Author Topic: investing in properties without cashflow  (Read 6249 times)

c-kat

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investing in properties without cashflow
« on: November 25, 2014, 07:44:52 PM »
I know most people invest for cash flow, but I live in a city (Ottawa, Canada) where you can't rent properties for 1%/month rental income. Its 0.50% a month and for the most part historically that is what it's been. But lots of people have done well as investors because of mortgage pay down and appreciation over the long term.  The average family salaries here are the highest in Canada, yet we don't have high house prices like Toronto and Vancouver and houses typically appreciate only 2-3% a year, but are more stable than other cities.

I really believe that cash flow isn't everything. And when interest rates are low principal paydown can be quite high even the first year. Appreciation should also be a factor.  How do you figure out your ROI based on those variables?

I recently bought in a neighbourhood that is newer, and is expected to triple in size in the next ten years.  It breaks even only, but I put a downpayment of 15 K on it and its worth 300K so to me, even without appreciation, if the 300K is paid off in 25 years, I will have turned the 15K into 300K which is a great investment. And I do feel I have a pretty good chance of some appreciation.

Also, due to some government layoffs which happen here every 10 years or so rents have fallen by 100-150, they'll be up again next year (this is what always happens), so I do think I'll be able to get some cash flow over time.

Purchase price  287K (Current Value is 300K)
Initial Mortgage 272
Downpayment 15K
Mortgage at end of year 1 = 264

So I put 15K down but at the end of the year had 8K in new equity which to me is a 50% return on initial investment, plus it had gone up 13K, so essentially I turned 15K into 36K, which means I more than doubled my money.

Over the next 5 years I don't expect much appreciation but 8-9K will be paid onto the mortgage.

What are your thoughts on ROI?

JohnGalt

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Re: investing in properties without cashflow
« Reply #1 on: November 25, 2014, 08:50:32 PM »
Are the properties you're talking about here already rentals that you own?

On the surface... breaking even on the rentals + only expecting 2-3% appreciation does not at all sound like it's worth the hassel/risk of being a landlord.  At best you're making a 2-3% ROI which should be matchable in more passive investments.

c-kat

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Re: investing in properties without cashflow
« Reply #2 on: November 25, 2014, 08:57:24 PM »
Are the properties you're talking about here already rentals that you own?

On the surface... breaking even on the rentals + only expecting 2-3% appreciation does not at all sound like it's worth the hassel/risk of being a landlord.  At best you're making a 2-3% ROI which should be matchable in more passive investments.

Thanks for the reply. Yes, I own it already. I bought it last November. How are you getting 2-3% ROI?  I put only 15K down and the mortgage paydown for the year was 8K.... isn't that a 50% return. Plus the appreciation for the year was 13K, adding even more?


JohnGalt

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Re: investing in properties without cashflow
« Reply #3 on: November 25, 2014, 09:19:07 PM »
Are the properties you're talking about here already rentals that you own?

On the surface... breaking even on the rentals + only expecting 2-3% appreciation does not at all sound like it's worth the hassel/risk of being a landlord.  At best you're making a 2-3% ROI which should be matchable in more passive investments.

Thanks for the reply. Yes, I own it already. I bought it last November. How are you getting 2-3% ROI?  I put only 15K down and the mortgage paydown for the year was 8K.... isn't that a 50% return. Plus the appreciation for the year was 13K, adding even more?



Honestly - I wasn't following your numbers so I just went with your statement of cash flow neutral + 2-3% appreciation (which is basically just inflation and not really growth). 

Is that cash flow neutral after accounting for all of the costs such as vacancy's, tenant turnover costs (minor repairs, advertising, etc), and major long term repairs (roof, appliances, etc).

The $13,000 in appreciation you list is more like 4.5% on a $287,000 basis so already you're over the 2-3% estimate. 

The equity pay down may have been a 50% return on your downpayment this year.  But next year you'll have $22K in equity so another $8k pay down will be 33% on that, and less the next year, less the year after that so it won't stay at that level since you'll have more and more tied up in the house as time goes on. 

I'm not saying this is a bad investment - I guess maybe just pointing out that you should look at the long term expected Income - long term expected Costs (the time you spend managing the property should also be considered a cost) to get an idea for the real ROI. 

waltworks

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Re: investing in properties without cashflow
« Reply #4 on: November 26, 2014, 12:39:11 AM »
Go read other 1% rule threads. You are ignoring all the costs (taxes, insurance, vacancy, maintenance, management) and risks (lawsuit, natural disaster, loss of jobs in the area, etc) as well as the opportunity costs of not investing in other things.

A 1/2% rent property is almost certainly a bad investment.

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c-kat

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Re: investing in properties without cashflow
« Reply #5 on: November 26, 2014, 06:19:22 PM »
So here's my rationale.

I put 15K down, property is worth 300K and will be paid off in 25 years.  In order to turn 15K into 300K in the stock market in 25 years I'd need a 12 percent yearly return.

If the house goes up 2-3 percent a year it'll be worth 500K in 25 years, turning 15K into 500K in the market would be very difficult.

I also have money in the market, so I can have the best of both worlds.

waltworks

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Re: investing in properties without cashflow
« Reply #6 on: November 26, 2014, 06:48:21 PM »
What systems do you think will fail or require maintenance in that time? Do you think you'll have 100% occupancy that whole time? What do your taxes and insurance cost? How much did it cost you in fees/closing costs to buy? And how much will it cost you to sell and realize your profits in fees/commissions/taxes?

There is no question your house will probably be both paid off and worth more than you paid for it in 25 years. The question is how much money you will spend to accomplish that. You are not making an apples to apples comparison here. But good luck!

-W

So here's my rationale.

I put 15K down, property is worth 300K and will be paid off in 25 years.  In order to turn 15K into 300K in the stock market in 25 years I'd need a 12 percent yearly return.

If the house goes up 2-3 percent a year it'll be worth 500K in 25 years, turning 15K into 500K in the market would be very difficult.

I also have money in the market, so I can have the best of both worlds.

c-kat

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Re: investing in properties without cashflow
« Reply #7 on: November 26, 2014, 07:04:53 PM »
What systems do you think will fail or require maintenance in that time? Do you think you'll have 100% occupancy that whole time? What do your taxes and insurance cost? How much did it cost you in fees/closing costs to buy? And how much will it cost you to sell and realize your profits in fees/commissions/taxes?

There is no question your house will probably be both paid off and worth more than you paid for it in 25 years. The question is how much money you will spend to accomplish that. You are not making an apples to apples comparison here. But good luck!

-W

So here's my rationale.

I put 15K down, property is worth 300K and will be paid off in 25 years.  In order to turn 15K into 300K in the stock market in 25 years I'd need a 12 percent yearly return.

If the house goes up 2-3 percent a year it'll be worth 500K in 25 years, turning 15K into 500K in the market would be very difficult.

I also have money in the market, so I can have the best of both worlds.

The rent covers insurance, taxes, mortgage, advertising and small repairs. It doesn't include larger repairs, but the roof, air and furnace were all replaced last year with a 10 year warranty we assumed. Also my husband is handy and does some repairs himself.

I agree completely that we will have to put additional money in, but still with that I think we will come out ahead. It all depends on how much which is hard to predict. It also reduces our taxes.

I guess my point is the in Canada it is very rare to find 1% rentals especially in my city, so does that mean property investing is not an option?  So many people I know have retired on their rentals, even when they had to put some money in themselves. This is because of mortgage pay down, plus the properties doubled in value over the twenty years that they owned them. It must be possible if these people have done it. I'm always on the fence wondering if it is the right approach or not.

waltworks

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Re: investing in properties without cashflow
« Reply #8 on: November 27, 2014, 10:41:39 AM »
You probably should have done the research on this *before* buying the property, but now that you've got it, best of luck! If you do some reading here and elsewhere online, or go get some rental RE investing books from the library, you'll find that the 1% (or 2% for multi-unit) rule is pretty well agreed upon - and you can find plenty of longwinded arguments/explanations as well if you're dubious. The bottom line is that conservatively, over time, you should expect roughly 50% of your gross rental income to be lost to expenses of one kind or another. Run the numbers assuming that and see what you come up with.

I will just end with this: the fact that RE rental incomes aren't good in your area is not a very good argument for ignoring the usual rules of thumb. You are not required to buy real estate local to you, nor required to buy real estate at all - some places just aren't good places for RE investing, and that means your money should go elsewhere. Nobody would ever say that you should buy stock in a crappy company because all the companies in your town are crappy, right?

-W

GrayGhost

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Re: investing in properties without cashflow
« Reply #9 on: November 27, 2014, 11:58:19 AM »
This thread is basically asking, "Can I ignore very well established and very well regarded rules of thumb?"

And the answer ought to be no.

I'm sure that some people have done well on rentals in Ottawa even by breaking the 1% rule, but what you're essentially doing is betting on appreciation. And if that appreciation doesn't happen, you're sunk. Sure, you can say that appreciation is x and y percent per year, but you're one financial crisis, one industry breakdown, one shift in public desire from seeing that appreciation turn into depreciation.

So basically, you could buy a house that gets 0.5% of value per month in rent and bet on appreciation... or you could buy houses elsewhere that meet the 1% rule, and still stand to gain from appreciation.

Long story short, there are better deals to be had out there.

Now, you'll probably do okay with this investment, and I certainly hope that you do, but the opportunity cost here can't be ignored. If you're going to invest in real estate, I say do it in the most profitable manner possible. And if the Ottawa market isn't very profitable, then so be it.

Poorman

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Re: investing in properties without cashflow
« Reply #10 on: December 02, 2014, 12:19:48 PM »
We don't have all the numbers, for instance your interest rate, amortization term, and exact rent, but in the US I'm calculating that this would be a negative cash flow of almost $700 per month.  So your principal amortization of $8,000 is completely wiped out by negative cash flow. 

That means your only hope for profiting on this deal is through appreciation, but in your projections:
Quote
Over the next 5 years I don't expect much appreciation but 8-9K will be paid onto the mortgage.

To answer your question, your ROI will the be education you receive from entering into a pretty mediocre deal (not devastating, just not profitable). 

You'll do better next time.

marty998

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Re: investing in properties without cashflow
« Reply #11 on: December 02, 2014, 01:23:52 PM »

Are the properties you're talking about here already rentals that you own?

On the surface... breaking even on the rentals + only expecting 2-3% appreciation does not at all sound like it's worth the hassel/risk of being a landlord.  At best you're making a 2-3% ROI which should be matchable in more passive investments.

Thanks for the reply. Yes, I own it already. I bought it last November. How are you getting 2-3% ROI?  I put only 15K down and the mortgage paydown for the year was 8K.... isn't that a 50% return. Plus the appreciation for the year was 13K, adding even more?


So here's my rationale.

I put 15K down, property is worth 300K and will be paid off in 25 years.  In order to turn 15K into 300K in the stock market in 25 years I'd need a 12 percent yearly return.

If the house goes up 2-3 percent a year it'll be worth 500K in 25 years, turning 15K into 500K in the market would be very difficult.

I also have money in the market, so I can have the best of both worlds.


Err no. you are not turning $15k into $300k, and you didn't get 50% return by building equity that way. You are putting your own money in there. That's not an investment return, that stumping up more cash and actually reduces your return as it lowers your leverage.


escolegrove

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Re: investing in properties without cashflow
« Reply #12 on: December 03, 2014, 11:53:18 PM »
We have done well investing properties at .8% return. The key for us has been putting as little down as possible. We have managed our properties very closely in order to preserve the small margins. The nice thing is that the tenants are paying the house off, not our large down payment :)

arebelspy

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Re: investing in properties without cashflow
« Reply #13 on: December 04, 2014, 01:05:52 PM »

Are the properties you're talking about here already rentals that you own?

On the surface... breaking even on the rentals + only expecting 2-3% appreciation does not at all sound like it's worth the hassel/risk of being a landlord.  At best you're making a 2-3% ROI which should be matchable in more passive investments.

Thanks for the reply. Yes, I own it already. I bought it last November. How are you getting 2-3% ROI?  I put only 15K down and the mortgage paydown for the year was 8K.... isn't that a 50% return. Plus the appreciation for the year was 13K, adding even more?


So here's my rationale.

I put 15K down, property is worth 300K and will be paid off in 25 years.  In order to turn 15K into 300K in the stock market in 25 years I'd need a 12 percent yearly return.

If the house goes up 2-3 percent a year it'll be worth 500K in 25 years, turning 15K into 500K in the market would be very difficult.

I also have money in the market, so I can have the best of both worlds.


Err no. you are not turning $15k into $300k, and you didn't get 50% return by building equity that way. You are putting your own money in there. That's not an investment return, that stumping up more cash and actually reduces your return as it lowers your leverage.

Not if it's cash flow neutral counting the mortgage payment.  Then the tenants are buying it for you, and you aren't putting in any extra money beyond the down payment.
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MrMoneyPinch

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Re: investing in properties without cashflow
« Reply #14 on: December 04, 2014, 02:34:02 PM »
I really believe that cash flow isn't everything. And when interest rates are low principal paydown can be quite high even the first year. Appreciation should also be a factor.  How do you figure out your ROI based on those variables?

I recently bought in a neighbourhood that is newer, and is expected to triple in size in the next ten years.  It breaks even only, but I put a downpayment of 15 K on it and its worth 300K so to me, even without appreciation, if the 300K is paid off in 25 years, I will have turned the 15K into 300K which is a great investment. And I do feel I have a pretty good chance of some appreciation.

Also, due to some government layoffs which happen here every 10 years or so rents have fallen by 100-150, they'll be up again next year (this is what always happens), so I do think I'll be able to get some cash flow over time.

Purchase price  287K (Current Value is 300K)
Initial Mortgage 272
Downpayment 15K
Mortgage at end of year 1 = 264

So I put 15K down but at the end of the year had 8K in new equity which to me is a 50% return on initial investment, plus it had gone up 13K, so essentially I turned 15K into 36K, which means I more than doubled my money.

Over the next 5 years I don't expect much appreciation but 8-9K will be paid onto the mortgage.

What are your thoughts on ROI?
I strongly disagree with your stance on cash-flow.   Cash-flow is the only return that you can expect with reasonable certainty.  Appreciation is a guess.  From the start of the nineties, rental unit values did go down, then gained back the lost ground around 2002.  This means 0$ price change after a decade, no inflation-following and certainly no real gain.  For many landlords, that meant cash-flow did not cover DEPRECIATION for half a decade;  many bailed out with losses.  This was in a time when you could get a 7-year Canada Savings bond paying 10% with absolutely no chance of downside.

From the price and the location, I am guessing you have bought a small house or duplex.  It's a riskier bet from a vacancy point of view (one lost tenant cuts revenue 50-100%), but any losses you will probably be able to cover with your salary income.  That's a good thing.

As for the long-term return, you are a little off.  As a canadian landlord, I can tell you what are the schedules for "big repairs":
- Roof : 15-20 years, cost: 5k$ for asphalt shingles(for a detached house), double for flat roof.
- Windows and doors:  around 15 years, cost: around 1k$ per hole (window or door).
Because of our climate, these are unavoidable and predictable, NOT "unexpected".

I usually give kitchens and bathrooms a 15-25 year useful life.  In my experience, these sell the rental and are well worth the hassle.  I consider older ones to depress the rental price because you will have to endure lower-quality tenants and/or offer a bargain to keep the unit rented.  That's just my personal policy;  slightly worn countertops or cabinet doors will probably not be considered a problem for an already-installed tenant.  Cost: around 10k$ per kitchen or bath for a "nice utilitarian" remake (no granite, but nice ceramic floors and new pre-made cabinets).

Moreover, you should factor a 5% vacancy rate to be cut from gross revenue and stashed, because when a tenant goes you could have to hold the bag for a few months, mortgage, heat and all.  I am currently 5 months in for one of my units, and heating is not optional when temps go under 5C.  I'm not sweating since I have lost no rent in the last 4 years and this is only one of my many units.

All in all, expect to add a few years to your mortgage payoff date, since you have absolutely no way to amass a reserve to pay these costs and will have to borrow.  This investment will probably not bankrupt you, it will serve as training wheels.  If you are planning on buying more units, you will gain a little freedom by using the revenue from one to offset the spending on the other.

Thespoof

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Re: investing in properties without cashflow
« Reply #15 on: December 05, 2014, 01:40:23 PM »
What I don't indertand about rental properties is why people seem to ignore the fact that for my small down payment and some incidental cash over the years, some one else pays the property off for me. I will end up with several hundred thousand dollars that cost me next to nothing. If I were to work and save my money I could never come up with the kind of money that can be had by leveraging other people's money in several rental properties. 25 years from now when those three, four, eight properties have been paid for by other people's money, I sell and say thank you very much. What am I missing here?

waltworks

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Re: investing in properties without cashflow
« Reply #16 on: December 05, 2014, 01:50:06 PM »
Google "50% rule".

-W

What I don't indertand about rental properties is why people seem to ignore the fact that for my small down payment and some incidental cash over the years, some one else pays the property off for me. I will end up with several hundred thousand dollars that cost me next to nothing. If I were to work and save my money I could never come up with the kind of money that can be had by leveraging other people's money in several rental properties. 25 years from now when those three, four, eight properties have been paid for by other people's money, I sell and say thank you very much. What am I missing here?

arebelspy

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Re: investing in properties without cashflow
« Reply #17 on: December 05, 2014, 07:22:18 PM »
Google "50% rule".

-W

What I don't indertand about rental properties is why people seem to ignore the fact that for my small down payment and some incidental cash over the years, some one else pays the property off for me. I will end up with several hundred thousand dollars that cost me next to nothing. If I were to work and save my money I could never come up with the kind of money that can be had by leveraging other people's money in several rental properties. 25 years from now when those three, four, eight properties have been paid for by other people's money, I sell and say thank you very much. What am I missing here?

This.  If your mortgage payment is approximately half of your gross rents, you should break even, and that plan works.

If your rents only just cover your PITI, you'll be cash flow negative due to vacancy, repairs, etc.
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GrayGhost

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Re: investing in properties without cashflow
« Reply #18 on: December 06, 2014, 01:43:43 AM »
Not to mention that due to demographic shifts, industry changes, and who knows what else, your house might not be worth very much at all when it's paid off.

At least if you rent at the 1% rule, even if rents and property values tank, you have some margin of safety. Whereas if you buy a property where rent just barely covers mortgage payments and taxes, you're far more susceptible to risk.

potm

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Re: investing in properties without cashflow
« Reply #19 on: December 06, 2014, 05:54:46 AM »
If you want people to support your property investments, try posting on a Canadian forum. Or even better, try an Australian forum! Over here people think negative gearing your property investments is a good thing.
I do find the contrast funny though, with all the encouragement on this forum to not worry about the current level of the dow, just invest your money because you don't know where it will go.
Meanwhile in Australia and Canada there are much cheaper stocks with higher yields and everyone is busy buying property instead.

Not saying either way is right or wrong, just find the contrast interesting. Are people too affected by the most recent past results?
« Last Edit: December 06, 2014, 09:34:10 AM by potm »

waltworks

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Re: investing in properties without cashflow
« Reply #20 on: December 06, 2014, 07:44:58 AM »
Historically, house prices track inflation, and stock prices beat it (at least in the US) by something like 5%. That is your explanation. There's also next to zero transaction costs to buy/sell stocks. RE costs (again, in the US) something around 2-3% up front and 5% on the back end.

RE can be a great investment, but usually not if you're just counting on appreciation for the gains.

-W

If you want people to support your property investments, try posting on a Canadian forum. Or even better, try an Australian forum! Over here people think negative gearing your property investments is a good thing.
I do find the contrast funny though, with all the encouragement on this forum to not worry about the current level of the dow, just invest your money because you don't know where it will go.
Meanwhile in Australia and Canada there are much cheaper stocks with higher yields and everyone is busy buying property instead.

Not saying either way is right or wrong, just find the contrast interesting. Are people too affecting by the most recent past results?

MrMoneyPinch

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Re: investing in properties without cashflow
« Reply #21 on: December 06, 2014, 08:12:43 AM »
What I don't indertand about rental properties is why people seem to ignore the fact that for my small down payment and some incidental cash over the years, some one else pays the property off for me. I will end up with several hundred thousand dollars that cost me next to nothing. If I were to work and save my money I could never come up with the kind of money that can be had by leveraging other people's money in several rental properties. 25 years from now when those three, four, eight properties have been paid for by other people's money, I sell and say thank you very much. What am I missing here?

*work put in* is what you are missing.  IMO, if you are getting bond-level returns with your landlording business, you would have been better buying bonds because those do not have to be maintained and managed.

It is possible to leverage any investment;  get a loan, buy long bonds (say 25 years to maturity), pay loan with bond yield, get the (mostly OPM) principle back after 25 years, multiplying your effective ROI. This would be a lot less hassle and leave you with "hundreds of thousands of dollars that cost next to nothing".  For a little more risk, you could do it with preferred shares in stable corporations or even ETF's.  Would you do that?  Most people can't stomach the risk.

Capital gains (or even the future market value) for real estate is unknown.  Like stocks, there is an historic record of appreciation, and that record says it is inflation-following;  there were many periods when losses were recorded.  When real estate tanks, it takes quite a few years to bounce back (cf. the nineties and 2008-now).  That is why most RE experts recommend getting good cash-flow from them, which will give you the time to wait the storm out.

Also, my experience is that I like getting some $$ to reward my hustling.  Having excess cash-flow after paying all expenses and reserves makes me happy.  But that's just me.

DoubleDown

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Re: investing in properties without cashflow
« Reply #22 on: December 06, 2014, 11:19:00 AM »
Haven't read through the numbers to know if OP's situation is good or bad, but investing in properties without cash flow can be a viable strategy, as long as you've done due diligence on all the numbers and recognize it's a speculative play. Clearly, cash flow PLUS appreciation is best. If only one of the two is available, it becomes a lot more dicey to know which will end up being better. And it's even more dicey whether you could have made just as much or more money simply investing in an index fund and being done with it.

If you live in an area where positive cash flow is next to impossible to find, and are not willing to venture into investing in other areas, you can still do well on appreciation in the long run, provided things go as planned/hoped. But clearly, that's a more risky strategy. Some things that can help make investing in longer-term, buy-and-hold, appreciation-only strategies profitable:

- Up-and-coming areas with strong employment and growth outlook. Those areas can and do exceed inflation, sometimes far outpacing inflation and stock market returns

- Looking for deals, understanding your market, and only buying at the lowest possible price

- Location, location, location

- Avoiding really speculative plays, like high-priced McMansions in new developments or sketchy neighborhoods. Stick with established areas and reasonably-priced neighborhoods that you would live in yourself

- Avoiding condos/townhouses/etc. with HOA fees that can go up significantly over the years

- Watching out for properties with big ticket replacement costs that are likely to come up soon (roofs, HVAC, plumbing, etc.)

- Understanding benefits (if any) to your tax situation. Carrying losses can be okay if they give you tax advantages against your personal (earned) income

- Making sure to have enough cash reserves to weather extended downturns, maintenance costs, vacancies, etc. If you're forced to sell in a down market, you're done for.

arebelspy

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Re: investing in properties without cashflow
« Reply #23 on: December 06, 2014, 11:59:32 AM »
IMO, if you are getting bond-level returns with your landlording business, you would have been better buying bonds because those do not have to be maintained and managed.

This. 

The problem with real estate is that it has so much more risk as well.  So if your actual returns are only 2-4%, your risk-adjusted returns are way less.  Choose the bonds.

People going for low returns via no cash flow and only appreciation and taking on the risk of real estate, then adding leverage, taking on more risk, are wildly speculating.  It may work out well.  A lot of times it doesn't.  But there are safer, and surer paths.  Rental cash flow is one of them (the one closest to the same investment type, which it is often why it is suggested to the speculator).
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