Is this usually because of bubble housing prices, high property taxes, high vacancy rates, or a combination of all of these factors? (I know the reasons vary from one location to another.) The places I’ve seen mentioned as being bad for cashflow are NJ, CA, and south Florida. (having lived in NJ I know that the taxes there must be a factor in that case) .If anyone could break down the specific reasons why these places won’t work it would be helpful. Thanks.
I think that the answer to this question is pretty complicated.
I believe that the economy has a lot to do with it. If the median household income in an area is $150,000 per year, then real estate is going to sell for more than if the median income is $25,000 per year.
You will notice that a lot of investors will tell you to invest in your own local area. I have been advised by investors not to invest more than 15 to 20 minutes away from where you live; convenience was his rationale, he explained that it becomes too much of a hassle to drive 45 minutes in traffic to manage your rental property.
Annual appreciation will inspire speculation in the real estate market. If the average appreciation of a property is 10% over the last 50 years, many people will buy property without regard to cash flow.
Return on investment is another reason that people do not use cash flow as the primary concern during the purchase of real estate. For example:
Cost $300,000
Rental income $1800/mo.
minus PITI $2100/mo.
Expenses $900/mo.
So, the negative cash flow is $1200 per month. In 30 years, the rental income becomes passive income for potentially generations to come. Not only that, but children in the family can be offered the opportunity to buy the property, potentially offering economic opportunity and the result of living close by at the same time.
The PITI varies based upon the amount that you put down. So, if you put $210,000 down on the property,
PITI becomes $630 per month
Expenses remain $900 per month
Positive cash flow becomes $270 per month.
Annual cash on cash return is only 1.5%
The return on investment could be more based upon possible tax advantages, principal pay down, and appreciation.
Funder, Thanks for the detailed response!
This is a great forum but sometimes I get confused, since there are some people who are adamant that cash flow is the only thing that matters, others lean more towards appreciation. And then there are some people who say that anyone can make their own opportunities wherever they live, but Californians post here that they have to invest out of state and use PMs to make any money.
Holdandbuy, The #1 reason you should invest is for POSITIVE cashflow in my opinion. If you’re losing money every month, whether its $120 or $1200, you’ll be out of business. How many properties can you afford to buy if each one loses $120/month? Five? Ten? What if your ability to pay decreases? Will you lose some or all the properties? How may can you buy that financially stand on their own AND give you money each month? The answer is “As many as you can find”. With all that said, you need to be an expert in the market your investing in. Sometime the economy has little to do with rental rates/housing prices. For instance, my local market doesn’t have a lot of high paying jobs. But there are a lot of people who come to live part time. These people frequently have more money than brains and pay higher prices for their 2nd homes. The result is that the home prices/values have only declined about 5 - 10% their overinflated values a few yrs ago. I frequently see duplexes on the market that have a total gross rent of $1200. These properties are asking (and sometimes getting) $150k - $175k. The mortgage alone will just about eat up the gross rents. Its no suprise that these properties end up back on the market within a year. They’re constantly using the “greater fool theory”. Therer are some college towns that also don;t have a lot high paying jobs but have an increased housing demand for students. You’ll have to reearch your investing market and find out what the renters are paying and why. Then you’ll know what you can charge for rents and therefore, pay for a property.
well, I’m certainly glad I read this board before I ran out and did anything. Between this forum and the books I’ve been reading I just may end up being successful at this, or at least avoid becoming another Casey Serin!
Just be careful about what you believe from some of those books. One I’m currently reading is specifically about investing in Duplexes, Triplexes, and Quads. The author lists cash flow as being: Gross Rents - PITI= Cash flow
That is not what we’re talking about here. He made no mention of ANY possible expenses related to the property.
That’s not the first book I’ve seen something like that in.
I’ve been reading Frank Garrinelli’s (sp?) 2 books about financing & cash flow, and then I have a bunch of other books I haven’t gotten to yet. I try to verify information by reading these boards.