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Depending on EQUITY GROWTH OVER CASH FLOW in pricey RE markets?

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  • Depending on EQUITY GROWTH OVER CASH FLOW in pricey RE markets?

    I'm looking to purchase a 2-4 unit multifamily investment property in the Orlando region. I would like to live in one of the units for one year, refinance, move out, and rent out the remaining unit ("house hack" if you're familiar with the BP guys).

    There isn't a big market for multifam's in Orlando and when they do arise it's hard to cash flow even once fully occupied by tenants after the first year. I've been using assumed market appreciation rates of around 4% to appraise resale rather than capitalizing the NOI since I'm dealing with a 4 unit or smaller property.

    Is it too risky to rely predominantly on equity growth when running projections if future cash flow stays mediocre and stagnant? I'm concerned the deal becomes too speculative. That being said IRR is usually solid if I assume a 4% appreciation rate for the area.

  • #2
    too much risk with already 2:1 debt to income and new job

    Comment


    • TravisRADMD
      TravisRADMD commented
      Editing a comment
      Not sure I agree with those factors influencing the way I approach a deal too much if the numbers work. If budget allows, my $$$ should be working. I'm maintaining a 30% savings rate in addition to the debt service. Part of that will be directed towards RE.
      Last edited by TravisRADMD; 01-01-2020, 12:55 PM.

    • jacoavlu
      jacoavlu commented
      Editing a comment
      you said ZERO DEBT ASAP how can that jive with this plan?

      if I were you I’d live like a resident - that means pay off debt, rent, control spending, save, don’t go further in debt

  • #3
    The smart money in real estate generally does not invest in cash flow negative deals. Why invest when you will lose money every month? Unless the house hack will work long term for your family and save you lots of money on housing every month. Relying on inflation to make your investment work can work out over long periods of time, but what happens if we go from modest inflation to modest deflation? You could then lose the shirt off your back.

    Real estate investments are best when you have multiple exit strategies. Great appreciation? Sell or refinance. Great cash flow? Buy and hold.

    With a cash flow negative property, you have only one exit strategy and that depends on inflation rates and appreciation on a depreciating asset that needs continuous maintenance. Not a good idea to bet on only one upside parameter. The behavior of real estate in the past does not predict the future.

    Comment


    • CM
      CM commented
      Editing a comment
      I would "like" this 100 times if possible. OP should read carefully.

  • #4
    I agree. But I also have equity pay down as a back up in addition to speculative market growth. And cash flow after a couple years is positive; just not robust. Which is typical of many high value markets I thought. With a modest down payment isn't having someone else paying off the house great even if the the home's value theoretically stagnated. For instance, I ran the numbers on a property with low cash flow but even with appreciation assumed at 0% I could still return 10-15% (IRR) if i sold any time after 3 years of renting.
    Last edited by TravisRADMD; 01-01-2020, 12:52 PM.

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    • #5
      I don't buy real estate that doesn't cash flow. You can only feed so many properties with your clinical income. If something doesn't cash flow, either don't buy it or put down more money.
      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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      • #6
        Buying real estate that has negative cash flow is like buying a stock and having that company charge you for the privelege of owning it. It makes no sense. There is no place you read about real estate investing that says that is a good idea. Take it from those successfully in the business a long time, if it doesn't cash flow don't buy it.

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        • #7
          Multi-family like commercial properties can be difficult to sell even in good markets.

          Comment


          • #8
            Originally posted by TravisRADMD View Post
            I agree. But I also have equity pay down as a back up in addition to speculative market growth. And cash flow after a couple years is positive; just not robust. Which is typical of many high value markets I thought. With a modest down payment isn't having someone else paying off the house great even if the the home's value theoretically stagnated. For instance, I ran the numbers on a property with low cash flow but even with appreciation assumed at 0% I could still return 10-15% (IRR) if i sold any time after 3 years of renting.
            How do you know for sure that cash flow is positive after a couple of years? Wouldn't that be based upon an assumption of rising rents? Rents can be flat for years or even go down. What assumptions in your model lead to positive cash flow after a few years?

            I made tons of money on real estate investments over the years, but that was due to every property having at least modest positive cash flow from day 1, and also from the luck of major inflation over the years, and also being in a congested, high cost of living area where demand for housing exceeds supply. Despite all that, I am a bit concerned at the moment as demographic trends in this HCOL area are not looking great going forward, but my properties are cash flowing 6 figures so I have multiple exit strategies available.

            Comment


            • #9
              Originally posted by The White Coat Investor View Post
              I don't buy real estate that doesn't cash flow. You can only feed so many properties with your clinical income. If something doesn't cash flow, either don't buy it or put down more money.
              A bit of a hijack and a sincere question. I don't understand putting more money down as a justification to purchase and considering that a positive cash flow. Isn't that similar to what OP is suggesting?

              Comment


              • #10
                Originally posted by StateOfMyHead View Post

                A bit of a hijack and a sincere question. I don't understand putting more money down as a justification to purchase and considering that a positive cash flow. Isn't that similar to what OP is suggesting?
                What are you talking about? A good property may not cash flow with 5% down but will with 25% down. It isn't a "justification", it's just the way the math works.
                Helping those who wear the white coat get a fair shake on Wall Street since 2011

                Comment


                • #11
                  Originally posted by The White Coat Investor View Post

                  What are you talking about? A good property may not cash flow with 5% down but will with 25% down. It isn't a "justification", it's just the way the math works.
                  Yeah I get the math and it is now clear my interpretation of rental property cash flow vs the literal definition differ. If one purchases a bad, overpriced rental property in a terrible location/market and puts a large down payment or pays cash the rental income above expenses technically is cash flow but probably an unwise investment and not something I would be patting myself on the back for. If I have to put more down than the generally anticipated 20% to make it cash flow in most cases I'm going to pass and likely an inappropriate speculation for most novice investors.

                  Comment


                  • #12
                    Originally posted by StateOfMyHead View Post

                    Yeah I get the math and it is now clear my interpretation of rental property cash flow vs the literal definition differ. If one purchases a bad, overpriced rental property in a terrible location/market and puts a large down payment or pays cash the rental income above expenses technically is cash flow but probably an unwise investment and not something I would be patting myself on the back for. If I have to put more down than the generally anticipated 20% to make it cash flow in most cases I'm going to pass and likely an inappropriate speculation for most novice investors.
                    I agree. Just because it cash flows doesn't mean it is necessarily a good investment. But it does cash flow. I think you should buy good investments THAT ALSO cash flow because of the way you bought them.
                    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                    • #13
                      If you have to put 50% down to make something cash flow you will be forced to buy less of them. At least you hurt yourself less.

                      Comment


                      • Tim
                        Tim commented
                        Editing a comment
                        Solving one problem investment is easier than solving 5 problem investments. Diversification of losses is not a recommended strategy. More complicated, harder and more expensive per deal. You can only "hope" they are easier to get out with less pain. Additional deals can actually prevent some favorable solutions.

                    • #14
                      Buying a good real estate investment that also cash flows is easier said than done. Has anyone ever tried to get an aggressive loan on a rental property which makes it not cash flow which eliminates income and builds equity. Maybe Basically so your mortgage are paid off by the time you retire(and in a lower tax bracket) and then you can get better income from the properties?

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                      • #15
                        Any income property needs to cash flow first and foremost. Appreciation is an added benefit, but should never be your investment strategy. If the building does not have cash flow, it is not worth what you paid for it.

                        As for increasing your down payment, that defeats the purpose of the house hack (I spend a lot of time on BP). Most house hackers that buy owner occupied income property are using FHA financing and putting 3.5% down. The added benefit is FHA has very loose regulations where that down payment originates. It's very common to negotiate an FHA 2-flat purchase with the seller contributing 3% in a closing cost credit to the buyer, lowering your money brought to closing. The property needs to come close to breaking even with paying the mortgage and renting out the other unit. If you need to put 50% down to make the numbers work, don't buy the property.

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