TBT: Ask Marco – Are Low Cost Properties a Good Strategy for Cash Flow?

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.

Today’s question comes from Dave. Dave says fantastic podcast, Marco, and thank you for all the great information that you share.

Dave, you’re very welcome.

Given the fact that I am trying to replace my everyday job income with positive cashflow. I am trying to maximize the amount of cash flow I can get on each property while also maximizing the amount of properties that I can purchase. As I see it, this leads me to think that I should focus on lower-cost properties. For example, under $90,000 with $250 to $350 per month in net cash flow.

First off, do you think this is a sound plan? If not, what holes or pitfalls do you see, and what do you think would be a better strategy if it is a good idea, which markets do you recommend investing in with your team to meet these criteria?

Thanks again – Dave

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Throwback Thursday Episode (The episode originally took place in the year 2020)

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Okay, well, Dave, very good question. I’m going to summarize this question to basically this. Are low-cost properties, a good strategy for cashflow?  So the short answer is yes.

So let’s just be clear. Generally speaking, when you have a strategy that you turn into a plan, you are either focused on predominantly properties that generate better or above-average cash flows or you’re purchasing properties in areas that you anticipate will provide solid or above average appreciation. So your strategy is cashflow versus growth or income versus growth.

Sometimes you have a little bit of both and these are transitional markets or what we might call a hybrid situation, not necessarily a hybrid market, but you’re focused on generating cashflow or as much of it as you can or appreciation because you’re looking at it from a medium to a longterm perspective where you just want capital growth and you’re going to give up on that cash flow or that cash on cash return at least for the first year or two. So with that in mind, what you are focused on is maximizing cash flow. In fact, you’ve said it yourself, you’re trying to maximize the amount of cash flow and you’re trying to maximize the amount of properties that you can purchase. The answer here is pretty simple. In fact, you’ve more or less answered it yourself. And what that is is just to focus on lower-cost properties that generate as much cash flow as possible in dollar terms, because that’s what you’re looking for.

And it doesn’t sound like you’re too concerned about price growth. At least not initially, at least not right now. And that’s fine. So when essentially you’re making an investment to generate cash on cash return and that property will pay itself off, it’ll pay down the mortgage and it will appreciate nominally over time unless things change in that market. Now, let me give you a couple of examples here, markets like Birmingham. You asked about markets, Birmingham, Dayton, Ohio, Memphis, Tennessee, Northwest Indiana. Those are great markets for this Huntsville, Alabama, Montgomery, Alabama, the York area of Pennsylvania. So these are markets that are very cashflow centric, they’re smooth and stuff. Eddie linear markets. They don’t appreciate radically. It’s not that they’re depreciating. They’re just very stable, essentially boring markets. Okay. Now let’s just be clear about low cost versus cheap because you brought this up. So when you’re focused on cheaper properties, let’s just make sure that you’re focused on lower-priced properties, not cheap properties.

As a lot of people define cheap being, you know, just poorly manufactured, purely renovated in poor condition distressed. It’s none of that, what you’re doing is you’re basically buying on one side of the price spectrum. It’s really the, uh, the, the lower two fifths. If you will, if you break a market into Quintiles, it’s the second quintile. It’s not the cheapest stuff. It’s right above that. It’s not quite the middle market, although it can be. So just to throw out a couple of quick examples, cause I just went on our website@noradarealestate.com and I just picked out three or four properties. Actually I looked at about eight, but these are ones that are essential, you know, the cash flow centric property. So one Memphis, it’s a three-bedroom, two-bath, a hundred thousand dollars purchase price, the net cash flow from this. And when I say net, I’m deducting vacancy, I’m deducting maintenance and repair.

So it’s a true net number. It’s roughly about $2,700 per year. So about $225 per month, positive net cash flow. There’s another property in Northwest Indiana, a three-bedroom, one bath home, $99,000 generating a net cash flow of about $2,900 per year. So roughly $240 per month, cashflow Dayton, Ohio three bedroom, two baths 91,000. It generates 2,400 a year, about $200 a month. So yeah, you can hit those numbers. In fact, I actually just did a quick copy and paste into a spreadsheet. I have a batch of properties that range in price from 88,000 on up to 112,500. And what I found is the average down payment of that batch was $20,011. The average monthly cashflow true net averaged out to $299. So let’s just call it $300 per month, true net cashflow. So you can hit those numbers of your targets are actually pretty realistic. And to your other point, which is maximizing the number of properties, there are a lot of factors involved.

It’s not just the market or the price there’s taxes. There is, you know what the gross rent is on the property that’s being collected. Your insurance costs. There are different factors. So you are always comparing an Apple to an orange, they’re all fruit, but you’re comparing apples to oranges here. So what you need to do is actually look at properties one at a time and compare them each side by side to find what is going to work best for you. But if all things were equal, generally speaking, yes, if you were buying the so-called cheaper priced or lower-priced properties, you would be able to double down on the number of properties that you’re purchasing and essentially doubling up or doubling the monthly cash flow. So, you know, the sample I’m going to give here is that you could purchase two of that three-bedroom, two-bath properties in Memphis for a hundred thousand dollars each generating $225 per month.

Or if you were looking at a $200,000 property, when I’m looking at in st. Louis right here for 192,000, well, it’s generating about the same $210 a month in cashflow. So you essentially are buying a property that is twice the price with the same amount of cash flow. So your obviously your cash on cash return is going to be lower. So if you were able to buy two of those Memphis properties for a hundred thousand dollars, then you’ve doubled your cashflow. I know I’m just thinking about this as a $50,000 chunk of cash that you have to invest. I don’t know how much you have to invest, but let’s just say it’s $50,000. Well, with $50,000 of investible cash, you have enough for a down payment plus closing costs. Plus some reserves to acquire, to have such properties like that. Memphis three bedrooms, two baths, or even the one in Birmingham.

But ultimately it’s going to work out to be about 200 to $300 per month in cash flow times too because now you’re spending that $50,000 and investing it on two properties with two down payments of roughly $20,000 each. So enough of the math. Again, there are properties. I will point out that you could purchase with the $50,000 down payment that are closer to $200,000 and will generate cash flows that are okay equivalent to having two of those lower-priced Memphis or Dayton, Ohio properties or Birmingham properties. So yeah, again, you need to just look at it at each and every property and compare them side by side. The bottom line is as a general rule of thumb. Yeah. You should be able to double or nearly double your cash flows getting to $100,000 properties versus one, $200,000 property. I hope that made sense. So anyway, pitfalls.

Yeah, just again, it’s not really a pitfall, but these lower-priced properties are typically in your C plus B minus and B class neighborhoods. They do appreciate not as well as properties that you’re going to find in your upper-end areas like your Hey minus class neighborhoods. Again, I’m just generalizing here. There are exceptions to every rule and this is very much market area neighborhood specific. All right. Well, I hope that answers your question, but if I were in your situation looking to maximize cash flow, maximize the number of properties and I had, let’s say hypothetically $50,000, I probably would look at two of those hundred thousand dollar properties or less, but around that price range, that’s kicking off ideally around $250 a month plus or minus $50 per month. True net cashflow.

All right, Dave, hope that helps. I appreciate the question.

I hope you enjoyed this week’s throwback Thursday episode. If you haven’t already, remember to subscribe so you don’t miss out on a single episode. If you have a question about real estate investing or finance, simply go to passiverealestateinvesting.com and click the Ask Marco button. . I read all of them, I reply to many of them, and sometimes I cover them on the show, and I’m gonna try and do more of that. So, I am going to encourage you to go to passiverealestateinvesting.com and submit your question for Ask Marco.  Lastly, help us share the show with other like-minded people that you know who can benefit from it as well. Just visit us on your platform. Most of you are on iTunes and leave us a rating and review. I would greatly appreciate it. I read them all and I will thank you in advance. And that is it for today. Thanks for listening. I will see you on our next episode.

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