Used all my cash

I’m a begining investor and looking to purchase additional properties. I bought a duplex (216k) in november and put down 20% and with closing costs, i needed to bring 50k. This was all my cash. I totally renovated one of the units and the property has to be worth at least 240k now. I owe 176K. My question is…how can I buy an additional rental property with no money down. Can I use the equity in the duplex? Is it too early seeing how I just bought it? I have excellent credit, good income and a strong work history. There are so many great deals out there if you want to hold on to them and rent them.

Are you living in one half of the duplex? Basically the income from the property has to be able to support the additonal debt from tapping the equity. What’s the gross income? What 's the mortgage payment now? If you’re paying a 176k mortgage @ 7% , you have a $1170 monthly payment. Using the 50% rule, each side has to generate $1170 just to break even. Someting tells me this property is in a negative cashflow now. The added debt will sink you even deeper. If you post the exact #'s regarding the property, it would be easier to comment on it.

I do not live in it. I get $2325 a month in rent. My monthly payment is $1735 and includes taxes/ins. Tenants pay their own utilities. So it makes approx, $600 a month.

I get $2325 a month in rent. My monthly payment is $1735 and includes taxes/ins. Tenants pay their own utilities. So it makes approx, $600 a month.

If that were only true…

Mike

It must be that new math. I could never understand it. :cool Look Civitar, your property is losing money each month. Here’s some expenses you’ve overlooked.

Vacancies
Maintenance
evictions
Missed rents

I could go on. But the hard truth is this. About 50% of your total gross rents will go to expenses. The other 50% will be left over for debt service and profit. There may be some fluctuations in your expenses from year to year, but you don’t have any cash available for reserves to pay for the unexpected items. As my old college professor used to say, “learn it now or learn it later”. Let me put it this way. According to your #'s, you’re making $7200/yr. That’s a 14% return on your $50,000. If a furnace suddenly breaks and costs you $5,000, your ROI drops to 4.4%. That’s assuming you have no other expenses besides your mortgage,taxes&ins. You WILL have expenses. They may be repairs, vacancies, maintenance, evictions or all of the above. But they will be there. That $50,000 could be earning a modest 5% ROI in a savings or CD and you won’t get the responsibility & tenant hassles. This is how you should’ve valued the property.

Gross rents- $2325
Expenses- $1162
Profit/mo. $200 (minimum $100/mo./unit)
Mortgage P&I $962.

If you get a 30 yr. mortgage @ 7%, $962 is a $144,595 total purchase price. The taxes & ins. are included in the Expenses. This way the property stands on its own financially and puts money in your pocket. Using the income approach to purchase an income property is the only way to determine the actual value. It sounds as if you’re using a the market value or “comp” approach. In my opinion, you paid about $71,000 more than the property is worth for an INCOME PROPERTY. You could have put a 10% down payment on about 3 duplexes (of similar purchase price) with that $50,000.

You’re out of your mind. Maintenace!!! I know the difference between a hammer and a screwdriver unlike you yahoos. There’s nothing I can’t build or fix. I paid 216K for a property in one of the nicest towns in CT. And your telling me I paid 70k too much!! Do you honestly think you can buy a duplex in Simsbury, CT for 146K? You have no idea what your talking about. My rents…1025 and 1300 per month. The 1025 is still below market value. Vacancies…possible, but have 2 tenants in there for another year and they pay every month. “…you could have bought 3 duplexs” That’s the dumbest idea i’ve heard of all day. At least with my duplex it make $600 a month and it goes in savings in case something does happen (eviction, .etc) You’re a knuckle head.

I'm a begining investor and looking to purchase additional properties.

Apparently you are very seasoned at least your arrogant response would indicate so. Why ask for input from us scmucks? :rolleyes

I know the difference between a hammer and a screwdriver unlike you yahoos.

We are in awe of your majesty.

The first thing that you need to learn in investing is to take your feelings out of it. Listen to those who have gone through the trial and tribulations. The numbers very rarely lie.

I don’t like being patronized…that’s all

I was not patronizing you. I was giving you my opinion. If you wanted us to give you a “high five”, you should’ve said so in your original post. I apologize. I wasn’t aware of your maintenance prowess, your ability to get materials for free, your ability to maintain 100% occupancy 100% of the time, rent to perfect tenants who don’t break things and always pay their rent on time. In your unique situation, I would advise YOU to go to your local bank and take out a home equity line of credit for future purchases. Since you have $600.mo. profit each month, you can afford the extra $600 increase in debt. Then you can just keep dong it over and over. ALWAYS REMEMBER, if you’re not 100% leveraged, you’re not trying hard enough. In fact, Capital One offers 125% LTV home equity loans. It’s worth it if it allows you to keep buying properties and never slow down. You’ll be sipping champagne on your new yacht within a year or two. Happy Easter! :beer

Phelmboy is correct about property expenses.

At any rate, to address your original question…Sure, you can buy more properties with no money down. You can wholesale, bird-dog, or something like that. If your question really is…" how do I purchase more rental properties with none of my own cash", that’s a different story. You can use a hard money lendor, private money, pre-forclosures, etc. Just read up on this forum regarding no money down purchases. However be warned…if you think your mortgage/taxes/insurance are your only expenses with rental properties, you will be bleeding cash very quickly.

Please post with civility and no name-calling…

Keith
Moderator

This is a good test case here
How does one get out of or manage a situation like this ?

when the numbers arent’ a great as they should or could have been.

with increasing property tax and always seems to be a yearly escrow shortage…

I don’t think he wants to get out this property. He wants to expand his operations. And he will no matter what.

To answer your question, it depends on what the actual #'s are on each property. Sometimes you can increase the monthly income by increasing rents if possible. The best way to manage negative cashflow is prevention. The numbers have to work before you buy in the first place. Fortunately, the members on these forums have developed excellent criteria for defining a good deal. All you have to do is ask their opinion and they’ll give it you. :beer

Wow, why ask for opinions if you don’t want to hear them? I just bought a 5 unit mixed usage building that will require maybe 50K in repairs, mostly mechanical and cosmetic, for 22K. Last schedule E was between $2600-$2700 a month. Nobody thought a deal like this was possible either but it is. This guy will eventually figure out that this wasn’t a good deal, especially since he had to bring 50K of his own cash to closing to even begin to make the numbers ok in his eyes.

Sometimes you have to get off the side lines and get in the game. You can crunch the numbers and analyze and analyze and when your done analyzing you can analyze some more. Believe in yourself and go with your gut. I also own a 3-family I bought 2.5 years ago. I was scared to death…but I did it. You know what? It’s the best investment I ever made. I make $425 after the house payment every month and I put into savings. I’ve saved $ 6,250 for unforeseen expenses. Not one dime has ever come out of my pocket. The principle goes down monthly and the value goes up….and I enjoy working on my properties. In fact I love it! Buy a nice property in a nice area; maintain it and keep it for a few years and you will not fail. I repeat…you will not fail!! If I listened to that 50/50 rule I’d be sittin’ at home like a schmuck saying, “ I wish I owned rental property.” Get in the game folks. The 50/50 rule may work in some instances but not all. If you want some advice…buy in a nice area. You’ll get a better quality tenant. Also, if you lack repair skills, buy a building that has the hi-dollar items new, (i.e., furnace, roof (leaking roof is disastrous).

Have you ever seen the movie “Pacific Heights”? :biggrin. However, just buying in a nice area and getting a good tenant will not ensure success. A good tenant can become a bad tenant or no tenant very quickly just through a job loss, divorce etc… Things are good for you right now, but how will your property fare when times get tough? If you have a vacancy for a few months and a few unexpected repairs, your $6250 will go fast. If you don’t mind dipping into your pocket in addition to the 50K, go for it. But you can only go to your wallet so often. That is a limiting strategy in my view. Anyone can get in the game. Only a few stay in the game. Those few live by the 50/50 rule along with a few others.

Nothing in life is guaranteed. There’s risk in everything. You have to take chances. Be smart and think it through, trust your gut instinct and know your location. If it were easy and risk free everybody would do it. The saddest two words are, “if only.” I have not failed with my two buildings. Don’t get me wrong…I’ve put a lot of sweat equity in them. Did I have to put down 20%? Probably not. But I chose to. I don’t have a crystal ball…I can’t forsee a tenant shafting me or a pipe bursting in the middle of the night. You deal with it and move on…it’ll make you a better person. 50/50 is nice maybe for a large building, but a duplex or 3 family. Way too conservative.

My time is worth more to me than the sweat equity I would have to put into my properties. Why pack up a mower, drive across town, unload it, pay the gas and maintenance for the mower, gas to get there, spend 90 minutes of my time on the round trip when I can pay someone to do it for $15. Sure I could remove that $60/month cost from my expenses on that property but I would rather live by the 50/50 rule and comfortably manage a property. I don’t want to get up and shovel sidewalks and parking lots when it snows. I want to know I offer amenities that others can’t and provide them in a timely manner. I am a dad and my time is worth more to me than worrying about taking care of this petty, yet very importnat stuff, myself.

You’re now providing advice after you spent all your cash? You asked for advice, remember?
At any rate, you seem to think you know what you’re doing. You’ve bought two properties in 2.5 years, and have no cash left.So at that rate you’ll buy 4 properties in 5 years. With $50k I can buy 10 properties in one year using the 50% rule, have instant cash flow and will have refi’d all my money back out.

You stick to what you’re doing if your gut tells you so, but don’t ask for advice and then lash out at everyone when you get it. If you don’t want advice or constructive critisism, don’t ask for it.

30 months of $450 is $12,750. Where did other $6500 go in the savings?