possible to find good cash flow deals on mls?

Rehabbing, Fix and Flip, Rental Properties
21

bluemoon06 and propertymanager,

You are both right. Bluemoon, if you have a perfect house and carefully screened upscale tenants, you will have way fewer evictions and rent problems.

However, you will also have picky tenants with a sense of entitlement. The suddenly constantly-running toilet tank will be your problem, not theirs. The mouse invasion, the roach that ran in under the door, the tile that came loose in the bathroom, etc. will all happen in a perfect house.

Poor tenants don’t want the landlord to come over…rich tenants call you all the time! Like you are their servant…goes with the territory.

Single family homes cost more in upkeep than apartments. They don’t have shared roofs, walls, yards to spread the cost around Propertymanager is right on costs.

22

You are right that single family houses cost more to upkeep. That is why I don’t upkeep them. The tenant keeps up the yard in single family. If you work for a major company like DuPont, GE, or Exxon they don’t build a plant or refinery out of operating money. They build it out of capital money. Their operations are a function of profits (Income statement stuff). The new plants and refineries come from assets or net worth (balance sheet stuff). The roof is not a cost it is a capital expense. If one is needed I put it on when I purchase the house with borrowed money. In effect it is part of the purchase price. If you find a house worth $100k for sell for $60k but it takes $10k to fix up and make right (including a new roof) the house has an effective acquisition cost of $70k. You MUST make the place right before you rent it. That new roof will last 10 years. I won’t own the house more that 5 years anyway so I never put roofs on more than once. If I did keep a house until it needed a new roof I would refinance the house and take the cash out of the house to pay for the roof. Don’t do capital work out of operating expenses. Make the house pay for the house.

23
I won’t own the house more that 5 years anyway so I never put roofs on more than once. If I did keep a house until it needed a new roof I would refinance the house and take the cash out of the house to pay for the roof. Don’t do capital work out of operating expenses.

Regardless of what you call it, the new roof is still taking away from the cash flow. If you treat it as an operating expense as I do (even though it’s not technically an operating expense), it’s deducting from the cash flow. If you treat it as debt, it’s still deducting from the cash flow. So, the cash flow is affected either way.

If you don’t keep your properties, then you’re really in a different business. You’re in more of a slow motion flipping business than the long term rental business.

Mike

24

You are right. I met a guy Eric on this forum a couple of weeks ago. We have been working together on buying some houses. He that told me that same thing. I keep 10 to 12 houses, but they are not the same houses. That is how my business model has evolved. I was originally going to get 20 houses and live off the rents. But I have decided that 10 or so is (for me) the optimal number. This way I never do maintenance and each iteration I get more cash flow. I do keep doing rehabs though. I guess it is like a 12 month flip that I keep doing. It gets around ordinary income (capital gains), I don’t have a lot of depreciation recapture, and I don’t do maintenance.

25

I’ve been away for a bit, so I haven’t responded.

I am operating more on the Bluemoon side of expenses than the Propertymanager side of expenses (for now).

I take them both into consideration. I know the expenses COULD be higher, and over time, will approach 50% of gross (because they historically have) but I also know that rents will increase over time (because they historically have) the value of the properties will increase over time (because they historically have) and someone else is paying for the rest of the equity for me on a house that I bought below 65% of (ARV - fixup).

In my neighborhood, a “rent ready” 3/2/2 at 1500+ SFH will sell for $100k - $110k. I can buy them - REO off the MLS - for 50k - 65k (because it’s on the edge of the hood, and people don’t want to buy a fixer-upper on the edge of the hood, but they’ll buy a nice house to live in at a modest price.). I can put in 10k -15k of fixup and rent it for 1,000 - 1,200 (i previously left out the higher end of the rent, being conservative, but that’s the actual range.)

I “manage” the properties myself.

I just got my taxes back from my CPA, even on the house I bought for $88k put $10k into, and rent for $1050, i’m breaking even. As I get more doors, more of my “fixed expenses” will be spread across multiple “assets”.

Like Bluemoon, I’m in two businesses. The landlording business and the “slow rehab/flip” business. Perhaps, I do risk a little bit of cash flow, in return for equity. My first deal gave me $30k in equity. I can accept B/E cash flow, or even negative cash flow on that deal. I can’t do 20 of those. I can do 10 deals that will give me 40k equity and $35 - $235 in monthly cash flow.

Also, I’m doing conventional finance, so I’m putting 10% down. I make decent money on my day job, so I don’t mind putting money into appreciating assets that cash flow. My 401k doesn’t cash flow, but I put money in it. That’s good investing and good business. It’s not very creative and it’s not 100% OPP, but it makes money. There are plenty of people who have used this approach and have made plenty.

Mike, I think you got a little confused on Bluemoon’s “double-dip” discussion. He’s talking PITI, not just PI. My monthly PI on a 60k loan is $350 - $400. The TI (taxes, insurance) is another $300 or so. So, on 1k rent, 30% of it is TI. Vacancy in Houston is 5% - 8%. The rest of the expenses are what I manage, and they’re all tax deductible, so there is some benefit to them.

The point of the thread is, yes, you can find cash flow deals on the MLS if your area and your business supports them. Even if you don’t find 50% deals, for some businesses there is more to purchase than only cash flow. If you are only purchasing cash flow for today, then you probably cannot find good deals on the MLS.

26
Even if you don't find 50% deals, for some businesses there is more to purchase than only cash flow.

I don’t know what you mean by “50% deals”. The “50% Rule” that I use only says that operating expenses will be 45% to 50% of the gross rents. As you said in your post, operating expenses will approach 50% of the gross rent over time. We are in complete agreement on this point.

but I also know that rents will increase over time (because they historically have)

That is not necessarily true. Rents go DOWN as well as up, especially in the short run because rents are set by the market (supply and demand). While it is true that over the long term rents will probably go up, inflation causes expenses to also go up, so you will need higher rents just to mitigate the effects of inflation over time. The net result is that rents MUST go up to offset inflation if you are to keep the same cash flow.

I am also in complete agreement with you that there is more than one way to make money. If you can buy a property at a discount and flip it (even in slow motion), that can certainly be profitable. Also, if you buy a negative cash flow property in an area of high appreciation (speculating on future appreciation), that can also be quite profitable. However, those are completely different businesses than what I’m talking about. I’m talking about the rental business, not flipping or speculating.

Mike

27

Saying that “rents go down” is the equivalent to someone saying “my expenses aren’t 45% - 50%”. Rents in Youngstown and Dayton are probably down right now. Those are exceptions, just like someone’s expense ratio may not be 45%.

How long is the horizon? On a long enough horizon, the property is paid off, rents and expenses increase, equity increases. Overall my position increases. I’m trying to increase my financial holdings - cash, properties, assets, income. I’m not trying to landlord, and landlord only, forever. Landlording is a means to an ends.

Had I bought 20 $100,000 properties - with no equity - 10 years ago and broken even for 10 years - no positive cash flow - and assume 5% annual appreciation (5% is a conservative number in most places - including Houston) - i’d have $600k on just appreciation.

Having said that, I certainly agree that if I can buy so that I cashflow $100 a month at 50% expense, I’d have even more, because i’d pull an extra $12k per year on those same 10 houses (another $120k over 10 years, not including interest or re-investment).

For now, I’ll defer some cash flow to build $600k in equity, even though i will try to buy as best I can and manage my expense ratio. I’m currently buying and fixing at 55% - 70% ARV, so that number would be closer to $1MM. Hopefully, I’ll be around in 10 years to verify. Even if the appreciation and fixup numbers are off, that’s a lot of room to error and still be happy.

28
Hopefully, I'll be around in 10 years to verify.

You won’t. If you pay market price on 20 properties, you will be bleeding a LOT of cash for 10 years and will be out of business UNLESS you have a LOT of disposable cash to put in. AT best, you’ll have a forced savings plan. At worst, you’ll be broke and flipping burgers at a fast food restaurant.

Good Luck,

Mike

29

Every property is purchased at “market” price (which is not necessarily at retail price). When you buy it, you are the market… I am not buying at full retail price, that’s for sure.

I am a real estate investor. I’m investing. I have income from a burger flipping job that pays for me to live a comfortable life, will allow me to be an inflation adjusted millionaire at my current savings rate (excluding RE) in 20 years, and gives me enough to also “save” - as you put it - in a vehicle that has a greater return than my savings account and the stock market. I get to borrow someone else’s money to finance a portion of my investment in an appreciating asset, and I get someone else to pay, at a minimum, the cost to finance and maintain that asset.

You’re right. If I had to live off my real estate investments today, I could not. Maybe that’s the difference. You are a RE business. I am a RE investor that is building for the future, using a blueprint that many others have used. Your pile of money may be bigger than mine. I don’t need the biggest pile. I just need a pile.

Perhaps, one day, I will have a RE business that must sustain and grow itself.

For now, I live in a $110k home, I don’t commute to work, I don’t have credit card debt, I don’t buy new cars (I do have one car note), and I don’t buy myself clothes or toys (except for my kids) and I “save” $25k - $30k a year toward my future (savings, 401k, paying down mortgages, buying real estate, etc.)

Mike, I’m curious, what is your take on cash flow, ROI, cash on cash return, etc? For example:

$1k gross rent per month
$100k ARV - Mortgage $80k (includes 5k fixup) at 6.5%
Therefore P+I = $500
Expenses = $500
Cashflow = $0
Bad deal, right?

If you take that same deal and put down $20k, making the mortgage $60k
P+I = $379
Expense = 500
Cashflow = $120
120*12=7% Annual Cash on Cash return and 209% total ROI ($20k got you $40k in equity + $1860 in cash) in one year.

I don’t know where I can invest $20k and get a 7% cash on cash return and a 209% ROI in 1 year AND have someone else pay down the principal on an appreciating $100k investment that I own. Is this a bad deal? To me, that’s better than the stock market, which, during my life time has averaged 7.75% compound annual growth rate.

The deals I’m looking at now look more like this:
$110k ARV
60k purchase
10k fixup
3k close (I realize I left this out above, so the cash on cash and ROI would come down a little, but not much)
7k down
Rent $1,000
So…
P+I = 345
Expense = 500
Cashflow = $155

That’s 9.3% cash on cash return and a 259% ROI in 1 year. The cash on cash return is 9.3% every year. The annualized ROI would decrease over time, but the total ROI would stay 259%. This does not take into account any tax savings, appreciation, or increase in rent, all of which will increase both the cash on cash return and the overall ROI…

Based on historical trends (which is how “expenses are 50% of gross rents” is also calculated) the above will look like this in 10 years:
ARV = 180k (120k equity on 5% annual appreciation)
Rent = $1340 (3% annual appreciation - avg rate of inflation)
P+I = $345 (doesn’t change, right?)
Expense = $670
Cash flow = $325

So, in year 10, the ROI on the initial 20k outlay would be:
$31k cash flow from years 1 - 10
$120k equity
$7.5k principle reduction
total = $158k
ROI = 790%

Ten of those = $1.58MM in 10 years. I’m trying to have 10 of them next year (but not putting $20k cash into all of them, obviously)

Not bad for “savings”. If anyone knows where I can get a 790% over 10 years, let me know (thats 26% CAGR). Even the original “bad” deal will beat ALL of my other saving and investment options.

I’m not as successful as you are - yet - because I haven’t been doing what you’re doing or doing what I’m doing as long. However, I will be successful. I think I already am.

30
Had I bought 20 $100,000 properties - with no equity ...Every property is purchased at "market" price (which is not necessarily at retail price).

Let’s not quibble with a silly word game. The market price is the price that the market will bear. Just because I buy the property at a very low price, doesn’t mean that is the maximum the market will pay for the property.

From your post, it’s clear that you in fact do not intend to buy properties with no equity - in fact, far from it. That’s why your examples have a positive cash flow.

For example:

$1k gross rent per month $100k ARV - Mortgage $80k (includes 5k fixup) at 6.5% Therefore P+I = $500 Expenses = $500 Cashflow = $0 Bad deal, right?

Let’s look at your example if you really did pay market value of $100K:

Gross rents: $1,000 per month
Operating expenses: $500
NOI: $500
P & I ($100K, 30yr, 6.5%): $632
Cashflow: $132 per month LOSS

So, if you had 20 of these as you said in your original post, that would be a monthly LOSS of $2,640 per month or $31,680 per year - OUCH!!! That’s why I said that you can’t pay market and have a positive cash flow. Putting down a large downpayment does not change the quality of the deal - all you are doing is buying the cashflow.

Now, all the talk of appreciation, tax savings, and increased rents don’t mean one thing to me if I’m losing $31,680 per year. I’m in business to make money, not lose money!

Mike, I'm curious, what is your take on cash flow, ROI, cash on cash return, etc?

I want a minimum of $100 per unit per month positive cash flow (using real world operating expenses).

I don’t care about ROI or cash on cash return, because they don’t matter for running a business.

Look at this example:

Purchase Price: $79,000, ARV $79,000, No money down
Gross Rents: $1,000
Operating Expenses: $500
NOI: $500
Mortgage Payment: $499.33

Cash flow $0.67 per month
Cash on cash return: INFINITE!!!

Clearly an INFINITE cash on cash return beats the measley 9.3% cash on cash return on the deal that you are actually looking at - Right? Unfortunately, even though this deal has an INFINITE return, the cash flow each month is only 67 pennies and there is absolutely no equity. Cash on Cash return? Personally, I’d take your measley 9.3% cash on cash return with a cash flow of $120 per month over this clearly superior INFINITE cash on cash return with 67 cents positive cash flow any day!

That’s why I don’t like or use cash on cash return.

I’m also not interested in any formulas that require a crystal ball for future appreciation, rent increases, or anything else. The reason is simple - I don’t know what’s going to happen tomorrow. We have had an unprecedented run-up in housing prices and we could easily have an unprecedented decline in housing prices over many years. Moreover, if you have a negative cash flow today, you probably won’t be able to hold the property until tomorrow.

Don’t get me wrong. I’m hoping that the market will appreciate; that rents will go up; that taxes will go down; that demand for rentals will increase; and that government regulation will decrease. However, I’m not betting the farm on any of that. I’ll take the cash flow NOW and the equity NOW so that my business can survive until tomorrow.

Having said all that, the deal that you are actually looking at doesn’t look too bad. It should have a positive cash flow, although only about $40 per month the way I calculate it. It will also have $37K of equity. So, all in all not bad. At least that should allow you to survive to enjoy the appreciation, tax benefits, principal paydown, etc.

Good Luck,

Mike

31

I think we have a definition problem. I am saying you can cash flow on houses on MLS, not houses that are purchased at retail prices. There are houses on MLS that are close to 50 cents on the dollar. There is one I found today that was a 3-2-2 with 2400 sqft that has an ARV of $140k for sell for $66k. It will take probably $10k fix up. The rents in that neighborhood are $1300/month. I think that will cash flow.

32

Mike & Bluemoon,
As always, thanks for your responses. I always feel a little bit richer (in education and RE earning potential) after a good discussion with the two of you involved.

I’m up at 4:15a on Saturday because I couldn’t stop thinking about the best ways to buy now, cash flow, equity, managing expenses, make ready, etc…

Good stuff.

33

Mike, Bluemoon, bdub

Thanks you all for great discussion and very valuable info. I have learned alot from you.