living solely on rental income

[islander]

just my 2 cents but if you had 40 propeties and they all cash flowed $150 a month 40*150 = 6000month *12=72000 plus any equity and all not bad i think granted you have to have 40 properties but who says you have to stop at 40...if property values increase above average why not then sell halfe and go from there...mean while if you also flip a few properties and make an additional 20k per deal you would end up making over 100k per year

food for thought

[Roger J]

i think granted you have to have 40 properties

You can do it on a lot less properties.  I currently have nine properties that have a monthly positive of just over $3K a month.

Raj

[islander]

did you do 100% finance or put money down I was basing it on 100% finaning(maybe this is why im still trying to get started and you have 9 properties) LOL

[Roger J]

Actually, I pulled out between $5-20K on each of six of them, so you can say that I financed them 103-125% or so, and bought the other 3 100% financed.

It doesn't matter whether you get 100% financing, or put money down.  You STILL need to figure it as 100% financing.  Putting down 20% just to get positive cashflow isn't really getting you positive cashflow.  You still need to figure paying yourself back the DP.


Raj

[gmtmaster]

did you do 100% finance or put money down I was basing it on 100% finaning(maybe this is why im still trying to get started and you have 9 properties) LOL

I am closing on 5 properties next week that will generate $310/month cash flow (average and the total includes management). All 100% financing...

[carlosguti]

I think this will be a good place to post this: a little off topic.

mortgage 30 years ammorazation table for 30 years, instead of paying large chunks of cash to lower years in payments look at what goes into your principal every month. and add the exact amount every month.

example.

$1,500 payment

$1,487 interest
$13     principal
------------------
make that extra payment of $13 dollars or whatever it is every month POW your mortgage has been cut in half......

hope this makes sense email me if you dont get it, very powerful  info

[kdhastedt]

This is OK, Carlos but towards the end, it all reverses...the $1,500 payment becomes $3,000 a month!

For example, if you borrow $204,500 for 30 years at 8%, your payment is $1,500.55. Your first payment is $137 of principal and $1,363 in interest.  Under your plan, you would pay $1,500 plus the 2nd month's principal of $138 for a total of $1,638.  At the end, you are paying the $1,500 payment plus the last month's prinical of another $1,500 for a payment of $3,000.  The amount of principal grows each month and under this plan needs to be paid.

Keith

[reoconsultants]

Propertymanager,

              In that case of getting 46k back that also shows the bank that I have enough capital to do more deals! As we all know that equity is not always easy to get to! In your case leaving the equity in the property sure it will lower lower your payment on the other hand look at issues of high monthly cash flow is that or is that not taxable as income? That is right it is! I am at a different point in my life where I have a great monthly cash flow! And really do not care if I win loose or draw on some properties on the other hand I read in another post of yours that you currently own 6 houses or something like that and yes at that point in time I would worry more about cash flow and leave cash in a deal! I own 15 times that amount! let me ask you this if you would have pulled out all your cash you could have owned a property free and clear but then again if I was buying houses at 96k I would own more then one free and clear as my avarage deal is around 210k. So before we can compare our deals I am going to compare a hot dog to a t-bone then compare the shuttle to a bike!  

[carlosguti]

Keith I dont understand how you get the reversal?

I have done this with several clients and it cuts thier mortgage in half!

[v_1dlivi]

I pulled up a Excel spreadsheet and work the numbers that Keith and Carlos are talking about.

Originally a 204,500 for 30 years at 8% would be $1,500.55 per month for 360 months.

I took the principal and it comes to $138 month 1; 139 for month 2; 140 for month 3; until month 359 where the principal would be $1,491.

Now going with Carlos's adding the principal to the payment the payment months go down to 119 months which is 9 years, 11 months and the final monthly payment would only be $831.30. The payment would never get larger then $1,803.10

All this takes in effect that you take the Principal from the original 30 years mark and not adjust for the new payments and interest. Also the principal you pay will only really go from $138 per month to $303 in month 119.

Makes it sound interesting. Alot of people use the "pay the principal" method with Credit card bills or any debts to help pay off much quicker. Paying in 1/3 the time will save roughly $180,000 in Interest payments on the 204,500 example.

David

[v_1dlivi]

And because I was curious. If instead of adding a dollar to each month (ie. 1,368, then 1,369, then 1,370, etc.) If you find what the highest principal addition would be ($303) and start using that from day one (ie. instead of $1,500 + principal you pay $1,800 from month one) you only save 6months of payments. Ending at month 113. But that is still an addition $10,000 saved.

I Love playing with numbers.

David

[aak5454]

paying principle is a waste off time and kills cash flow.  by default, your rate of return is the interest rate on the loan minus your net income tax rate.  Most of my investment loan are under 7%.  This is cheap money.

moreover, the equity is locked up on a "saving act" with a one-way door.  sure, you get the money out....for a fee....

[steve67]

Hey here is a novel idea......Why not finance the properties, rehab them and then refi with a power arm of lets say 1.9%.  If you do 10 houses this way and have a positive cash flow of $5,000 per month the next one you buy you could pay off fairly quickly.  The more you do this way the more it grows and soon it starts to grow exponentially.
I have a friend that has a $250,000 line of credit, he will buy a house, fix it, rent it and then over the next few months pay it off.  He is basically moving money around.

[carlosguti]

Great post david, Im sure your numbers are correct. Thanks for doing the math!

[propertymanager]

Whoa!  This is getting to be a complex thread - since there are two or three topics running simultaneously!

This topic is entitled "living solely on rental income".  The only way to live solely on rental income is to have cash flow.  Without cash flow, you're out of business.  REO - I must confess that I don't understand your concept that you "really do not care if I win loose or draw on some properties".  That doesn't make sense.  I currently have about 25 rentals (not six) and I do absolutely care that I "win" on every one.  I certainly do understand that if you have a lot of properties, the profits on some properties can cover the losses on others, but why have losers if you don't have to?  Furthermore, if you have a great monthly cash flow, why mortgage your properties to the hilt in order to pull out cash?  That doesn't make sense to me.

I also don't understand the statement by AAK5454 that "paying principle is a waste of time".  Another word for "principle" is "equity".  Letting the tenants pay down the principle is exactly the mechanism to build wealth.  Over a period of time as the principle is paid down to zero, your cash flow dramatically increases and the number of properties you need to hold to generate a given income decreases.  That isn't a waste of time, it's a very powerful tool to achieving wealth.

My business plan calls for acquiring 50 rentals with an average positive cash flow of $200 per rental.  This will generate a positive cash flow of $10,000 per month and over $1,000,000 in equity (with no appreciation or principle paydown).  Now, in 20 years, when all the properties are paid off, the monthly cash flow will be more than $30,000 per month and the equity will be well over $3,000,000 with absolutely no appreciation.  IF there is appreciation, then that's just icing on the cake.  In addition, with my conservative plan of keeping at least 30% equity in the properties and only buying properties with significant cash flow, I have built-in insurance against housing properties deflating and any emergencies that may arise.

So, my opinion is to be conservative and survive in the long term.  Insist on positive cash flow AND equity with every property.  Keep some equity in your properties and paydown the principle.  Stay away from risky interest-only loans and only use ARMs that will cash flow at the cap.

Mike