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Cash Flow vs Value Appreciation

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welshmin

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Hey guys,

New to real estate investing and hoping to get a little help.

Recently bought our first home (Feb) and have since fixed up, built equity and saved. We're now looking at our first rental property.

I've noticed in my area (Brisbane, Australia) that there are townhouses in gated communities selling for $200 - $250k (LOW in Australia!)
That would cash flow, after all costs (insurances, government rates, taxes, etc.) to about $2k per year with a 20% down payment.

Pretty good as far as I've been able to see in my initial research.

Most places do NOT cash flow positive in my area at 80% leverage.

What's the downside?
These townhouses, using comps in similar gated communities or in the same ones, are selling for an average of $40,000 LESS than they originally sold for 10 years.

Is this something to be scared of? Property value DEPRECIATION?

My thoughts
It does limit the ability to build equity and refinance to pull cash out towards the next property.

However, with the cash flow increasing each year as the principal is gradually paid down, does that matter?

Would appreciate your thoughts fellas, what is this newbie missing? Am I crazy?
 

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Connor

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So I invest in townhomes, but of course it's here in the US. Townhomes tend to not appreciate as much as true single family, as when times are good, people want to have their own big yard and all that. But I've found them to be less risky, since you can have less variability in a smaller footprint.

Not trying to hurt your excitement, but assuming 20% down, you're looking at $40-50k. $2k a year is only 4-5% cash on cash return, which is probably not enough cushion. You've got to account for vacancy, maintenance, and turn costs (when you have to fix up a property in between tenants)- don't know if you did that in your calculations.

I try to look for double-digit cash on cash returns, so when you factor in the debt pay down, I get a 15% return or so. That makes it worth the time and effort to me versus investing in other opportunities.
 
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welshmin

welshmin

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Brisbane, Australia
So I invest in townhomes, but of course it's here in the US. Townhomes tend to not appreciate as much as true single family, as when times are good, people want to have their own big yard and all that. But I've found them to be less risky, since you can have less variability in a smaller footprint.

Not trying to hurt your excitement, but assuming 20% down, you're looking at $40-50k. $2k a year is only 4-5% cash on cash return, which is probably not enough cushion. You've got to account for vacancy, maintenance, and turn costs (when you have to fix up a property in between tenants)- don't know if you did that in your calculations.

I try to look for double-digit cash on cash returns, so when you factor in the debt pay down, I get a 15% return or so. That makes it worth the time and effort to me versus investing in other opportunities.
Thanks Connor, no excitement hurt, I want to come into this rationally.

Is your 15% return after HOA fees, insurance, rates, etc.?
And is that return only from rent or capital appreciation as well?

I am having trouble finding any places in my area that would come close to that kind of return, what % deposit are you using for that kind of investment?

Vacancy, maintenance and turn costs are not something I factored in.

Greatly appreciated!
 

SteveO

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The dynamic has been very different between Australia and the States for a long time. There are typically higher returns over here in the right areas.

The fact that the prices have dropped could go in your favor. Real estate tends to go in cycles. Have you had a down cycle lately or is it just that complex? It also may be an opportunity for lowballing your offers. If the units are not selling well, why not shoot a low offer price?

Those returns would make it difficult to make any real money though. I like to purchase multi-family fix and flips. Can make more that 100% annualized return on my investment in the right market. It is not the right market here in the US right now though.
 
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welshmin

welshmin

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Brisbane, Australia
The dynamic has been very different between Australia and the States for a long time. There are typically higher returns over here in the right areas.

The fact that the prices have dropped could go in your favor. Real estate tends to go in cycles. Have you had a down cycle lately or is it just that complex? It also may be an opportunity for lowballing your offers. If the units are not selling well, why not shoot a low offer price?

Those returns would make it difficult to make any real money though. I like to purchase multi-family fix and flips. Can make more that 100% annualized return on my investment in the right market. It is not the right market here in the US right now though.
Yeahhh, that's the kind of shit i've been dreaming about!

There have been a few high growth areas but typically at already high valuations that are out of my reach.

The country has actually seen a drop in valuations of about 7% on average in the last year, so it's definitely not just this area. If anything, my area has stayed more or less flat, slight growth over last year.

Lowballing will definitely be worth a try as I am not desperate so can afford to insult a few owners :p

I ran through a spreadsheet provided by @Petros over here: NOTABLE! - I bought my first rental property. Here’s how I did it and what I learned.

My cash flow, after taxes, expenses etc. ended up being NEGATIVE $5.6k Per Annum.

Shit house.
 

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SteveO

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Lowballing will definitely be worth a try as I am not desperate so can afford to insult a few owners
The sellers don't mean anything in your life. They can say no. So don't look at it as insulting. Look at it as sifting to find the motivated seller.
 

Connor

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Thanks Connor, no excitement hurt, I want to come into this rationally.

Is your 15% return after HOA fees, insurance, rates, etc.?
And is that return only from rent or capital appreciation as well?

I am having trouble finding any places in my area that would come close to that kind of return, what % deposit are you using for that kind of investment?

Vacancy, maintenance and turn costs are not something I factored in.

Greatly appreciated!
You definitely need to factor in for those costs. That's what gets most landlords who only own a few units- looks like they are making money, and then BAM! It takes them $4,000 to fix up the place and it's sitting vacant for 6 weeks because they didn't have contractors lined up to do repairs.

15% does not include any sort of appreciation, and yes it's after all of those costs and funding for vacancy. It does include debt paydown, so it's really closer to 10% cash on cash return.

It's really up to you and what your risk tolerance is. If you think that area will appreciate and you can break even or make a little bit of money from renting, that might not be a bad proposition, but I don't think those numbers make sense to invest on just a cash flow basis.
 
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welshmin

welshmin

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You definitely need to factor in for those costs. That's what gets most landlords who only own a few units- looks like they are making money, and then BAM! It takes them $4,000 to fix up the place and it's sitting vacant for 6 weeks because they didn't have contractors lined up to do repairs.

15% does not include any sort of appreciation, and yes it's after all of those costs and funding for vacancy. It does include debt paydown, so it's really closer to 10% cash on cash return.

It's really up to you and what your risk tolerance is. If you think that area will appreciate and you can break even or make a little bit of money from renting, that might not be a bad proposition, but I don't think those numbers make sense to invest on just a cash flow basis.
Yes, you're absolutely right on closer inspection. When looking deeper into it and factoring in those added expenses it's not worth it.

Rather, the way to go seems to at least aim for cash flow neutral or very slightly positive so that you at least are holding an investment that is paying itself down and (hopefully) appreciating in value.

Save 20% deposit -> purchase house at discount to market value (negotiate) -> cash flow neutral and have tenants pay down loans -> pull out equity at later date for next purchase.

Repeat the cycle and in a span of 10 or so years, you've got a good portfolio of properties who have paid down or are paying down themselves and will be ready to cash flow positive.

I was thinking too short term.
 

Runum

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You have gotten some good advice. Here's my take on the process.

Many US "investors" last decade were betting on appreciation with little to no consideration of cash flow. Property valuations in some parts of the country were escalating rapidly. The property values plummeted 2007-2009 and the gamblers were upside down and could't sell for the outstanding mortgage. The cash flow would not cover the costs. The result was short sales and foreclosures.

You have to make sure that the cash flow is going to see you through during the tough times. You also need to be able to influence the appreciation in some respect. Improve a building/neighborhood, more/better services, better quality of life for tenants, raising rents.

Good luck
 

Connor

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Save 20% deposit -> purchase house at discount to market value (negotiate) -> cash flow neutral and have tenants pay down loans -> pull out equity at later date for next purchase.

Repeat the cycle and in a span of 10 or so years, you've got a good portfolio of properties who have paid down or are paying down themselves and will be ready to cash flow positive.
That's absolutely what most people are shooting for. We've started putting our properties on 20 year amortized notes instead of 30 to speed up the debt payoff.

My brother and I have pretty big goals with real estate, so that's part of why we want to make sure our properties cash flow well. I know several people though who just try to break even with cash flow and want to own properties for equity build up. Comes down to what are you looking to accomplish and what is your tolerance for risk.

Happy to answer any other questions that you might have, though it's not like I know it all by any means.
 

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welshmin

welshmin

Bronze Contributor
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Feb 4, 2016
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Brisbane, Australia
That's absolutely what most people are shooting for. We've started putting our properties on 20 year amortized notes instead of 30 to speed up the debt payoff.

My brother and I have pretty big goals with real estate, so that's part of why we want to make sure our properties cash flow well. I know several people though who just try to break even with cash flow and want to own properties for equity build up. Comes down to what are you looking to accomplish and what is your tolerance for risk.

Happy to answer any other questions that you might have, though it's not like I know it all by any means.
Absolutely, thank you mate. Gives me a lot of confidence I'm on the right track.

Thank you!
 

Timmy C

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I am also from Australia.

Looking at house prices here can be pretty insane sometimes, doesn't seem to ever crash in my entire lifetime I have not witnessed anything but booming.

Anyone from Australia had a look into international property investment in countries such as.

America.

Pakistan.

Europe.

Africa etc etc?

Any good books on international property investment?
 
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Paul K

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Lots of interesting comments. I have been investing in Real Estate for over 30 years. The whole key is Due Dilligence and not pulling the trigger until you see a deal. Dont be an emotional buyer, lots of people get antsy and execute too quickly. There is work involved to find the deals, but once you do, life ebcomes alot more easy. Just keep on doing this until your portfolio is strong and becomes a money machine. Patience and due dilligence mixed in with some work and you will be set for life. I only buy deals, yoi can too. If you have any questions perhaps I can help. paulkrane@gmail.com
 

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