Minimum cash flow on rentals

[propertymanager]

Land Baron,

The security deposit can be used for damage, cleaning, trash removal, unpaid rent, late fees, unpaid utility bills that were the tenant's responsibility, etc.  In fact, your lease will probably say that the security deposit can be used 'to fullfill the tenant's obligations' as outlined in the lease.  

Does having a security deposit reduce your expenses as compared to not having a security deposit?  Yes.  However, it is standard practice to have a security deposit.  Therefore, a better way to think of it is that the 45% to 50% expense figure assumes that you will have a security deposit.  Therefore, not having a security deposit would actually INCREASE the expenses beyond the 45% to 50% range, because you would be paying expenses that should normally have been paid by the tenant's deposit.

Hope that helps.

Mike

[bdub]

bdub,

It's not optional.  You must do better on future deals if you are to keep investing (or unless you're already rich).  
Good Luck,

Mike

Mike,
I agree, it is definitely not optional, which is why I don't yet have another deal.  It is easy to find a $100 over PITI deal (which we have lost money on already, because of fixup and closing cost).  I'm looking for a deal on MFH, but first i need some time (can't quit the day job with a newborn and wife at home) to look and make offers... lots of offers if i'm going to find a MFH at a price that is going to clear 50%GR+$1...

[morningnewsman]

Would that 45%-50% expenses be less if you were renting a condo, co-op or townhouse?

[propertymanager]

Morningnewsman,

No, the expenses would not be less.  

Mike

[henryinma]

Morningnewsman,

No, the expenses would not be less.  

Mike

It depends what part of the country you're in. I sold a 388k condo where the new owner rented it out. She got $2800 a month for it. The condo fee was $325 a month and the taxes were $300 a month. Rentals are still stong in this area and she actually had it rented before closing. She actually got a pretty good deal, probably worth about $420-$430k right now and that's a year later. Some markets are still strong as there aren't that many units on the market.

[propertymanager]

Henry,

You're certainly not saying that the only expenses are the condo fees and taxes...are you?

The property you mentioned certainly does not have positive cash flow if it is mortgaged.  It might be a good deal if the owner sells it, but it is a TERRIBLE rental.

Mike

[dwj469]

I just dont think some understand fully expenses. Just imagine you had no job and you had to count on your rental properties as your sole source as some on this board do. Now take every single thing even remotely related to operating your rental business and separate that from anything personal that has absolutely nothing to do with your rental business. Those are expenses to be included in your property expenses.

[ChrisABQ]

propertymanager:

What does all of this mean to those of us (me) who are cash-poor, and need to utilize a home equity loan to finance our first property - or take a 100% mortgage?

Is positive cash flow possible without having a large portion of the property paid for, thereby lowering the mortgage payment?

It seems that finding a rentable property that meets these criteria would be difficult, or impossible.  Is it?

Right now I'm struggling with the decision to use my current home's equity to make a purchase, or to wait until I have sufficient cash saved for the down payment.

Thanks,
Chris

[Bluemoon06]

Right now I'm struggling with the decision to use my current home's equity to make a purchase, or to wait until I have sufficient cash saved for the down payment.

Chris, it is a numbers game.  The equation has two sides.  Instead of putting more money down, find a property that you can buy cheap enough that after fix up it still cash flows.  What I buy I call trash houses.  I can buy a house that you can stand in the living room and count the stars.  That house will be $50k below market price.  I can put a new roof on a house for $3,000.  Add that to normal fix up and I have $15,000 to fix up a house that is at a $50,000 discount.  I don’t need any money down with that.  What I do is I will take one major problem.  I will take one problem like foundation, or roof, or HVAC, no more than one but that is usually all that is needed to get a huge discount.  The last house I bought in December 2006 had a garage door that was off the track and the trees were grown up around it.  I paid a garage door company $150 to re-hang the door and my son and I took a chain saw and whacked down the trees and paid a guy $60 to haul the limbs off and I got that one for $40,000 below market price.

[propertymanager]

ChrisABQ,

If you are cash poor, can you afford an "investment" that loses money each month?  I am not cash poor, but I still can't afford too many "investments" that lose money.  Regardless of the ability to afford negative cash flow, why would I do it?  The purpose of being in business is to MAKE MONEY, not lose money.

Yes, finding properties that will cash flow is difficult!  If it were easy, everyone would do it.  The reality is quite the opposite.  I heard one guru say that 95% of the REI students will never even do a single deal.  Of those that do, the vast majority will be out of business in a short period of time.  

You can see evidence of this at REIA meetings and on these internet forums.  Every few months, nearly all of the faces and names will change.  An entire new group of newbies will be around and only a very few seasoned investors will still be present.

That's just the reality of things.

Mike

[henryinma]

Henry,

You're certainly not saying that the only expenses are the condo fees and taxes...are you?

The property you mentioned certainly does not have positive cash flow if it is mortgaged.  It might be a good deal if the owner sells it, but it is a TERRIBLE rental.

Mike

Of course there are other expenses, but those are the major ones. Also I never said it was a good rental. Some people are in this business to buy properties as investments and in certain parts of the country like Boston, you're never going to find a good rental unless you have a large down payment. Some people just go with the negative cash flow and make it back up on their taxes when they deduct the interest expense and take their 1/27.5 depreciation on the property.

[ChrisABQ]

property manager:

You said: "If you are cash poor, can you afford an "investment" that loses money each month? . . . The purpose of being in business is to MAKE MONEY, not lose money."

Exactly the reason for my original question.  No - I cannot afford an investment that loses money.  Hearing that 45-50% of the gross rental income goes to expenses, and the rest is left over for paying the mortgage and (maybe) some profit is both eye-opening and discouraging.  Although, I'd rather go into this knowing what I'm getting into rather that fooling myself into believing that every property is a good investment.  Thanks for being honest.

So, all of that being said, I must go back to what I already knew, and that it that I must make my profit when I BUY my property, not through speculative market appreciation.

Chris

[propertymanager]

BINGO!  If you follow that strategy, you will be one of the FEW that survives.

Good Luck,

Mike

[LRrenewvating]

Propertymanager,

Why do think that is?  (That so many people don't continue.)

Is it that they lose interest when they are not able to find the deals you seasoned investors talk about?
Is it a lack of knowledge and they make too many mistakes at the beginning and cannot recover?
To scared to take the first step?
Because they are expecting to get into a get rich quick (less than a year) business?
Is it because they came in only thinking that having knowledge of rehabbing and wholesaling is all they need and they having some business knowledge is not necessary?
Is it lack of funding?

I am a newbie and am courious why so many fail.  And I don't want to follow that path.  

I am having a hard time here in York, PA without any local REI club to meet other investors.  I have met a couple though and have been trying to work with and learn from them but I do not feel comfortable with them I sometimes feel like they are taking advatage of me because I don't know everything they do.

Sorry to get off the initial cash flow subject that I started myself (thanks for all the input on that evveryone) but your last remark lead me to this post.  I don't want to fail so I want to know why people do.

[dwj469]

My belief is they dont have a plan. They do initial research and are flooded with ideas from everyone and dont know which way to start? Rentals or flipping but how? Why do you want to do rentals or why do you want to flip properties? How are you going to go about doing this? You need a plan. Stick with the area you want to concentrate on in real estate investing and become an expert in that field. Make sure the properties make you money the day you buy them. Do you research. To answer your question why most fail is they fail to make a good plan, they hit a bump in the road and give up. Its much easier to just settle for a job. Its hard work but the payoff is phenomenol. Dont give up. Good luck.