150K turn key house and posted the homes marketing photos. The sidewalks were destroyed and the walk way concrete was off set. Repairing the sidewalk came down to a risk benefit analysis. This was deemed a "Midwest Cash Flow property". If failing to maintain your property is the only way it cash flows, I am sorry but that is not cash flow.
Yes, that's a huge problem. "Midwest Cash Flow Properties" are literally between 60 and 120 years old. Plumbing, windows, driveway, etc - all big ticket items. The problem get's amplified by OOS investors who buy sight unseen and have no idea how bad it is. The problem is that we start seeing public push-back from the DNS (Department of Neighborhood Services, they issue fines) and the press: it gives landlords a bad rep - the newspaper does not differentiate between OOS and local. It just says "landlord" and shows a nasty picture..
A while ago I got a call from a guy in Texas who was desperate, 3 of his 4 Milwaukee properties have been vacant, PM can't find a tenant for months, pictures look fine, makes no sense. He is a friend of a friend, so I go there and it is immediately clear why nobody is renting. The level of grime and disrepair is absolutely extreme, the house reeks, trash in the yard. PM staff meets me there with the keys and says, yeah we told the owner, but he did not want to pay for anything that exceeded the cash flow.
I talk to him, he wants out. It took about 15k to clean, paint and band-aid the property to the point where we could fire sale it. Priced at $120k it was surprisingly hard to find a buyer. I am usually selling high-end properties and am used to multiple offers.
The first buyer walked after the inspection, not for one particular issue, but for the sum of all of them, inspection reported a lot of "beyond service life" items. Weeks later found another buyer, barely qualified, a pain to work with, does not respond half the time, red flags all over, seller is motivated. We ended up giving massive concessions after the inspection. We thought it was a done deal; buyer did not show for the closing!! Took me weeks to track him down and sign a CAMR. Meanwhile some dumps 2 old mattresses and a bunch of tires in the front yard. By the time I get my trash guy there, he says there was trash too. I made it work the third time.
I think the whole thing took me 4 or 5 months, I think my TC spent more hours on it than we made in commission.
Never again!!
