Do Investment Properties Cash Flow?

Do Investment Properties Cash Flow? Has anyone else noticed that buying new investment real estate does not cash flow? At today’s prices, which are likely lower than in the last several years, you still seem unable to find real estate that can turn a profit as a rental property. I wonder why that is?

A January 3rd 2010 article in the “Washington Post” titled “Cash-rich real estate investors trigger bidding wars, frustrate other buyers” discussed how investors are beating out homeowners in making offers on homes, but these investors are solely the type to buy a property, fix it up, and sell it for a profit to a homeowner. That seems to be the only real estate “investment” going on these days, by real estate investors. These “investors” were not of the “buy and hold” sort.

So my question revolves around the “why” of the story, not how. Why can you not turn a profit renting real estate if you buy real estate at today’s prices? Is real estate still vastly over priced? Are there simply far too few renters in the Washington DC Metro area, too few to push up rents to the point of positive cash flow? My guess is that this is the case in most areas of the country, certainly most urban areas. What is the answer to my question?

I took a call from a client recently, who was excited to buy a piece of investment real estate, and hold it for the long haul. But my first question without even knowing the numbers was “why?”. I had a feeling it would not cash flow, and wondered if the investor had even gone through the numbers. He had not.

The investor told me the price of the townhouse was $410,000. He saw this as a bargain since it was a bank sale/foreclosure, and he thought the value was more realistically $440,000. I told him the total mortgage payment, after putting down 20% (20% is the current minimum down payment for buying investment real estate) would be $2518 when including taxes, insurance and a small HOA fee. I then asked him how much it would rent for, the answer was $2100/month! Clearly this is a home that is suitable only to a homeowner, or if the numbers support it, an investor purchase, renovation, and quick resale for a profit. No investor would want to buy a long term rental property at a $418/month loss, and I did not even include expenses for maintenance, repairs and property management expense.

And the above story is not unique. I have been in the mortgage business for over 24 years, and I have not seen a property show a positive cash flow since the late 1990’s. So it all makes me wonder “why?”. Why is it that real estate in the Washington DC Metro area, and most other areas, does not seem to ever show a positive cash flow? Anyone else have any theories?