All Forum Posts by: Bryce Renicker

NO WAY!! This market will eventually stumble!! I have read some crazy stuff on this thread!! A deal that does not work, does not work!! There will always be more deals!!!!! If someone even tells you to sniff it then send them a contract to use their money to buy the deal!! 100% sure they will forget you even exist!! You are here to make money you are NOT doing this for your health!! ALWAYS figure the worst outcome in the deal, if it works then, it is a winner. If you have to make it work then walk away!! Trust me deals are out there you just have to work for them. Go to every bank and talk with every officer about what you are looking for, senior citizen centers, nursing homes, local hardware stores, anywhere you can think of that might have an elderly person who might be ready to get out is who you are looking for. Heck you may find someone who will owner finance it for you since they don't want to pay that moron joe any taxes!! I can assure you there is someone out there who is old and has a deal that they are wanting to get out of because they are tired of it.    

@Bryce Renicker I work through this issue with clients all the time. I took a quick look at your numbers, and right out of the gate you are building in property management for a property that you are house hacking. 2-4 units in Chicago rarely cash flow with the FHA loan/professional management combination, and that is ok! You aren't going to use a PM. Honestly, people rarely do until they get a ton of units under there belt and have to make decisions about keeping a job versus jumping in to manage full time. A 2 or 3 unit building will take you maybe 2-3 hours a month to manage... honestly would you be ok saving $100 per hour at this point in your journey?

The other thing to remember is that your FHA loan is often times treated more like a bridge loan by most investors. Too many newer investors obsess over the interest rate and terms, and then try to refinance out of the loan in a year so they can buy another FHA deal. If you are able to see appreciation or pay down the loan (or a combination) to get your 20-25% equity, then you can refinance out. This saves you roughly $275 on the deal you have here! That is $3300 per year.

This is where people need good advice from their team. If you buy a good building and have a solid business plan to get to healthy cash flow then yes it MIGHT be ok to take on negative cash flow for a while. 

 First off, I am going to touch on something nobody has done in this thread. Using a 5% vacancy factor is most likely your BEST case scenario and you or anyone else should NEVER use "best case" for underwriting your deals. Second, 7% maintenance - that is certainly a good number, many use only 5% but what is missing is capital expenses which should also be 5% for a total of 10%. You are also missing other expenses like accounting, legal (if and when you have an eviction or any need for legal fees), leasing fees (PM's will manage for the 10% you show but they also charge a decent portion of the first months rent for leasing fees too). All in all, your negative cash flow projection on this deal is too low, your negative will likely be greater.

Now, with that said, I too will take a different approach than the majority consensus here with a caveat. Cash flow is only ONE income stream that stems from buy and hold investments in RE. There are a number of other factors in buy and hold real estate such as amortization, depreciation, cash out refi (non taxed money), forced appreciation (can be from lower expenses, raising rents, value add opportunities, etc.), market appreciation, etc. On top of that, your tax exposure can be very much limited to non existent with the right buy and hold plan and cash flow of a few hundred dollars for each door is nothing compared appreciation over 10 years.

Speaking about CA RE only, any person can take data from any 15 year hold period and find results that prove that the market appreciation alone with beat the best cash flowing cities in America hands down. Does that mean nobody should buy cash flow properties anywhere else? Of course not, to each his own is a huge factor here. There is no right or wrong answer here generally speaking, although many of the posts above are expressed that way. What is best for you and what pencils out best for you vs your risk factors, your desires, your abilities, get the point? It is great to hear other people's perspectives and once you sift through them all, the final decision on what will be best for you is left up to YOU, not us. Age is also a factor, for those who are older, cash flow for monthly income may factor in as a higher priority than negative cash flow with long term future appreciation plays, whereas a younger investor may go down the other road.

In summary, take people's opinions and suggestions and use that to help gain a better understanding of the big picture, then make the decision that fits your goals and needs (along with your financial advisor/CPA). - Don't miss this important factor - get the opinion from your CPA with a side by side comparison of multiple avenues to see which is best for YOU.

I have flipped a lot of properties, especially over the last 10 years and what I wouldn't give to do it again, only this time, keep 1 out of every 5. I would have made more money on appreciation of these homes in So Cal than all the flip money combined, especially when you factor in tax exposure.

I agree with @Joe Villeneuve that paying more upfront to cash flow is purchasing the cash flow and at too high a price.  

I do not agree that cash flow should be the only criteria or even a primary criteria.

If you need the cash flow to make the bills, then cash flow is critical.  If that is not the case and you are in a position to be able to handle unexpected items such as an eviction moratorium that could result in a year of no rent, then the total return is how a RE should be evaluated.  I have the resources accumulated from RE investing that I do not worry one iota about cash flow if the total return meets my criteria.

Here is the reality about cash flow: initial cash flow has a poor correlation to actual cash flow over a long hold.  In my poor initial cash flow market (San Diego), I have multiple properties at better than 2% rent to purchase ratio.  The best initial cash flow is in places that the market is anticipating poor appreciation or considers high risk.  This is because the RE market is efficient and based on numerous parameters with projected appreciation and projected risk being 2 of the more critical.

There are numerous reputable references for historical appreciation and/or historical return on buy n hold RE (Case Shiller, neighborhood Scout, Zillow). Looking at these reputable references indicate that the best return is achieved in markets that had terrible initial cash flow. Case Shiller has the 3 top returns in the US for this century as San Francisco, Los Angeles, and San Diego. All 3 markets have poor initial cash flow. An average purchase in any of those 3 cities from 5, 10, 20, 30, 40 or 50 years ago would produce better ROI than an average purchase in the great initial cash flow markets.

As indicated I have multiple 2% ratio properties (that would have outstanding cash flow if they had not had cash extracted, so they have OK cash flow), but what about the appreciation?  My worst appreciating property over the hold period is $1900/month.  The best is over $6K/month.  Do I think my purchases were outstanding?  some where, but most where normal purchases and 2 were slightly poorly timed purchases (both depreciated after purchase).  Even the poorly timed purchases have appreciated at least $1900/month.  I wonder how many properties with great initial cash flow have total returns that can match just the appreciation of my properties?  I suspect very few if they are small unit count properties.

Cash flow gets taxed.  Minimizing cash flow minimizes taxes.  Appreciation gets taxed if you sell without a 1031.  If you die before you sell, the RE gets a new value base and the gain evaporates.  With the current laws I expect to never pay taxes on my RE profits.  The goal should be as much return with as little via cash flow as possible (at least until the rules change).

Good luck

@Bryce Renicker

I bought a 4 plex in Rogers Park 5 months ago. The top 3 units are 4 bed 2 bath, the garden is a 2/1. In the listing the rents on the owners unit alone were listed $500-600 under market. I converted one unit so far to by the bedroom model. PITI w utilities are $4900, gross income once I move out will be $6900 - you can find deals - I got this for 25k under asking! It was just over the FHA limit when listed so it didn't pop up on most of their searches. It worked out in the end because with seller credits I still ended up with only 3.5% down.

Look for listings where you can raise rents or do a by the bedroom model. I may convert another unit to Airbnb and the last one to a by the bedroom - it’s at least easy to manage while house hacking.

All I'm saying is that when I joined BP years ago, the mantra was that investing for appreciation was gambling.  Now that we've had this epic run-up in prices, the mean sentiment seems to have shifted away from that and has somewhat progressed to one where no cash flow or even negative cash flow is acceptable because your property will appreciate in value. I consider that to be a somewhat dangerous line of thought. RE, like many other asset classes, is highly cyclical. In ANY type of due diligence when evaluating an investment, you have to ask yourself where we are in the RE cycle. Is it the time to be banking on appreciation?

And as a reminder, I'm an investor that relies heavily on appreciation. But with that said, I never invest in anything that once stabilized, still has a negative cash-flow. All of my local properties had positive cash flow from day one and I will never invest in anything that pencils negative. 

I agree that it's still hard to see anything that would cause us to enter a pull-back phase. But once it does start, RE downcycles last for at least a few years. It's also hard to picture rents going down, but I'm pretty sure rents will level off and slowly decrease in the next downcycle. It just wouldn't be worth it for me personally. I would still want the comfort of having positive cash flow (even if reduced) during an economic downcycle.

Of course, in the long-term, all RE goes up. So even a terrible purchase today will always look good when given enough time.

Also, I just reread your initial post. You're going to start with a house hack with 3.5% down......that changes things significantly! Even if it pencils negative after you move out, if you find a place to house hack with 3.5% down and you like it, I say go for it!  

Agreed...everything cash-flows with sufficient capital up front. Also, and I don't mean to single you out Arlan because I'm speaking in general terms, but I'm pretty astonished at how everyone used to label investing for appreciation as gambling. Now, so many people are posting about appreciation. As someone who lives in Los Angeles and relies heavily on appreciation, I can tell you without any uncertainty that investing now and counting on short term appreciation in the current market environment is what I would call gambling. Unless you're an experienced value-add investor, counting on appreciation right now is not a good idea. 

And now a word from the other side of the aisle. 

1)While you were househacking, assuming this is the kind and price of place you would rent anyway, you are several hundred per month better off as you are paying down your mortgage instead of your landlords. 

2) By the time you move out/move on I’m going to assume rents will rise at least $100/mo per side so you are cashflow even. If you don’t think rents will rise, don’t buy.

3) the reason this property isn’t cashflowing, as you said, if because of your low downpayment. BUT, the same people who say not to buy it because it’s not cashflowing would call you dumb for paying extra towards your mortgage. But putting more down is exactly that, paying more towards your mortgage. 

4) you’re getting a better internet rate for the next 30 years because you’re living in it now. That will save you $10’s of thousands of dollars. 

5) you’re paying off at least $210/mo towards your loan, so while you’re cashflow negative you’re still making a profit. If this was an interest only loan and it broke even you’d be in the same spot. 

6) one of my best investments now is a townhome on the lake that cashflowed negative $900/mo for 7 years. it was making a profit of about $10k/year the first year and now that it’s paid off it makes over $20k/year, all cashflow. This is the same tenant for 7 years. Probably 4 phone calls. A new garage door opener, a fridge and a leaky faucet. 

If this is your only way to get in to real estate and are confident you can afford it. I don’t think anyone on BP thinks interest rates or prices will be lower in 5 years. Prices could easily increase faster than you can save more for a downpayment. 

You are beginning to sound emotional, and are rationalizing a bad deal into a good one.  Walk, not check that, RUN away as fast as you can and don't look back.

Someone said it would be OK if your income could cover the negative CF.  WHY?  That's like saying, I have a full time job that pays me enough so I can go work a second job, and pay the employer for the privilege.