All Forum Posts by: Michael Kotylo

You're playing checkers when you should be playing chess. Location is the most important criteria. That and the value of the subject property compared to the surrounding properties. It's hard to find high initial cashflow in a good location these days, but this is where property values and rents go up faster, which results in higher cash flow after a few years as rents appreciate not to mention much more overall wealth-building profit from property value appreciation, tax benefits, and principal pay-down. 

Forcing appreciation (buying the worst house on a good block and improving it to the condition of the other properties, then raising rents according to the improved condition) is a much faster way to build wealth than buying purely for nominal cashflow like $200/month and waiting. However even without an active value-add strategy, if the property is in a good location then it will do well from natural appreciation and you will have good cashflow over time through rent appreciation. In less desirable locations the initial cashflow may be higher but property values will be flatter and rents will only increase on pace with inflation if that.

You're looking at SFRs as if they're commercial or multifamily (the income approach to valuation). Single family properties are valued based on comps and others will buy them at fair market value according to supply and demand. What a potential buyer's projected cash flow might be or what their spreadsheet calculator magic ball says doesn't factor in to the sales price typically (unless in an area where only investors buy). I'd recommend making offers based on all the facts of the property and looking at the big picture, primarily focusing on location instead of current cap rate. Properties in good locations will usually do well for a buy and hold investor even if initial cashflow is low. Properties in bad locations, not usually as much even if the day one cashflow on paper is high.   

@Michael Kotylo - Everything depends on your situation and the specifics of the property. For me, when I first got into REI, I was paying ~$14K year after year in ADDITIONAL federal taxes beyond what was already being deducted from the paychecks of my wife and I. We bought our first two rental properties (one on December 30th of the year) and upon filing our taxes in the following year, we got a refund of $6,000! So that is a $20K difference in our tax situation. Now they didn't - but would they not have still been good purchases for us on taxes even if they had negative cash-flow? And we also got a state tax refund on top of that. Plus, both of those properties currently rent for about $600/mo above what they originally rented for... Now I am by no means telling you to IGNORE cash-flow or to proceed with a negative cash-flow deal. I am simply suggesting that year one cash-flow should not be your only determination of what is or is not a potential good deal. There are also other aspects that should be considered. I missed out on a LOT of what today would be excellent properties to own because the YEAR ONE cash-flow was not good enough for my calculation at the time - and today they would all be strong cash-flow performers... Just my $0.02.

Cash-flow is certainly important, but it's not the only way you make money from rental properties - there are at least 4 others. Also, it should be called "first year cash-flow", as you can raise rents, get better priced insurance, dispute taxes, rehab the property to lower future repairs and capex, negotiate property management fees as you bring more properties onboard, improve processes and marketing to lower vacancy expense, refi when rates decrease, etc... And for me, the tax benefits alone may still make a property worth buying even if cash-flow is -$500/mo. So, to answer your question, I do not look at cash-flow alone... I consider all 5 ways a given property makes money to determine if it will be profitable overall, along with what cash-flow is likely to be 2 or 3 years out.

In Cleveland, Ohio after all PITI + reserves for PM, maintenance and capex the goal would be to get $300 monthly net cash flow off of a 80-120k Single family.

I've made plenty of mistakes so take my advice more of a learning opportunity rather than a "this is how you do it".

Appreciation:
My first investment was right after the 2008 crash.  Not an ideal entry point.  Prices had dropped something like $40k on a slightly more than $200k new home and we jumped in.  Appreciation was great in general the prior few years... until we bought the house.  Prices continued down and we lost a good portion of its value, eventually the market bottomed out, and then very slowly appreciated again for many years.  So many people just walked away and gave the home to the bank.  We kept ours.  Then shortly before Covid hit, the appreciation went up significantly.  There was a slight bump down, but its been going up more recently again.  This was not a good entry point but I was inexperienced and have since learned.  That's just what the market was like in this area at the time.  I bet on appreciation and with my poor timing it wasn't the best.  On the other hand, my last investment doubled in value in under 5 years.

There are many factors to investing in a property, but appreciation and profit (from rent) are two big components. Appreciation is a bet. And it can pay off very nicely. Appreciation here toward the west coast is a bigger factor than in the Mid-West typically. It is very typical out here to have near zero initial profit from investing in a MLS listed property as a rental. Anything juicy is scooped up by insiders and door knockers and those never hit the market. My neighbor has a real-estate friend. The friend finds the deals and the neighbor manages the rehab and they flip the properties. These never see the MLS until the flip is done. Even in our current high priced market this is happening.

Rent profit out of the gate has historically been more of a factor in the mid-west.  Its not my area so I don't know why, but people will pay $1400 a month to rent a $100k property.  It doesn't make sense to me, but it seems to be the case.  I can't really comment on this except in these areas, the numbers you are looking at usually make more sense.

People need a place to live and if they have a job, their income will dictate the amount they are willing to pay and that will partially dictate values of property. Property values and rent prices can become greatly disconnected here. In my area out in the desert with minimal greenery and dubious water sources, the area has become a mini tech center. Households bringing in over $200k now are common. These are also generally buyers (too live in it) and not renters. 10 years ago, prior to most of the tech arriving, I'll speculate the average household income in the area was under $75k. Houses that were $300k back then are now sometimes in excess of $650k. There are million dollar houses around here. If you buy one of these at this price, is there potential for immediate rent profit? For the most part its no, but 5 years ago I was looking at MLS properties that I could squeeze maybe $100 to $200 a month out of and were selling for $225k (with a substantial down payment also) I thought that was pretty good. Once again, the bet on appreciation is always present here. As tech keeps building, prices continue to rise.

Rent:
Back to my 1st investment and the poor timing, rent was stagnant for a good 10 years at the exact same rate.  No joke.  The area was on the outskirts of town and was expanding rapidly and then with the 2008 crash.  It literally froze for a good 10 years.  It really took a long time to recover.  We had a decent enough income and no kids so we could afford the $200 a month deficit.  About 6 years ago I was able to raise rent and it has been rapidly going up since then.  It even has continued to go up over the past year.  With a refinance to a good rate a few years back and the climbing rent, this buy and hold property now is performing well.

My most recent investment from 5 years ago is also paying double the mortgage.  Another buy and hold.  Some of my properties I have bought as a primary residence and when I move on, I just hold them and convert them to rentals.

Long story short, not all buyers are assessing a property's value with your numbers.  Most are not.  Your numbers are valid for your goals, so I'm not telling you to change your formula.  Just know you are competing with people who have different numbers and goals.  Most home buyers just need a place to live and really aren't calculating in the numbers significantly.  Mom and dad with 3 kids and a good paying job come to town having left their million plus dollar home in California probably won't hesitate slapping down 50k or more than you or I are willing to pay on a home if that's what they want to live in.  As more and more come in, prices will naturally rise.  High interest rates just make it even more difficult.  Local renters may to some degree not be able to absorb higher rents ant if the market can't bear it, rents can become disconnected from property values.

If someone needs it to live, they pay what works for them regardless of the investment potential and numbers.  Others are willing to bet on the appreciation.   If all property was sold based on numbers, markets across the country would be turned upside down.  My first investment property brought in -$200 a month rent not including maintenance and vacancy.   Best investment?  Certainly not, but now it's bringing in $1400 over mortgage and has doubled in value.

How are you coming up with this number?

$2500/mo rent but expenses would be more? How?

What is the amount are you financing?

Your numbers aren't making sense.

How many units are in this property? You plan to live in one, did you account that you might have to "pay" rent and that's why your cash flow is so negative?