Is it worth investing? (attached my analysis)
Hello, I am new to a real estate investment. I’ve run some numbers with a current real estate listing, but it seems hard to find a house with positive cash flow. Even if I found one, the cash on cash return is very small. I understand Columbus is a highly appreciated area, but do you think it is still worth investing with the small cash on cash return (sometimes 0) if appreciation is expected? Is it worth going through when the average yearly rate of s&p is about 10%, which is pure passive income? Thank you,
@Jung-Jin Shim, a few things to keep in mind.
1. A deal is what YOU make of it NOT what is advertised. If the asking price is $185k, it might not be a "deal" worth it for you unless you can get it for $165k. You buy because its a "deal" not because you like it yourself personally.
2. You make money 3 ways: cash-flow, mortgage pay down and market appreciation. All of them figure into what you expect to get out of the deal even though cash-flow in my opinion is the most preferred of the 3 ways.
3. Deals can get better over time. Over the next 3-5 years, it is not unreasonable to expect rents to go up a little and for interest rates to go down. So, that is you refinance your cash-flow will improve quite a bit.
4. Stocks suck! If you invest $100k in stocks and they go up 10% you make $10k. If you invest $100k in real estate you can acquire a $400k property and if that appreciates 10% you make $40k! Plus real estate is tax advantaged!
Real estate is better because leverage allows you to multiple your return. Your return is tax advantaged and also you have more direct control over the investment.
Quote from @Kevin Sobilo:
@Jung-Jin Shim, a few things to keep in mind.
1. A deal is what YOU make of it NOT what is advertised. If the asking price is $185k, it might not be a "deal" worth it for you unless you can get it for $165k. You buy because its a "deal" not because you like it yourself personally.
2. You make money 3 ways: cash-flow, mortgage pay down and market appreciation. All of them figure into what you expect to get out of the deal even though cash-flow in my opinion is the most preferred of the 3 ways.
3. Deals can get better over time. Over the next 3-5 years, it is not unreasonable to expect rents to go up a little and for interest rates to go down. So, that is you refinance your cash-flow will improve quite a bit.
4. Stocks suck! If you invest $100k in stocks and they go up 10% you make $10k. If you invest $100k in real estate you can acquire a $400k property and if that appreciates 10% you make $40k! Plus real estate is tax advantaged!
Real estate is better because leverage allows you to multiple your return. Your return is tax advantaged and also you have more direct control over the investment.
Thank you so much for your answers. I was wondering if you have any bottom line in terms of an initial cash on cash return.
I invest in Columbus. If you are looking for cash on cash returns as your spreadsheet suggest, there are much better deals especially if you look for 2 or more units. I see you have property management included in your analysis. I would suggest you learn how to manage it yourself for at least a year or two before turning it over to property management. That way you can learn how it should be done and know how to handle the property management company. I've had bad experiences with two different property management companies in Columbus that stemmed from them not taking timely action on repairs that cost me a lot of money and also not identifying obvious things in inspections that led to higher turnover rates and increased the time that it took to get the unit ready for the next tenant. Many of them also charge fees to the tenant that you don't receive effectively taking an additional portion of what you could be charging in rent. As far as returns compared to stocks, you left out appreciation and tax advantages. My opinion of Columbus is very strong. If we are to assume a 3.5% appreciation, which I consider very low when compared to the shortage of houses and growth in Columbus, if you put down 25%, that 3.5% appreciation is a return of 14% of the amount you invested. Keep looking and find a place with positive cash flow and you'll be good.
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#4 Market Trends & Data Contributor
- Real Estate Agent
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Columbus is an appreciation market. So if your property is to appreciate only 5% a year, and you put 20% down on a $200k property, you would be earning $10,000 in equity every year NOT including loan pay down.
I strongly advise against entering into any deal where you're facing a negative cash-on-cash return. Ideally, you should aim to at least break even. While some lenders may consider breaking even as "performing," I personally wouldn't classify such an asset as performing. Remember, there are numerous deals available, and although I'm not deeply familiar with the Columbus market, I believe you can find a more favorable opportunity with a positive net return.
If your primary objective is passive income, as indicated by this scenario, investing in the S&P may indeed offer a more passive approach. However, it's essential not to overlook the additional profit avenues mentioned by Kevin—appreciation and mortgage paydown.
Continuing your search for the right deal is key. Transitioning from single-family residences to multifamily properties, particularly those with 2-4 units, is likely to result in a better cash-on-cash return, provided they are acquired at the right price. Remember, success in real estate often hinges on purchasing properties at favorable rates. There's no need to settle for anything less than the perfect opportunity. Patience is a virtue; wait for the right moment to seize the ideal investment opportunity.
#3 Starting Out Contributor
- Real Estate Agent
- Nevada
The strategies of the 2010's are different than now. It's very rare to be able to be able to put a small amount down for cash flow and appreciation. There is this idea if you put more than 25% down it's a "bad deal" or if the 1% rule is not followed it's a "bad deal". Investing is a business and the business environment has changed from interest rates to contractors to tenants. Working within the current environment and making money with real estate will take more creativity and diligence. The rules are not everlasting and have no factual basis besides it worked before.
#1 Market Trends & Data Contributor
Quote from @Jung-Jin Shim:
Hello, I am new to a real estate investment. I’ve run some numbers with a current real estate listing, but it seems hard to find a house with positive cash flow. Even if I found one, the cash on cash return is very small. I understand Columbus is a highly appreciated area, but do you think it is still worth investing with the small cash on cash return (sometimes 0) if appreciation is expected? Is it worth going through when the average yearly rate of s&p is about 10%, which is pure passive income? Thank you,
These days, either you invest for cashflow or appreciation, it's way better to invest locally. Buy your neighbor home.
If you take out the property management, you are at least breaking even. If the house is solid and in a decent area, you could do it. Rates will come down and rents go up, refinance and you'll be making some money.
Quote from @Jung-Jin Shim:
Hello, I am new to a real estate investment. I’ve run some numbers with a current real estate listing, but it seems hard to find a house with positive cash flow. Even if I found one, the cash on cash return is very small. I understand Columbus is a highly appreciated area, but do you think it is still worth investing with the small cash on cash return (sometimes 0) if appreciation is expected? Is it worth going through when the average yearly rate of s&p is about 10%, which is pure passive income? Thank you,
increase the number of units and lower your average housing cost per unit. 180k for 1500 in rent doesn't' work. all in triplex we can build with land for 400k with our margin and land and entitlement that rents for 5400 a month in columbus. I'd pass on this deal 10x over. get your housing unit cost lower and look at new construction
