I have bought and sold and held a number of properties so far. I would like to have a rule of thumb to go by to know which ones qualify as keepers. Does anyone have any input on this?
Paul
The definition of a keeper will be different for different investors.
1. What are your goals
2. Are you looking for maximum cash flow
3. Are you looking for maximum appreciation
4. Which ones are the most management intensive
5. Which ones are the most maintenance intensive
6. Which ones will build you the greatest amount of equity in the shortest amount of time, giving you the money you need for that next great deal.
7. It all comes down to your goals, short term and long term and which properties best fit what your accomplish in a given time period.
Sorry this isn't the rule of thumb you were looking for but hope this helps.
Although it may not be exactly the answer you wanted, you've got all the advice you need right there in the posts previous to mine. It really does depend on what your own strategy and goals are. Just like Ray, the two most important factors for me are area and cashflow. I have other criteria I use, but they won't necessarily suit you. For example, I don't really care for a building that's made up of only 1 bdrm units, even if it cashflows. A mix of one and two bdrms is great, but all 1 bdrms units means having to spend more time on this building dealing with turnover. And I just won't go for efficiencies or rooming houses. I think they're too much of a headache, although you'll find other investors on this site who make boatloads of money on these sorts of properties. It's different for everybody, which is one of the things that makes this industry so great. It let's people who would otherwise be competitors, cooperate and share leads to the mutual benefit of all involved. Good luck developing your own criteria.
The only advice I can offer you is to STOP LOSING MONEY. Losing money every month does not make you an investor, because investors create positive cash flows by learning fundamentals.
Go to your local REI meeting asap. Do not buy another house until you learn more about both conventional and creative real estate investing.
If yuor market does not support cashflow properties, stop doing them. THere are other ways to make money in real estate, Fix/Flip, Assigning, buying notes, etc.
Congrats on jumping in. But your fears are being realized, you are hemoraging money. I looked at you profile to see what you do for a living that you can afford this negative cash flow. It said you are a rehabber, so sell one of these properties as most rehabbers would. If the profit can cover you monthly losses on the rest for the next year, then maybe you can afford more. I agree with the first response about getting some knowledge or mentoring at a real estate investors club, do it now. My wife and I only have two income properties, but they both earn income. My wife feels a negative cash flow is acceptable for long term growth; I don't, you can imagine our conversations. The appreciation in Florida is probably similar to yours we have been having 24% increases yearly since 1999, so I've blown opportunites my wife has "seen". I am not going to wear a hair shirt over what I missed yesterday, I don't invest in lotto tickets or speculation of tomorrows prices. I would say get rich slow and find some motivated sellers where you can at least break even on a monthly basis. Good Luck with whatever road you travel.
Thanks for the reply. All the properties I acquired were rehabbed and now are about $100 K in equity each. ON PAPER, I hope things stay the same.
I can flip but I feel that these properties are going to be worth much more in the future. As I mentioned before, in CA, it's getting very hard to find deals with positive cash flow, so why sell a $300 -$500 negative and have nothing to appreciate.
Also, another question, when you talk about cash flow, what amount of down payment is put up? The formula would be different with 100% financing or if you put 20%. Thanks!
I run my numbers as if I am financing 100%, as I use a equity loan for down payment anyway, it pretty much is 100% financing. I don't believe in playing the shell game of paying a big chunk down to make it cashflow, but, my focus is on cashflow properties so I do not hold anything that is negative cashflow. I can see the dilemna of not wanting to get rid of it as it is so appreciating, I guess I would focus on flipping in that type of market as the appreciation rates cannot continue as they are currently, especially in CA. Just my .02
A couple I went in at 5% and the rest at 10%. I talked to a successful realtor in CA and his strategy is to go in with 20% an keep the negative to a manageable figure. About my deals, I had to beat buyers with a stick to win all these properties. As you know, RE was hot in CA few months ago and sellers were getting multi offers on their properties, many offers were 100's of dollars over the asking price. Things has cooled down now, but prices are still high. I figured, it's better to be in rather on being on sidelines and miss the boat. With the strategies mentioned above, I would have stayed out and missed this boom. My point, and my thinking is that it might look unattractive, but don't let some negative keep you from playing the game. I can handle the negative on what I already have, but on 20 it's a different story. Am I correct or am I in a different world and need to wake up? Thanks, POVERTSUX
Have you ever thought about selling 2-3 to pay down or off the others so that you have positive cash flow? With that kind of appreciation you can buy many sell a few and make your own positive cash flow. Or with that kind of investment capital there is no reason to have negative cash flow, just put more down. I know, that goes against the general feel of this site, but I've never seen anyone who paid cash that has negative cash flow.
Good Luck,
Shawn(OH)
PS. Here in Ohio $500,000.00 would get you 2.5M in rentals. At an average of 40k each that would equal approx 60 houses at $600.00 per month or 36k per month income vs $21,800.00 per month mortgage payment..... Something to think about
Povertsux, your predicament illustrates Kiyosaki's saying, "If you can't make money with no money, you cannot make money with money!" According to him, you don't even have assets there, you have cash-eating Alligators!
You are substituting cash for knowledge, which is A strategy, but not one that is going toserve you well over the long run. I know, I once was feeding a $10,000 per month negative cash flow on 40 Alligators!
Keep your powder (cash) dry until you learn more about the financial side of the business.
As for your present situation, here is a way out. Raise the rents to produce a positive cash flow to you and reduce the renter's net rent at the same time!
Here'[s how. Put the property into a properly set up Land Trust. Make the renter a minority beneficial interest owner. Have the trust Net Lease the property to the renter at a rate that will cover all the expenses and produce a positive cash flow to you.
The renter will now be able to write off the mortgage interest and the real estate taxes against his income, thereby producing a large tax refund, reducing his net out of pocket cost, usually below what he was paying as a plain renter. This is called a triple net or tax lease.
The IRS says a benefitcial interest holder in a properly constructed land trust which owns the property, who has all of the liabilities and responsibilities of an owner; mortgage payments, real estate taxes, insurance, maintenance, etc can take the tax deductions of an owner. (IRS Reg 164 (h) 4(d))
Incidently, he cannot take depreciation, since he lives there. You can. That will partially shield your cash flow from taxes.
This set up more than solves your cash flow problem. Since your "renter" is on a net lease, he is responsible for repairs and maintenance, not you!
This is an excellent way to hold properties with no negative cash flow and no management headaches without giving up any appreciation, which I see as your primary investment goal.
Don't worry. If your co-beneficiary renter should fail to make his payments on time, or fail to keep the property up, you can kick him out like you would any other renter.
Obviously, I cannot go into the mechanics of how to implement this strategy in this post. The Land TRust is a specialized entity and there are plenty of people out there that are not setting them up correctly, which can be disasterous.
If you would like more information, or assistance, contact me at **Please See My Profile**
yeah, I don't understand. You are speculating that appreciation rates will stay the same, and that the lump sum figure by which your property appreciated in a given year, minus the total negative money that left your bank account, is a positive figure, but that is all theory, and appreciation rates can change.
If it were me, I would sell ALL of them, take the cash, stop the bleeding, and have a fat nest egg, go to my local meetings, and learn the creative ways of doing things and start making that money grow based on TODAY's market conditions, not ones you are speculating into the future.
Good thing you are in CA, anywhere else and you would be dead (with the exception of NY and MA, and possibly FL)
I would strongly consider selling and cashing out. Appreciation rates NEVER stay the same forever, and CA is due for a correction, I would say.
Just to add, I am assuming that the hit you are taking on the negative cashflow is not including maintenance items? If I were you I would also seriously rethink what you are doing. Appreciation is a nice added benefit, but I don't think it is wise to use it soley as your only way to make money off of a property. The only way that would make sense I would think is if you were right even with your PITI and insurance but not that far behind on each property. It would seem to me that negativce cashflow over time is just eating into your appreciation making your efforts worth less. REI is supposed to pay us we aren't supposed to pay it lol
I would suggest you stop investing in single family homes and do either 2-4 unit properties or even small apartment complexes in CA. The risk is then spread over multiple units..
When you are playing with fire, you risk getting burned.
California is a hot market and home prices have increased considerably over the past few year. Many knowledgable pundits have predicted a cool-down in some of the hot regional markets across the nation. Having said that, at this time, I would be looking at reducing my risk exposure in SFR's in CA by selling it and cashing my chips. The time for buying more SFR's in CA in the hopes of appreciation has already passed. I would instead look at other markets or maybe not to do anything at all.
I was thinking, every month for the last 20 years I have taken from 6% to 15% of my income and invested in a 401k, hoping that it would appreciate. Wonder why we frown upon the same concept when applied to real estate?
My of my landlord friends have said that they made their money on appreciation, and not on the rents.
Brenda, while I am sure that is true for many landlords, that should not be the PRIMARY investing strategy. The appreciation is the surprise bonus or the icing on the cake, and I think this investor is hanging out in the wind right now, losing money every month.
If it were me, I would sell all of them, or at least cut my exposure down to a quarter of current size. Too much risk, and too much money being lost in negative cash flow on SFH which typically cash flows very poorly.
I would lease-option a few of them at above market rents to cut into that 3-5 hundred negative each month, and hope that the tenants default or otherwise do not exercise thier option to purchase. Also, I have seen l/o deals that with the purchase price to be 95% of the appraised value at the date when they exercise thier option. That way you stil get your appreciation. I would also try to get the l/o tenat to pay all of your mortgage payment in exchange for a gauranteed portion of the appreciation even if they do not purchase or excercise thier option. This would require an appraisal now, and then to estabish a basis to calculate the appreciation. I would think this would appeal to some tenants.
Hi,
Thank you guys for all the wonderful responses. I would love to have you all over for dinner. The power of knowledge, experience,brainstorming and some capital, wow.
I hear and understand what you are saying. My thinking was, and still is, if the negative cash flow was a major concern, then I would have stayed out of the market & missed out on the appreciation. You say "appreciation is just icing on the cake", that is true, but it's a big factore in RE, otherwise RE is not that attrative. Also, if you stay out and appreciation keeps on going, then you really will miss the boat. Having said that, at the present time, I'm not buying any properties, due to the high prices and therefore the higher negative. Do you think rents will catch up with the RE prices? I'm thinking that in about a year I can have these properties in Positive. Am I being greedy to HOLD? Remember, the buy and hold is one of Warren Buffets strategies, no mine
I've got to say that what you're doing is NOT investing but rather gambling. You are betting that the appreciation will offset any and all losses that you are currently incurring. There are a few problems with that though.
First, you're assuming that appreciation will continue. That is not always the case. The RE market is just like the stock market and it will have it's ups and downs. If you hold too long and get stuck in a down market, then you're in a bad way. You've lost the appreciation, you've lost money every month, and very possibly get stuck with a house that you can't even sell.
Second, are you figuring you numbers correctly? With a $500/month negative cashflow, your property has to appreciate 2% per year just to break even, and that it not counting added costs of upkeep, etc. that I don't believe that you included in that $500. There are also costs involved when you sell that eat into that equity as well. They need to be added in as well. I've heard too often the "I made $50K on this property" but they don't count all the costs they incurred over the 2 years that it took to sell it and usually for less than they were asking.
Third, appreciation only matters IF you sell the property. So if you currently have negative cashflow, you are losing money, plain and simple. Appreciation doesn't buy you dinner.
There are buy and hold markets out there (outside of CA) where you can get positive cash flow. Another strategy you might try is to exchange one or more of your SFRs for multi-units where you can get more cash flow.
Dude .. If you have majore appreciation- sell some
pay off or down the others , create Pos NOI
You will take it in the shorts a bit on Cap Gains
But you need to get the NOI going-
1. Cash Flow begets more props & $$$$
2. Your FICO will / is dropping like a rock
Banks look at your Income Ratio (Big-Time)
3. Never buy a property that is Neg Cash Flow
unless you can foresee the future and shows
huge , fast gains in appreciation - and when you can do that ... you will not need to go on Trumps show ...
He will seek you out and sign a 20 year contract with you
for 50% of all gains made .
I seems that your monthly negative on 2 properties is 400 per property or 9600 per year.....If your properties have appreciated by so much, can you refinance and get an interest only loan on the properties to reduce the monthly loan cost, also can you pull out 10-25k to cover the negatives over 2-3 years, finally is it possible to increase your rents on the two houses that you own.....These actions will help with the negative.....
Next focus on your goal....What are you trying to accomplish... If you have 500,000 of cash to invest do you want to deal with 20 houses in your own backyard or across the country......
Hypothetically, If your goal was to make 10-30% per year on the 500,000 cash while limiting your risk but investing in realestate, you could loan your money out to investors....ie...you loan an investor 70,000 to buy and rehab a property. You have a mortgage on the property for the amount of your investment.....The investor resells the property after the rehab is complete and pays you 20% on your invested capital of 70,000, or 14,000 profit....Investor provides a preapproved buyer that will purchase the property when the property has been rehabbed. This is one alternative to buying and holding 20 properties with negative cash flow....If you did one investment deal every other month you would earn 6x14,000,. or 84,000 in a 12 month period, Your profit increases with more deals you fund.....
Gotta love the advice about speculation in other areas of investing, but not RE... what up wit that? I think if you can afford the negs, why not speculate. ALL INVESTING IS SPECULATIVE. However, Bill's advice obout setting up the land trust is outstanding (and free!). Good Luck.
Hi,
The $500 K is in a MM account waiting for the next deal and some for a cushion. Or should I say, if invested in CA, another negative cash flow deal . I agree that negative cash flow is a NO NO, but disagree with the sentiment that you should only buy positive cash flow deals. It's about impossible to find deals, at least in CA, with 100% financing as some in this discussion suggested, and at the same time have positive cash flow. My question to them is, I wonder how many properties do you guys own? That is, new properties that were recently purchased and not 10 years ago.
I strongly believe that appreciation is the name of this RE game. I can live with 3% appreciation, which can mean double digit return on my investment. I don't think we will all make a living on $100 or so positive flow per month. With 100 % financing, paying the mortgage down is no way to be rich.
I have been looking into the possibilities of developing and selling SFH, which I'm new to and was wondering if that would be a better way to invest.
The reason why many people do not frown on a 401k is because they forget that it is tied to the stock market, therefore subject to bull and bear markets. It's also considered okay because "everybody has a 401k."
IMHO, 401ks are the biggest joke played on the working individual. The loyal employees of Enron understand what I am talking about.
As a landlord, I make a positive income of $700 a month, off of two properties. Why take a loss when you can put an extra 8,000 in your pocket a year? Appreciation is nice...but extra cash in the meantime is much nicer.
What you have, my California friend, is a bunch of liabilites. One option for you would be to fix two of them up, sell them, and put those profits into the mortgages on your rentals so you start gaining positive cash flow.
Another strategy in the future: buy low, sell high. Buy when things are cheap. If there's a frenzy going on, sell something and make the moolah!
Quote:
On 2004-11-30 17:36, bgrossnickle wrote:
I was thinking, every month for the last 20 years I have taken from 6% to 15% of my income and invested in a 401k, hoping that it would appreciate. Wonder why we frown upon the same concept when applied to real estate?
My of my landlord friends have said that they made their money on appreciation, and not on the rents.
Have 11 total units now .. 5 in So Cal , 6 Out of State .
Started Investing June 2001 .
There are many ways to skin a cat , It all depsends on
what your goals are ...
For instance , I am utilizing REI to basically replace
my Corp Day Gig income b-4 they do an Enron .
So what is highly important to me is Multiple streams
of passive income . I will give you 2 examples
One I accomplished & the 2nd I did not .. and am kicking myself now .. but again my focus is on cash flow .
1. I just purchased a 4-plex out of CA . Price was
$145K ,My Net is approx $1050 per mo. or
$12,600 per year. If you find about 6 of these deals
you now have over $75K per year Disposible income
You can quit your day job and retire or keep your day job and use the $75K per year to snow ball and add another
6 Props and retire with $150K per year .. up to you..
But it all = Cash Flow .
2. (Kicking myself now )
My parents where moving from Riverside county CA
1 year ago , They had a SFR they purchased for $78K
and was selling it for about $154K , They asked me if
I wanted to buy it .... I ran the numbers and Even with an
IO Loan I would be Negative about $100 per mo.
Pass ..(Kicking Myself) now 12mo. later smaller homes
in the same area are going for $230 K
I could have purchased it on an IO Loan - ate the
$1200 in 1 year and now be selling it for a $76K
Profit. (Kicking myself again) .... But hey
I am doing great with my cash-flow focus
and very happy with my 40% cash-on-cash results .
+ +++ any appreciation that comes my way (Gravy)
I have similar thoughts to Daryl and being in southwest florida I've kicked myself on a few as well but bottom line is I don't speculate (at least for the time being until I have more cashflow)
Daryl, I am curious what the gross monthly income is of that 4 plex where you net over $1,000 a month.
[addsig]
Have you thought of selling any properties but taking paper instead of cash? When taking notes you can probably get some cash in the form of a down payment yet still collect a monthly income from each property on a note.
You wont have control of the property obviously, but can generate a steady cash flow, charging higher interest on the note than you pay on the mortgage, theoretically you will make money from monthly payments every month on top of the mortgage payments.
Im young, and new, so this might not be suitable for you, or a sound idea at all....but maybe you should look into it if you want to keep a monthly income from the properties but dont want the negative cash flow.
Some comments on this idea from more experienced investors would be useful.
~Andrew
example I was going to invest in Charlotte
NC, Growth was great low UE rate- looked closer
and found way too much over building and high Vacancy
Rates. They are doing what CA did 20 years ago.
Building to Inventory (Big Mistake) in CA they have learned and now only buy the land , grade it and then
sell the homes b-4 they start building . Huge waiting lists.... also they are not letting investors buy 6 or 8 of them.. only Owner Occ for min 1 year .
The only thing that will make the CA home prices dive
will be interest rate hikes , whereas Charlotte is open
to major Bubble issues with the combo of over building
and rate hikes .
LOL - Also in Charlotte they try to sell Multi-Fams
for what they think they are going to be worth ... never seen such a thing..
Hi RetireEarlyLBCA & All,
As you know I live in Riverside CA. I have seen my home jump form $300 to a current price of around $700. Few years ago or around 2001, many homes were selling for around $100K - $200K, I also kick myself for not seeing the trend, at these prices you definitely had positive cash flow. But at current prices, no way.
With your thoughts, you'll hardly have any investors or investing going in CA. That's hard to believe, don't you think.
commercialking suggested investing in a different sector, where would you invest?
Well , I am not currently investing in So CA , but there are lots of investors still buying way over price , they are speculating .
I do not have the stones for it after some 300%
appreciation in the last 5 years in So CA .
But there are folks buying HUD 4-plex's in Long Beach
that are appraised by HUD @ $400K for $560K
with the 2/1's renting for $900 max they are paying 13 times Gross- I have noticed the same crazy stuff in Riverside Co as well .(my props are in Hemet,CA)
This is why I am re-directing my REI's outside CA
Risky.. yes .. as risky as the above example , not in my book.
I look for states with low Prop-Tax and Good Growth
and start calling RE agents & Prop Managers in that
area.
Darryl,
Have you bought long distance yet?
I think yours is a smart strategy: low taxes, growth, + new or re-newed interest in location. After you hone down to some areas, what do you look for in calling Managers and Realtors? What are your next steps? [ Edited by ceinvests on Date 12/05/2004 ]
This reminds me of the story of the guy who buys apples for ten Cents, sells them for 5 cents, realizes that he's loosing money, so he decides to make up for it by selling twice as many!
You're using the wrong equasion!!!
DO NOT BUY MORE HOUSES LIKE THIS!
Good advice has been given so far. You need to change your method, change area, or both.
NEW JERSEY & PHILA AREA THE RENTS FOR 3-4 BEDROOM HOUSE IS $900.00 -1200.00 THUR HUD AND PRICE FOR HOUSE IN PHILA IS AROUND $3500.00- 15000.00 AT THE SHERIFF SALE
As long as you stay liquid, with a cushion to cover the negative..I think your investment strategy is sound. I have started refie with interest only loans from Wells and Wash Mutual...I
I cut my payments 54%...they appraised the properties at 80%, and the homes had gone from 200,000 to 350,000. And the appraisals came in...So now I have credit lines, a lower monthly and cash in bank...I can handle negative and still sleep at night
[addsig]
Thanks all for the sound advices.
belairpatrol, I think you prove my point. Appreciation is the game here. By refinancing with interest only loans you're not getting anywhere without the appreciation. Right?
Have you considered re-financing to increase your cahflow? All other factors being equal, rates tend to be lower when you re-fi than when you purchase a home. You can re-finance and lower monthly payments by reducing your interest rates. The payments can be even lower if you pay down your principal by bringing in cash to the re-fi. This will save thousands of dollars in interest.
Well Povrtysux, I will confess that the long 4 part article on housing bubbles that I recently published here on TCI was largely written in response to your post and a phone conversation I had with a friend who is also in the CA market. I bring it to your attention.
commercialking, I read your article. Thank you for bringing it to our attention.
To comment on this article: He said "speculative bubble". I agree, it's only speculation. I kinda don't agree with the theory of stocks compared to RE. Stock values are depending on their performance. RE value is based on availability and demand. The less land you have available, the more expensive you have to pay for it. You want to live in the surrounding Orange county areas in CA, you'll have to pay the higher price. Take NY city, you pay millions of dollars to own a townhome or a condo in Manhattan. Do you think it's a BUBBLL? I don't think so.
On the "The Florida Real Estate Craze" His theory blamed the Hurricane for the Bubble burst. Natural disasters are good to consider when investing but are very hard to predict therefore they are not to be considered in today's RE values. I agree that if they happen, they can deflate prices even in the swamps. One can't stop moving forward because someone thinks a natural disaster is in our future.
At a loss of 3-500 each per month say 400 avg. Thats 2000 monthly and 24,000 yearly . That means you'll need to keep your 500 K to pay for you 5 properties. Now you want 20 with neg. cash, that'll cost you 80,000 a year or 7000 a month . I'd get out now while you still have the equity. Flipping sound alot more sensible and profitable.
Don't forget appreciation and tax benefits. You see, my whole question concern is about appreciation. If you get the average 3-5% appreciation on the whole investment or the house value, then that would mean a decent return on your initial investment after deducting the negative.
povrtsux has to me has already made his decision and wants more approbation of that decision than advice.
If you are going with the neg cash flow - several things
1) get the properties reappraised yearly and increase the insurance coverage. Lots of investors here in FL put up with the neg cash flow because of appreciation, did not keep up with changing insurance coverage as property appreciated and are now in a bad shape because insurance after the hurricanes did not care about the appreciation. Only coverage mattered. Upshot is that they ate the loss each month for years and now can not recover that.
2) Seems ti me there must be something you can do to fix the negatives. Maybe refinance at a lower rate or do some slight improvements that are cheap but would make for higher rents.
3) Give your taxes a thought for a way to make those negatives neutral
if i had 500k in cash, i'd invest 400k it in a TIC deal in a commerical deal in California. commercial properties aren't on the same wave as residential properties. there are many companies offering 7% return plus appreciation plus tax benefits via TIC deals. 7% on 400k is 28k/per year. plus i'd have 100k left over for another deal or two.
linlin, I think you misunderstood my original question. I asked for ways around the negative and not ways to sell. We all know that selling is the best way to get rid of all our problems, but that's not what I want to do. I agree that the discussion turned into why I bought, CA inflated prices and the Bubble. Having said that, I agree that refinancing is my best option to bring down my negative.
What I don't understand is why so many people in this forum don't see appreciation as RE main means to riches. When they say "a good deal is buying 80% of the today's value". Isn't 80% of today's value 100% of yesterdays plus appreciation?
povrtsux - There are only 3 ways to get rid of the negative cash flow of your properties:
1. Raise Rents
2. Refinance and reduce your mortgage rate
3. Reduce expenses of your property (Being that it is a SFR, I doubt this would work)
If you are looking for other ways to reduce your negative cash flow, then it is akin of asking how you can get Milk from a Stone.
About your second part of question as to why people don't see appreciation as the name of the game, people see the state of the current housing sector using different eyes. Home prices have steadily appreciated year over year, keeping in pace with general inflation, except for certain periods in the past (eg: 1988-1992) when homeprices fell down. It is common for home prices appreciate 1-2% every year, but uncommon for a 10-15% appreciation every year. The appreciation you have realized in your SFR's over the past 3-4 years is because of relaxed Fed monetary policy and not because of any changes to the underlying fundemental value of your property. Having said that, and without going into a Macroeconomic Monetary Policy discussion, I personally think that Cash flow is important when the housing sector is on a downward trend while appreciation is important when the housing sector is an upward trend. What the futute trend of our current house sector is entirely left up to the individual to decide.
Your third part of the question is whether you should be investing in a different sector RE. I don't see how this would get rid of your negative cash flow on your SFR's. Assuming that this question is not related to your 'negative cash flow' question, I would say that Condo Conversion would be a decent challenge because of the demand for Condos. Again, this would depend on your local RE market.
Hope this helps.
We invest in problem properties that have a few "little" things wrong with them. Then we depend on the rents. The way we figure it, our tenants are supposed to pay a big chunk of our mortgages.
I think you can spend a lot of time freting about appreciation. It's a pleasant subject, but we don't think about it all the time. We concentrate on staying competitive in our market. (You really can retire and live off your properties).
What I want to do next is get directly in the path of growth. There's a tremendous amount of growth going on in Middle Tennessee right now. I don't think it is hard to find properties that will bring in the rents now and higher appreciation later in my area. Times are good.
I am a landlord in San Francisco, and I understand that it is very hard to buy investment properties that are cash-flow positive. Most of the buying is speculative (even for multi-unit buildings in my area) and not advised. I bought mine because it was a way for me to achieve home ownership of a 4 unit building at a monthly cost equivalent to buying a condo. The refinancing and increased rents due to rehabbing have made the building cash-flow positive, but in some ways I was lucky because of falling interest rates. Going forward, I will not be investing in California, but in areas that have sound CAP rates, like Az, Or, Eastern Wa. Even when management fees are included, it is possible to be cash flow positive.
By the way, if you do projections of passive income over time based on properties that are cash-flow-positive from the beginning vs. those that are losing a little money, you will see that your wealth will grow MUCH faster on the former.
I believe doing these sorts of projections based on projected rent increases, utilities, mortgages, etc. is an important part of any business plan, including yours.
Good luck.
I didn’t want to get involved in the debate / discussion on this thread. But I did want to tell you that I think you’re spot-on when you say, "What I don't understand is why so many people don't see appreciation as RE main means to riches." Exactly! Without it, people might as well fix up old cars and sell them.
The other thing that’s amazing to me is how some people seemingly don’t fully analyze a particular deal, property, or market. They will gladly put 20-30% down, get an interest only or negative amortization loan, and think they can have "positive" cash flow. Based on what? Either a property is over-valued, or it’s not. Is it a good deal, or not? Rental income should be weighed against the total deal -- not how much someone puts down. Whether they pay it up front, or a little bit every month – they’re still paying it. There are just too many other factors that determine whether someone’s really making money.
I think commercialking’s articles on "The Bubble" are outstanding, and really put things into perspective. But when he uses your situation as an example, I think he should have also mentioned that when you "feed that $500 per month alligator" (using his scenario) you’re also paying down the principal at about the same rate – which needs to be factored in.
And I know he was just using your post to illustrated a concept. But something to keep in mind is that your market (currently appreciating at over 30%) has averaged 6.33% over the past 25 years -- compared to 3.46% nationally. When you figure the wonders of "compounding" that means a $100k house in 1980 would now be worth over $420k. Equal to inflation? Maybe. But that’s the beauty of appreciation -- it’s not based on how much you invest. So, if you went in with 10% down, that 420% appreciation would translate to 4,200% gross ROI.
Another thing to consider in your market is that the appreciation has (at least in part) been the affected by of a whole lot of factors other than just a frenzy. Population growth, industry growth, new community development, Orange County and L.A. trends, etc., Some of it, arguably, could have even been an upward correction.
Will the bubble burst? Probably. But who knows if it will drop over 30%, as the example in The Bubble article indicated. Again, in your area, the most it has ever dropped in one year is 10.81% (1994). And someone buying at the worst time (1990-91) could have easily been upside down for the next 6-7 years. But in the 6-7 years following that, prices more than doubled what they were in 1990-91.
I guess my point is that if we research our market, follow the trends, do the math on BOTH sides of the equation, work the right deals, and have the staying power, we can greatly minimize our potential risks. And hopefully we can make appreciation the "cake" – and not just the icing on top.
BTW – if you want to email or PM me, I’ll gladly send you a quarterly breakout of the appreciation / depreciation history in your market area.
I don't think anyone disputes appreciation as a way to make money with realestate. Afterall, that is everyone's goal. I think what was surprising was the negative cash flow on so many buildings. Thus all the comments on selling or getting out from under that situation. Yes, it will balance out when the properties are sold but I think a lot of us are looking at "why negative cash flow at all?" especially with interest rates on the rise again - at least here in Fl
If povrtsux has the means to continue footing the bill for the negative cash flow and it has minimal impact on his dealings then I am sure no one would dispute his decision to hold out for appreciation and eat the losses for the time being. Then that is that.
However, a lot of folks depend on the rent for the building to cover the mortgages while the building is still appreciating. I guess basically the best of both worlds.
Just my personal opinion and feeling but I try to never use my cash flow from one building or savings to cover the next. I try to make each self sufficient. Not always possible but that is always my goal. I always go with the "what if?" scenario
As I said before, there are relatively inexpensive things povrt might be able to do to the buildings to increase the rents or to reduce the mortgages. I am sure with his portfolio he will not have any trouble getting much better rates than he has now. Whatever he decides I am sure he will keep his best interests in mind and choose what is appropriate for him.
One thing you have to remember, you may not be doing anything wrong. If the area doesn't cashflow, it doesn't cashflow.
I have been investing in real estate for almost 10 years now.
I was investing in the suburbs of Chicago and purchased many single family homes. About seven years ago I purchased nearly 30 homes at an average of $100 per month negative cash flow. (Of course I kept buying on an average of 1 house per hundred calls - the best I could find, which was slightly negative or break even at best).
At first I thought I was just not doing good enough deals. I thought it was something I was doing wrong. My mentors who had a lot more experience in this business than I had said "creative real estate techniques work everywhere" and "most people use the excuse that it just doesn't work in my area" I guess I didn't hear them mention a true fact that many real estate investors go broke and quit.
I decided to hang on and here is the plan I came up with.
I had a very profitable business that would suppliment my loss until the homes appreciated and I figured in about five years I would start seeing positive cashflow on these properties. And besides real estate appreciates so in a worse case scenario I'll get that, right?
Guess what. The rental market in the last 2 years has really taken a hit because all of the "good tenants" became home buyers (due to such low interest rates and loose credit standards/ mtg broker competition).
Rents actually went down! Those properties were finally starting to pay a few hundred dollars a month cashflow - just when I needed it most. Then the rents fell a couple hundred dollars a month.
In 2001 the economy took a dive and I closed my very profitable business before the end came so fortunately I didn't lose money there. At that moment I was seeing cashflow so I decided to go full time into real estate.
Then as I told you before, rents went down. I did have some profit in properties so little by little I sold to cover my expenses and feed my alligators and put food on the table, all the while I foolishly bought more alligators. Fortunately I didn't buy a whole lot more.
But I have to tell you. The appreciation, over the five to seven years was only 5% at best and 2% on average and some properties didn't appreciate a dime.
(Instead of making money from solving people's problems, I often felt I took over people's problems and made them my own.)
Perhaps if I was in California I would have faired much better with greater appreciation. But do YOU want to count on that? Don't make the same mistakes I did. I'm still recovering from this.
I am still investing in real estate (in a different state now) and I will not buy anything that doesn't cashflow at least $200/mo. - my average is $300 per month .
All in all, at least I now have confidence in my own convictions and analysis on things. I've never been one of those cocky investors that thought they knew it all, but this experience has really tought me a lot. I know I can deal with just about anything now and my confidence has really improved my negotiating skills and my closing ratio tremendously.
Before I decided to move, I did research for a year on at least 50 cities; I called rental ads to get a feel for rents in different areas and found out the values of the home to the rents, etc.
I decided to leave Illinois for other reasons besides my real estate woes, but just out of curiosity, I ran numbers on Rockford and Peoria (2 decent size towns that were close to but not considered part of the greater Chicago area). I discovered that by doing what I was doing I would cashflow at least $100-$200 per month under the current market conditions.
My suggestion to you is to find your Rockford or Peoria or at the very least do something different, as some of the previous posts suggest.
Insanity is doing the same things but expecting different results.
Get rid of those alligators (or keep a couple if you can afford it, in case they do appreciate wildly like some California real estate has in the past - but don't base your plans on it - have an exit strategy in the works in case it goes bad).
And by the way, It's not all doom and gloom. I did happen to make some great deals in that time.
I wish you luck and encourage you to continue to trust your instincts!
Hi,
Great discussion and much appreciated advices.
melissa, I'm not familiar with the suburbs of Chicago. In 2001, 30 properties bought in CA, would have netted me, today, at least 9 million dollars before the "negative cash flow", expenses and taxes. I guess that would have been a good investment.
You said "The appreciation, over the five to seven years was only 5% at best and 2% on average and some properties didn't appreciate a dime". Long term, it's safe to say that an average of 3% appreciation is normal, right? On a property of, lets say $500,000, an appreciation of 3% means $15,000 per year. If you put 20% down, that's about 15% return on your investment, not bad.
Some go in with 0%, that's incredible return don't you think?
It would be wonderful if you can share with us your experiance on how you managed to buy all these properties? What kind of financing? What down payment % you use when buying, that is, to get to the positive cash flow? and the big question is how you set up and owned these properties? The bottom line and to be blunt, I would love it if you became MY OR OUR MENTOR
Thanks in advance!
I'll use your SFR $500K example as I was just looking at a 34 plex for sale in Oklahoma tonight on the MLS .
I got the city from the latest "Best Places to live in USA"
ranking on the internet .
You say buy a $500K home go negative cash flow
and get 3% per year or $15K per year appreciation.
Lets look at the difference .
There is a 34-plex in Oklahoma for sale now for $499K
approx $350 mo ea rent . That is $142,800 GRI a year.
with 30% Dwn (Commercial) after PITI , $950 mo Man fees. you are looking at $96,000 a year NOI - now for the vacancy and Repair Lets do 15% Vac & 15% Repairs
30% Total you are still looking at $56K per year Pos
Cash-Flow or 37% Cash-on Cash Return on your down
of $150K - +++++ any appreciation you may get .
If you get 0 zero appreciation it does not matter
you got 37% on your cash investment .
Wall Street guys would sell thier mother for annual
returns like that .
Not downing you , just showing that cash -flow is Best .
also .... you would get $56K per year liquid- not held
up in equity where you need to refi and pull or heloc it and pay 4% interest rates .
You could make a purchase like this - us the $56K to
pay down your SFRs on the snow-ball method
and really be raking it in at the end of an 8 to 10 year
plan. 30 SFRs in the Bay Area not sure what your rents are.. but I put you at $1500 to $1800 per mo. rents
ea. home . .. am I close ? after paid off you are looking
at $45K per mo. or $540K per year income .
+++++ any equity you may have . It just does not matter .
Hope I am not ranting here .. but you have great props
secured now ..with the $500K liquid you have , just adjust your buying habits to let somebody else pay your $500 per mo negitives and take it to hyper space guy .!!!!!
Hi Darryl,
I clearly see your point. Although it's a dream, I'd love to buy something like this in CA. I agree with you that I must look outside my box for these opportunities. The thought of investing out of my area is not very comforting. Commercial or multi units are sounding much better than SFR and I'll definitely look into them.
Paul,
The definition of a keeper will be different for different investors.
1. What are your goals
2. Are you looking for maximum cash flow
3. Are you looking for maximum appreciation
4. Which ones are the most management intensive
5. Which ones are the most maintenance intensive
6. Which ones will build you the greatest amount of equity in the shortest amount of time, giving you the money you need for that next great deal.
7. It all comes down to your goals, short term and long term and which properties best fit what your accomplish in a given time period.
Sorry this isn't the rule of thumb you were looking for but hope this helps.
Larry
it is difficult to have a rule of thumb, but for me its how much overall profit it will generate and how much repairs, if any, has to be done.......km
Depends on area, cashflow, type of building, area and cashflow. Did I mention cashflow and area?
[addsig]
Although it may not be exactly the answer you wanted, you've got all the advice you need right there in the posts previous to mine. It really does depend on what your own strategy and goals are. Just like Ray, the two most important factors for me are area and cashflow. I have other criteria I use, but they won't necessarily suit you. For example, I don't really care for a building that's made up of only 1 bdrm units, even if it cashflows. A mix of one and two bdrms is great, but all 1 bdrms units means having to spend more time on this building dealing with turnover. And I just won't go for efficiencies or rooming houses. I think they're too much of a headache, although you'll find other investors on this site who make boatloads of money on these sorts of properties. It's different for everybody, which is one of the things that makes this industry so great. It let's people who would otherwise be competitors, cooperate and share leads to the mutual benefit of all involved. Good luck developing your own criteria.
Thanks for the replys.
Paul
I keep all multi units, they are my keepers!!!!!!!!!!!!!
[addsig]
Hey Paul,
I would determine what your goals are and use them goals to calculate all options. Then its easy, go with the most profitable way to meet them.
Good Luck
The only advice I can offer you is to STOP LOSING MONEY. Losing money every month does not make you an investor, because investors create positive cash flows by learning fundamentals.
Go to your local REI meeting asap. Do not buy another house until you learn more about both conventional and creative real estate investing.
Best of luck, Dave
If yuor market does not support cashflow properties, stop doing them. THere are other ways to make money in real estate, Fix/Flip, Assigning, buying notes, etc.
GL
Congrats on jumping in. But your fears are being realized, you are hemoraging money. I looked at you profile to see what you do for a living that you can afford this negative cash flow. It said you are a rehabber, so sell one of these properties as most rehabbers would. If the profit can cover you monthly losses on the rest for the next year, then maybe you can afford more. I agree with the first response about getting some knowledge or mentoring at a real estate investors club, do it now. My wife and I only have two income properties, but they both earn income. My wife feels a negative cash flow is acceptable for long term growth; I don't, you can imagine our conversations. The appreciation in Florida is probably similar to yours we have been having 24% increases yearly since 1999, so I've blown opportunites my wife has "seen". I am not going to wear a hair shirt over what I missed yesterday, I don't invest in lotto tickets or speculation of tomorrows prices. I would say get rich slow and find some motivated sellers where you can at least break even on a monthly basis. Good Luck with whatever road you travel.
Thanks for the reply. All the properties I acquired were rehabbed and now are about $100 K in equity each. ON PAPER, I hope things stay the same.
I can flip but I feel that these properties are going to be worth much more in the future. As I mentioned before, in CA, it's getting very hard to find deals with positive cash flow, so why sell a $300 -$500 negative and have nothing to appreciate.
Also, another question, when you talk about cash flow, what amount of down payment is put up? The formula would be different with 100% financing or if you put 20%. Thanks!
I run my numbers as if I am financing 100%, as I use a equity loan for down payment anyway, it pretty much is 100% financing. I don't believe in playing the shell game of paying a big chunk down to make it cashflow, but, my focus is on cashflow properties so I do not hold anything that is negative cashflow. I can see the dilemna of not wanting to get rid of it as it is so appreciating, I guess I would focus on flipping in that type of market as the appreciation rates cannot continue as they are currently, especially in CA. Just my .02
[addsig]
POV,
What type of loans are you using on these propeties to be that negative and hold them? Short terms for fast payoff???
Scott
A couple I went in at 5% and the rest at 10%. I talked to a successful realtor in CA and his strategy is to go in with 20% an keep the negative to a manageable figure. About my deals, I had to beat buyers with a stick to win all these properties. As you know, RE was hot in CA few months ago and sellers were getting multi offers on their properties, many offers were 100's of dollars over the asking price. Things has cooled down now, but prices are still high. I figured, it's better to be in rather on being on sidelines and miss the boat. With the strategies mentioned above, I would have stayed out and missed this boom. My point, and my thinking is that it might look unattractive, but don't let some negative keep you from playing the game. I can handle the negative on what I already have, but on 20 it's a different story. Am I correct or am I in a different world and need to wake up? Thanks, POVERTSUX
Have you ever thought about selling 2-3 to pay down or off the others so that you have positive cash flow? With that kind of appreciation you can buy many sell a few and make your own positive cash flow. Or with that kind of investment capital there is no reason to have negative cash flow, just put more down. I know, that goes against the general feel of this site, but I've never seen anyone who paid cash that has negative cash flow.
Good Luck,
Shawn(OH)
PS. Here in Ohio $500,000.00 would get you 2.5M in rentals. At an average of 40k each that would equal approx 60 houses at $600.00 per month or 36k per month income vs $21,800.00 per month mortgage payment..... Something to think about
Povertsux, your predicament illustrates Kiyosaki's saying, "If you can't make money with no money, you cannot make money with money!" According to him, you don't even have assets there, you have cash-eating Alligators!
You are substituting cash for knowledge, which is A strategy, but not one that is going toserve you well over the long run. I know, I once was feeding a $10,000 per month negative cash flow on 40 Alligators!
Keep your powder (cash) dry until you learn more about the financial side of the business.
As for your present situation, here is a way out. Raise the rents to produce a positive cash flow to you and reduce the renter's net rent at the same time!
Here'[s how. Put the property into a properly set up Land Trust. Make the renter a minority beneficial interest owner. Have the trust Net Lease the property to the renter at a rate that will cover all the expenses and produce a positive cash flow to you.
The renter will now be able to write off the mortgage interest and the real estate taxes against his income, thereby producing a large tax refund, reducing his net out of pocket cost, usually below what he was paying as a plain renter. This is called a triple net or tax lease.
The IRS says a benefitcial interest holder in a properly constructed land trust which owns the property, who has all of the liabilities and responsibilities of an owner; mortgage payments, real estate taxes, insurance, maintenance, etc can take the tax deductions of an owner. (IRS Reg 164 (h) 4(d))
Incidently, he cannot take depreciation, since he lives there. You can. That will partially shield your cash flow from taxes.
This set up more than solves your cash flow problem. Since your "renter" is on a net lease, he is responsible for repairs and maintenance, not you!
This is an excellent way to hold properties with no negative cash flow and no management headaches without giving up any appreciation, which I see as your primary investment goal.
Don't worry. If your co-beneficiary renter should fail to make his payments on time, or fail to keep the property up, you can kick him out like you would any other renter.
Obviously, I cannot go into the mechanics of how to implement this strategy in this post. The Land TRust is a specialized entity and there are plenty of people out there that are not setting them up correctly, which can be disasterous.
If you would like more information, or assistance, contact me at **Please See My Profile**
Good Luck!
Bill
:-?
yeah, I don't understand. You are speculating that appreciation rates will stay the same, and that the lump sum figure by which your property appreciated in a given year, minus the total negative money that left your bank account, is a positive figure, but that is all theory, and appreciation rates can change.
If it were me, I would sell ALL of them, take the cash, stop the bleeding, and have a fat nest egg, go to my local meetings, and learn the creative ways of doing things and start making that money grow based on TODAY's market conditions, not ones you are speculating into the future.
Good thing you are in CA, anywhere else and you would be dead (with the exception of NY and MA, and possibly FL)
I would strongly consider selling and cashing out. Appreciation rates NEVER stay the same forever, and CA is due for a correction, I would say.
Either way, good luck, Dave
Just to add, I am assuming that the hit you are taking on the negative cashflow is not including maintenance items? If I were you I would also seriously rethink what you are doing. Appreciation is a nice added benefit, but I don't think it is wise to use it soley as your only way to make money off of a property. The only way that would make sense I would think is if you were right even with your PITI and insurance but not that far behind on each property. It would seem to me that negativce cashflow over time is just eating into your appreciation making your efforts worth less. REI is supposed to pay us we aren't supposed to pay it lol
Good luck
Joe
[addsig]
I would suggest you stop investing in single family homes and do either 2-4 unit properties or even small apartment complexes in CA. The risk is then spread over multiple units..
When you are playing with fire, you risk getting burned.
California is a hot market and home prices have increased considerably over the past few year. Many knowledgable pundits have predicted a cool-down in some of the hot regional markets across the nation. Having said that, at this time, I would be looking at reducing my risk exposure in SFR's in CA by selling it and cashing my chips. The time for buying more SFR's in CA in the hopes of appreciation has already passed. I would instead look at other markets or maybe not to do anything at all.
I was thinking, every month for the last 20 years I have taken from 6% to 15% of my income and invested in a 401k, hoping that it would appreciate. Wonder why we frown upon the same concept when applied to real estate?
My of my landlord friends have said that they made their money on appreciation, and not on the rents.
Brenda
Brenda, while I am sure that is true for many landlords, that should not be the PRIMARY investing strategy. The appreciation is the surprise bonus or the icing on the cake, and I think this investor is hanging out in the wind right now, losing money every month.
If it were me, I would sell all of them, or at least cut my exposure down to a quarter of current size. Too much risk, and too much money being lost in negative cash flow on SFH which typically cash flows very poorly.
I would lease-option a few of them at above market rents to cut into that 3-5 hundred negative each month, and hope that the tenants default or otherwise do not exercise thier option to purchase. Also, I have seen l/o deals that with the purchase price to be 95% of the appraised value at the date when they exercise thier option. That way you stil get your appreciation. I would also try to get the l/o tenat to pay all of your mortgage payment in exchange for a gauranteed portion of the appreciation even if they do not purchase or excercise thier option. This would require an appraisal now, and then to estabish a basis to calculate the appreciation. I would think this would appeal to some tenants.
Hi,
Thank you guys for all the wonderful responses. I would love to have you all over for dinner. The power of knowledge, experience,brainstorming and some capital, wow.
I hear and understand what you are saying. My thinking was, and still is, if the negative cash flow was a major concern, then I would have stayed out of the market & missed out on the appreciation. You say "appreciation is just icing on the cake", that is true, but it's a big factore in RE, otherwise RE is not that attrative. Also, if you stay out and appreciation keeps on going, then you really will miss the boat. Having said that, at the present time, I'm not buying any properties, due to the high prices and therefore the higher negative. Do you think rents will catch up with the RE prices? I'm thinking that in about a year I can have these properties in Positive. Am I being greedy to HOLD? Remember, the buy and hold is one of Warren Buffets strategies, no mine
I've got to say that what you're doing is NOT investing but rather gambling. You are betting that the appreciation will offset any and all losses that you are currently incurring. There are a few problems with that though.
First, you're assuming that appreciation will continue. That is not always the case. The RE market is just like the stock market and it will have it's ups and downs. If you hold too long and get stuck in a down market, then you're in a bad way. You've lost the appreciation, you've lost money every month, and very possibly get stuck with a house that you can't even sell.
Second, are you figuring you numbers correctly? With a $500/month negative cashflow, your property has to appreciate 2% per year just to break even, and that it not counting added costs of upkeep, etc. that I don't believe that you included in that $500. There are also costs involved when you sell that eat into that equity as well. They need to be added in as well. I've heard too often the "I made $50K on this property" but they don't count all the costs they incurred over the 2 years that it took to sell it and usually for less than they were asking.
Third, appreciation only matters IF you sell the property. So if you currently have negative cashflow, you are losing money, plain and simple. Appreciation doesn't buy you dinner.
Roger
There are buy and hold markets out there (outside of CA) where you can get positive cash flow. Another strategy you might try is to exchange one or more of your SFRs for multi-units where you can get more cash flow.
Oh My God !!!
Dude .. If you have majore appreciation- sell some
pay off or down the others , create Pos NOI
You will take it in the shorts a bit on Cap Gains
But you need to get the NOI going-
1. Cash Flow begets more props & $$$$
2. Your FICO will / is dropping like a rock
Banks look at your Income Ratio (Big-Time)
3. Never buy a property that is Neg Cash Flow
unless you can foresee the future and shows
huge , fast gains in appreciation - and when you can do that ... you will not need to go on Trumps show ...
He will seek you out and sign a 20 year contract with you
for 50% of all gains made .
Darryl
I seems that your monthly negative on 2 properties is 400 per property or 9600 per year.....If your properties have appreciated by so much, can you refinance and get an interest only loan on the properties to reduce the monthly loan cost, also can you pull out 10-25k to cover the negatives over 2-3 years, finally is it possible to increase your rents on the two houses that you own.....These actions will help with the negative.....
Next focus on your goal....What are you trying to accomplish... If you have 500,000 of cash to invest do you want to deal with 20 houses in your own backyard or across the country......
Hypothetically, If your goal was to make 10-30% per year on the 500,000 cash while limiting your risk but investing in realestate, you could loan your money out to investors....ie...you loan an investor 70,000 to buy and rehab a property. You have a mortgage on the property for the amount of your investment.....The investor resells the property after the rehab is complete and pays you 20% on your invested capital of 70,000, or 14,000 profit....Investor provides a preapproved buyer that will purchase the property when the property has been rehabbed. This is one alternative to buying and holding 20 properties with negative cash flow....If you did one investment deal every other month you would earn 6x14,000,. or 84,000 in a 12 month period, Your profit increases with more deals you fund.....
Gotta love the advice about speculation in other areas of investing, but not RE... what up wit that? I think if you can afford the negs, why not speculate. ALL INVESTING IS SPECULATIVE. However, Bill's advice obout setting up the land trust is outstanding (and free!). Good Luck.
P.S.- I agree: poverty does blow.
Hi,
. I agree that negative cash flow is a NO NO, but disagree with the sentiment that you should only buy positive cash flow deals. It's about impossible to find deals, at least in CA, with 100% financing as some in this discussion suggested, and at the same time have positive cash flow. My question to them is, I wonder how many properties do you guys own? That is, new properties that were recently purchased and not 10 years ago.
The $500 K is in a MM account waiting for the next deal and some for a cushion. Or should I say, if invested in CA, another negative cash flow deal
I strongly believe that appreciation is the name of this RE game. I can live with 3% appreciation, which can mean double digit return on my investment. I don't think we will all make a living on $100 or so positive flow per month. With 100 % financing, paying the mortgage down is no way to be rich.
I have been looking into the possibilities of developing and selling SFH, which I'm new to and was wondering if that would be a better way to invest.
The reason why many people do not frown on a 401k is because they forget that it is tied to the stock market, therefore subject to bull and bear markets. It's also considered okay because "everybody has a 401k."
IMHO, 401ks are the biggest joke played on the working individual. The loyal employees of Enron understand what I am talking about.
As a landlord, I make a positive income of $700 a month, off of two properties. Why take a loss when you can put an extra 8,000 in your pocket a year? Appreciation is nice...but extra cash in the meantime is much nicer.
What you have, my California friend, is a bunch of liabilites. One option for you would be to fix two of them up, sell them, and put those profits into the mortgages on your rentals so you start gaining positive cash flow.
Another strategy in the future: buy low, sell high. Buy when things are cheap. If there's a frenzy going on, sell something and make the moolah!
Quote:
On 2004-11-30 17:36, bgrossnickle wrote:
I was thinking, every month for the last 20 years I have taken from 6% to 15% of my income and invested in a 401k, hoping that it would appreciate. Wonder why we frown upon the same concept when applied to real estate?
My of my landlord friends have said that they made their money on appreciation, and not on the rents.
Brenda
povrtsux ,
Have 11 total units now .. 5 in So Cal , 6 Out of State .
Started Investing June 2001 .
There are many ways to skin a cat , It all depsends on
what your goals are ...
For instance , I am utilizing REI to basically replace
my Corp Day Gig income b-4 they do an Enron .
So what is highly important to me is Multiple streams
of passive income . I will give you 2 examples
One I accomplished & the 2nd I did not .. and am kicking myself now .. but again my focus is on cash flow .
1. I just purchased a 4-plex out of CA . Price was
$145K ,My Net is approx $1050 per mo. or
$12,600 per year. If you find about 6 of these deals
you now have over $75K per year Disposible income
You can quit your day job and retire or keep your day job and use the $75K per year to snow ball and add another
6 Props and retire with $150K per year .. up to you..
But it all = Cash Flow .
2. (Kicking myself now )
My parents where moving from Riverside county CA
1 year ago , They had a SFR they purchased for $78K
and was selling it for about $154K , They asked me if
I wanted to buy it .... I ran the numbers and Even with an
IO Loan I would be Negative about $100 per mo.
Pass ..(Kicking Myself) now 12mo. later smaller homes
in the same area are going for $230 K
I could have purchased it on an IO Loan - ate the
$1200 in 1 year and now be selling it for a $76K
Profit. (Kicking myself again) .... But hey
I am doing great with my cash-flow focus
and very happy with my 40% cash-on-cash results .
+ +++ any appreciation that comes my way (Gravy)
Darryl
I have similar thoughts to Daryl and being in southwest florida I've kicked myself on a few as well but bottom line is I don't speculate (at least for the time being until I have more cashflow)
Daryl, I am curious what the gross monthly income is of that 4 plex where you net over $1,000 a month.
[addsig]
Have you thought of selling any properties but taking paper instead of cash? When taking notes you can probably get some cash in the form of a down payment yet still collect a monthly income from each property on a note.
You wont have control of the property obviously, but can generate a steady cash flow, charging higher interest on the note than you pay on the mortgage, theoretically you will make money from monthly payments every month on top of the mortgage payments.
Im young, and new, so this might not be suitable for you, or a sound idea at all....but maybe you should look into it if you want to keep a monthly income from the properties but dont want the negative cash flow.
Some comments on this idea from more experienced investors would be useful.
~Andrew
To return to your original question, PovrT, YES you should be investing in a different sector.
Hi ray_higdon ,
Get $2000 Gross (2) 3BR $550 ea.
(2) 2BR $450 ea.
Building was built in 1997 , very little maint .. so far.
Ray & all - Here is great web-site to look for possible areas for investing.. the data is a bit old , but free and basically .
tells a strategic tale of cities in the USA .
Population, P-tax , Curr Growth , Future Growth , UE Rate After you look here then you have to do more indepth
analysis -
http://homeadvisor.msn.com/pickaplace/comparecities.aspx?FS=CA&selFS=CA&selTS=CA&selFC=0&selTC=0&PFC=Seattle&PTC=San+Francisco&EarningFromCity=50000&PFS=WA&PTS=CA
example I was going to invest in Charlotte
NC, Growth was great low UE rate- looked closer
and found way too much over building and high Vacancy
Rates. They are doing what CA did 20 years ago.
Building to Inventory (Big Mistake) in CA they have learned and now only buy the land , grade it and then
sell the homes b-4 they start building . Huge waiting lists.... also they are not letting investors buy 6 or 8 of them.. only Owner Occ for min 1 year .
The only thing that will make the CA home prices dive
will be interest rate hikes , whereas Charlotte is open
to major Bubble issues with the combo of over building
and rate hikes .
LOL - Also in Charlotte they try to sell Multi-Fams
for what they think they are going to be worth ... never seen such a thing..
[ Edited by RetireEarlyLBCA on Date 12/04/2004 ]
Hi RetireEarlyLBCA & All,
As you know I live in Riverside CA. I have seen my home jump form $300 to a current price of around $700. Few years ago or around 2001, many homes were selling for around $100K - $200K, I also kick myself for not seeing the trend, at these prices you definitely had positive cash flow. But at current prices, no way.
With your thoughts, you'll hardly have any investors or investing going in CA. That's hard to believe, don't you think.
commercialking suggested investing in a different sector, where would you invest?
povrtsux ,
Well , I am not currently investing in So CA , but there are lots of investors still buying way over price , they are speculating .
I do not have the stones for it after some 300%
appreciation in the last 5 years in So CA .
But there are folks buying HUD 4-plex's in Long Beach
that are appraised by HUD @ $400K for $560K
with the 2/1's renting for $900 max they are paying 13 times Gross- I have noticed the same crazy stuff in Riverside Co as well .(my props are in Hemet,CA)
This is why I am re-directing my REI's outside CA
Risky.. yes .. as risky as the above example , not in my book.
I look for states with low Prop-Tax and Good Growth
and start calling RE agents & Prop Managers in that
area.
Darryl
Darryl,
Have you bought long distance yet?
I think yours is a smart strategy: low taxes, growth, + new or re-newed interest in location. After you hone down to some areas, what do you look for in calling Managers and Realtors? What are your next steps? [ Edited by ceinvests on Date 12/05/2004 ]
This reminds me of the story of the guy who buys apples for ten Cents, sells them for 5 cents, realizes that he's loosing money, so he decides to make up for it by selling twice as many!
You're using the wrong equasion!!!
DO NOT BUY MORE HOUSES LIKE THIS!
Good advice has been given so far. You need to change your method, change area, or both.
NEW JERSEY & PHILA AREA THE RENTS FOR 3-4 BEDROOM HOUSE IS $900.00 -1200.00 THUR HUD AND PRICE FOR HOUSE IN PHILA IS AROUND $3500.00- 15000.00 AT THE SHERIFF SALE
As long as you stay liquid, with a cushion to cover the negative..I think your investment strategy is sound. I have started refie with interest only loans from Wells and Wash Mutual...I
I cut my payments 54%...they appraised the properties at 80%, and the homes had gone from 200,000 to 350,000. And the appraisals came in...So now I have credit lines, a lower monthly and cash in bank...I can handle negative and still sleep at night
[addsig]
Thanks all for the sound advices.
belairpatrol, I think you prove my point. Appreciation is the game here. By refinancing with interest only loans you're not getting anywhere without the appreciation. Right?
Have you considered re-financing to increase your cahflow? All other factors being equal, rates tend to be lower when you re-fi than when you purchase a home. You can re-finance and lower monthly payments by reducing your interest rates. The payments can be even lower if you pay down your principal by bringing in cash to the re-fi. This will save thousands of dollars in interest.
Well Povrtysux, I will confess that the long 4 part article on housing bubbles that I recently published here on TCI was largely written in response to your post and a phone conversation I had with a friend who is also in the CA market. I bring it to your attention.
Hi,
Yes, refinancing is my best option at this point.
commercialking, I read your article. Thank you for bringing it to our attention.
To comment on this article: He said "speculative bubble". I agree, it's only speculation. I kinda don't agree with the theory of stocks compared to RE. Stock values are depending on their performance. RE value is based on availability and demand. The less land you have available, the more expensive you have to pay for it. You want to live in the surrounding Orange county areas in CA, you'll have to pay the higher price. Take NY city, you pay millions of dollars to own a townhome or a condo in Manhattan. Do you think it's a BUBBLL? I don't think so.
On the "The Florida Real Estate Craze" His theory blamed the Hurricane for the Bubble burst. Natural disasters are good to consider when investing but are very hard to predict therefore they are not to be considered in today's RE values. I agree that if they happen, they can deflate prices even in the swamps. One can't stop moving forward because someone thinks a natural disaster is in our future.
At a loss of 3-500 each per month say 400 avg. Thats 2000 monthly and 24,000 yearly . That means you'll need to keep your 500 K to pay for you 5 properties. Now you want 20 with neg. cash, that'll cost you 80,000 a year or 7000 a month . I'd get out now while you still have the equity. Flipping sound alot more sensible and profitable.
Don't forget appreciation and tax benefits. You see, my whole question concern is about appreciation. If you get the average 3-5% appreciation on the whole investment or the house value, then that would mean a decent return on your initial investment after deducting the negative.
povrtsux has to me has already made his decision and wants more approbation of that decision than advice.
If you are going with the neg cash flow - several things
1) get the properties reappraised yearly and increase the insurance coverage. Lots of investors here in FL put up with the neg cash flow because of appreciation, did not keep up with changing insurance coverage as property appreciated and are now in a bad shape because insurance after the hurricanes did not care about the appreciation. Only coverage mattered. Upshot is that they ate the loss each month for years and now can not recover that.
2) Seems ti me there must be something you can do to fix the negatives. Maybe refinance at a lower rate or do some slight improvements that are cheap but would make for higher rents.
3) Give your taxes a thought for a way to make those negatives neutral
if i had 500k in cash, i'd invest 400k it in a TIC deal in a commerical deal in California. commercial properties aren't on the same wave as residential properties. there are many companies offering 7% return plus appreciation plus tax benefits via TIC deals. 7% on 400k is 28k/per year. plus i'd have 100k left over for another deal or two.
linlin, I think you misunderstood my original question. I asked for ways around the negative and not ways to sell. We all know that selling is the best way to get rid of all our problems, but that's not what I want to do. I agree that the discussion turned into why I bought, CA inflated prices and the Bubble. Having said that, I agree that refinancing is my best option to bring down my negative.
What I don't understand is why so many people in this forum don't see appreciation as RE main means to riches. When they say "a good deal is buying 80% of the today's value". Isn't 80% of today's value 100% of yesterdays plus appreciation?
povrtsux - There are only 3 ways to get rid of the negative cash flow of your properties:
1. Raise Rents
2. Refinance and reduce your mortgage rate
3. Reduce expenses of your property (Being that it is a SFR, I doubt this would work)
If you are looking for other ways to reduce your negative cash flow, then it is akin of asking how you can get Milk from a Stone.
About your second part of question as to why people don't see appreciation as the name of the game, people see the state of the current housing sector using different eyes. Home prices have steadily appreciated year over year, keeping in pace with general inflation, except for certain periods in the past (eg: 1988-1992) when homeprices fell down. It is common for home prices appreciate 1-2% every year, but uncommon for a 10-15% appreciation every year. The appreciation you have realized in your SFR's over the past 3-4 years is because of relaxed Fed monetary policy and not because of any changes to the underlying fundemental value of your property. Having said that, and without going into a Macroeconomic Monetary Policy discussion, I personally think that Cash flow is important when the housing sector is on a downward trend while appreciation is important when the housing sector is an upward trend. What the futute trend of our current house sector is entirely left up to the individual to decide.
Your third part of the question is whether you should be investing in a different sector RE. I don't see how this would get rid of your negative cash flow on your SFR's. Assuming that this question is not related to your 'negative cash flow' question, I would say that Condo Conversion would be a decent challenge because of the demand for Condos. Again, this would depend on your local RE market.
Hope this helps.
Wow! I guess my Dad and I are very old fashioned.
We invest in problem properties that have a few "little" things wrong with them. Then we depend on the rents. The way we figure it, our tenants are supposed to pay a big chunk of our mortgages.
I think you can spend a lot of time freting about appreciation. It's a pleasant subject, but we don't think about it all the time. We concentrate on staying competitive in our market. (You really can retire and live off your properties).
What I want to do next is get directly in the path of growth. There's a tremendous amount of growth going on in Middle Tennessee right now. I don't think it is hard to find properties that will bring in the rents now and higher appreciation later in my area. Times are good.
Cordially,
Alice
I am a landlord in San Francisco, and I understand that it is very hard to buy investment properties that are cash-flow positive. Most of the buying is speculative (even for multi-unit buildings in my area) and not advised. I bought mine because it was a way for me to achieve home ownership of a 4 unit building at a monthly cost equivalent to buying a condo. The refinancing and increased rents due to rehabbing have made the building cash-flow positive, but in some ways I was lucky because of falling interest rates. Going forward, I will not be investing in California, but in areas that have sound CAP rates, like Az, Or, Eastern Wa. Even when management fees are included, it is possible to be cash flow positive.
By the way, if you do projections of passive income over time based on properties that are cash-flow-positive from the beginning vs. those that are losing a little money, you will see that your wealth will grow MUCH faster on the former.
I believe doing these sorts of projections based on projected rent increases, utilities, mortgages, etc. is an important part of any business plan, including yours.
Good luck.
Greeting povrtsux,
I didn’t want to get involved in the debate / discussion on this thread. But I did want to tell you that I think you’re spot-on when you say, "What I don't understand is why so many people don't see appreciation as RE main means to riches." Exactly! Without it, people might as well fix up old cars and sell them.
The other thing that’s amazing to me is how some people seemingly don’t fully analyze a particular deal, property, or market. They will gladly put 20-30% down, get an interest only or negative amortization loan, and think they can have "positive" cash flow. Based on what? Either a property is over-valued, or it’s not. Is it a good deal, or not? Rental income should be weighed against the total deal -- not how much someone puts down. Whether they pay it up front, or a little bit every month – they’re still paying it. There are just too many other factors that determine whether someone’s really making money.
I think commercialking’s articles on "The Bubble" are outstanding, and really put things into perspective. But when he uses your situation as an example, I think he should have also mentioned that when you "feed that $500 per month alligator" (using his scenario) you’re also paying down the principal at about the same rate – which needs to be factored in.
And I know he was just using your post to illustrated a concept. But something to keep in mind is that your market (currently appreciating at over 30%) has averaged 6.33% over the past 25 years -- compared to 3.46% nationally. When you figure the wonders of "compounding" that means a $100k house in 1980 would now be worth over $420k. Equal to inflation? Maybe. But that’s the beauty of appreciation -- it’s not based on how much you invest. So, if you went in with 10% down, that 420% appreciation would translate to 4,200% gross ROI.
Another thing to consider in your market is that the appreciation has (at least in part) been the affected by of a whole lot of factors other than just a frenzy. Population growth, industry growth, new community development, Orange County and L.A. trends, etc., Some of it, arguably, could have even been an upward correction.
Will the bubble burst? Probably. But who knows if it will drop over 30%, as the example in The Bubble article indicated. Again, in your area, the most it has ever dropped in one year is 10.81% (1994). And someone buying at the worst time (1990-91) could have easily been upside down for the next 6-7 years. But in the 6-7 years following that, prices more than doubled what they were in 1990-91.
I guess my point is that if we research our market, follow the trends, do the math on BOTH sides of the equation, work the right deals, and have the staying power, we can greatly minimize our potential risks. And hopefully we can make appreciation the "cake" – and not just the icing on top.
BTW – if you want to email or PM me, I’ll gladly send you a quarterly breakout of the appreciation / depreciation history in your market area.
I don't think anyone disputes appreciation as a way to make money with realestate. Afterall, that is everyone's goal. I think what was surprising was the negative cash flow on so many buildings. Thus all the comments on selling or getting out from under that situation. Yes, it will balance out when the properties are sold but I think a lot of us are looking at "why negative cash flow at all?" especially with interest rates on the rise again - at least here in Fl
If povrtsux has the means to continue footing the bill for the negative cash flow and it has minimal impact on his dealings then I am sure no one would dispute his decision to hold out for appreciation and eat the losses for the time being. Then that is that.
However, a lot of folks depend on the rent for the building to cover the mortgages while the building is still appreciating. I guess basically the best of both worlds.
Just my personal opinion and feeling but I try to never use my cash flow from one building or savings to cover the next. I try to make each self sufficient. Not always possible but that is always my goal. I always go with the "what if?" scenario
As I said before, there are relatively inexpensive things povrt might be able to do to the buildings to increase the rents or to reduce the mortgages. I am sure with his portfolio he will not have any trouble getting much better rates than he has now. Whatever he decides I am sure he will keep his best interests in mind and choose what is appropriate for him.
One thing you have to remember, you may not be doing anything wrong. If the area doesn't cashflow, it doesn't cashflow.
I have been investing in real estate for almost 10 years now.
I was investing in the suburbs of Chicago and purchased many single family homes. About seven years ago I purchased nearly 30 homes at an average of $100 per month negative cash flow. (Of course I kept buying on an average of 1 house per hundred calls - the best I could find, which was slightly negative or break even at best).
At first I thought I was just not doing good enough deals. I thought it was something I was doing wrong. My mentors who had a lot more experience in this business than I had said "creative real estate techniques work everywhere" and "most people use the excuse that it just doesn't work in my area" I guess I didn't hear them mention a true fact that many real estate investors go broke and quit.
I decided to hang on and here is the plan I came up with.
I had a very profitable business that would suppliment my loss until the homes appreciated and I figured in about five years I would start seeing positive cashflow on these properties. And besides real estate appreciates so in a worse case scenario I'll get that, right?
Guess what. The rental market in the last 2 years has really taken a hit because all of the "good tenants" became home buyers (due to such low interest rates and loose credit standards/ mtg broker competition).
Rents actually went down! Those properties were finally starting to pay a few hundred dollars a month cashflow - just when I needed it most. Then the rents fell a couple hundred dollars a month.
In 2001 the economy took a dive and I closed my very profitable business before the end came so fortunately I didn't lose money there. At that moment I was seeing cashflow so I decided to go full time into real estate.
Then as I told you before, rents went down. I did have some profit in properties so little by little I sold to cover my expenses and feed my alligators and put food on the table, all the while I foolishly bought more alligators. Fortunately I didn't buy a whole lot more.
But I have to tell you. The appreciation, over the five to seven years was only 5% at best and 2% on average and some properties didn't appreciate a dime.
(Instead of making money from solving people's problems, I often felt I took over people's problems and made them my own.)
Perhaps if I was in California I would have faired much better with greater appreciation. But do YOU want to count on that? Don't make the same mistakes I did. I'm still recovering from this.
I am still investing in real estate (in a different state now) and I will not buy anything that doesn't cashflow at least $200/mo. - my average is $300 per month .
All in all, at least I now have confidence in my own convictions and analysis on things. I've never been one of those cocky investors that thought they knew it all, but this experience has really tought me a lot. I know I can deal with just about anything now and my confidence has really improved my negotiating skills and my closing ratio tremendously.
Before I decided to move, I did research for a year on at least 50 cities; I called rental ads to get a feel for rents in different areas and found out the values of the home to the rents, etc.
I decided to leave Illinois for other reasons besides my real estate woes, but just out of curiosity, I ran numbers on Rockford and Peoria (2 decent size towns that were close to but not considered part of the greater Chicago area). I discovered that by doing what I was doing I would cashflow at least $100-$200 per month under the current market conditions.
My suggestion to you is to find your Rockford or Peoria or at the very least do something different, as some of the previous posts suggest.
Insanity is doing the same things but expecting different results.
Get rid of those alligators (or keep a couple if you can afford it, in case they do appreciate wildly like some California real estate has in the past - but don't base your plans on it - have an exit strategy in the works in case it goes bad).
And by the way, It's not all doom and gloom. I did happen to make some great deals in that time.
I wish you luck and encourage you to continue to trust your instincts!
Hi,
Great discussion and much appreciated advices.
melissa, I'm not familiar with the suburbs of Chicago. In 2001, 30 properties bought in CA, would have netted me, today, at least 9 million dollars before the "negative cash flow", expenses and taxes. I guess that would have been a good investment.
You said "The appreciation, over the five to seven years was only 5% at best and 2% on average and some properties didn't appreciate a dime". Long term, it's safe to say that an average of 3% appreciation is normal, right? On a property of, lets say $500,000, an appreciation of 3% means $15,000 per year. If you put 20% down, that's about 15% return on your investment, not bad.
Some go in with 0%, that's incredible return don't you think?
It would be wonderful if you can share with us your experiance on how you managed to buy all these properties? What kind of financing? What down payment % you use when buying, that is, to get to the positive cash flow? and the big question is how you set up and owned these properties? The bottom line and to be blunt, I would love it if you became MY OR OUR MENTOR
Thanks in advance!
povrtsux ,
I'll use your SFR $500K example as I was just looking at a 34 plex for sale in Oklahoma tonight on the MLS .
I got the city from the latest "Best Places to live in USA"
ranking on the internet .
You say buy a $500K home go negative cash flow
and get 3% per year or $15K per year appreciation.
Lets look at the difference .
There is a 34-plex in Oklahoma for sale now for $499K
approx $350 mo ea rent . That is $142,800 GRI a year.
with 30% Dwn (Commercial) after PITI , $950 mo Man fees. you are looking at $96,000 a year NOI - now for the vacancy and Repair Lets do 15% Vac & 15% Repairs
30% Total you are still looking at $56K per year Pos
Cash-Flow or 37% Cash-on Cash Return on your down
of $150K - +++++ any appreciation you may get .
If you get 0 zero appreciation it does not matter
you got 37% on your cash investment .
Wall Street guys would sell thier mother for annual
returns like that .
Not downing you , just showing that cash -flow is Best .
also .... you would get $56K per year liquid- not held
up in equity where you need to refi and pull or heloc it and pay 4% interest rates .
You could make a purchase like this - us the $56K to
pay down your SFRs on the snow-ball method
and really be raking it in at the end of an 8 to 10 year
plan. 30 SFRs in the Bay Area not sure what your rents are.. but I put you at $1500 to $1800 per mo. rents
ea. home . .. am I close ? after paid off you are looking
at $45K per mo. or $540K per year income .
+++++ any equity you may have . It just does not matter .
Hope I am not ranting here .. but you have great props
secured now ..with the $500K liquid you have , just adjust your buying habits to let somebody else pay your $500 per mo negitives and take it to hyper space guy .!!!!!
Darryl
Hi Darryl,
I clearly see your point. Although it's a dream, I'd love to buy something like this in CA. I agree with you that I must look outside my box for these opportunities. The thought of investing out of my area is not very comforting. Commercial or multi units are sounding much better than SFR and I'll definitely look into them.