Hi, I am new to the board but have been investing for a couple of years. I would like to hear some advice on if it’s better to put 0% down and have a somewhat negative return on my investment (but therefore have more money left over to invest in another property at the same time) or put 10% down and have a somewhat positive cashflow but then not be able to purchase anything else??? I have been doing it the 0% down way and don’t mind adding an extra $200-$300 per month–knowing I will make a huge profit when I sell.
Eurosurfergal,
You don’t KNOW you willl make a huge profit when you sell, you are SPECULATING that you will make a profit when you sell! I KNOW that I have a positive cash flow on my properties.
CASH FLOW IS KING in the buy and hold world. Unless the negative is VERY short-term and can be rectified with a very near-realtime rent raise, my vote is for cash flow…ALWAYS.
Keith
Let me add to Keith’s response, too.
Whether you put 10% down or 0% down, you’re still at a negative cashflow.
Putting 10% down does not make it a positive cashflow until you actually pay yourself back the 10% down. Take a $100K purchase. 10% of course, is $10K down. Assuming a small cashflow of $50/month, it would take you almost 17 years to pay yourself back the $10K with no interest payback. Add in a 3% interest (average for a CD account) and your payback jumps to almost 21 years.
Raj
great point roger.
i usually like to see atleast 16% cash on cash return for my investments. meaning if i put down 10k, i like to see 1600 cashflow per year.
if you do lease-options, it becomes easier to see these returns and much more.[your milage may vary depending on where you invest].
i saw a 4plex in syracuse for 38k. 10% down plus closing was around
6k. my monthly projected cashflow was roughtly $400 even factoring
repairs, prp mgmt, 5.85% taxes & vacancy. thats a tremendous 80% rate of return. [i passed however for numerous reasons].
I agree niravmd. About 14-16% and I am very happy! anything less and there is no point in playing there are so many deals out there!
eurosurfergirl,
it depends on your goals. if you’re making $100k/yr and a negative 1k/mo isnt killing you then you could go out and buy 10 properties each with 100/mo negative cashflow[i wouldn’t advise it, but you could]
if you’re making 36k and only have 200/mo in disposable income you would do better to invest some money down [in a smart investment] and get 100-200/mo to boost your income.
people use 0% leverage to increase their rate of return. if you get even $50/mo with nothing down it an infinite rate of return.
always factor in vacancy in your rate of return, along with prop mgmt and repairs. not just the PITI.
I’m sorry I don’t quite understand (due to my lack of knowlege of investing) how is that a tremendous 80% rate return. Can you please elaborate on the concept? Thank you.
May I ask you to show me how would I go about calculating the “rate of return, along with prop mgmt and repairs”? May I ask what is a PITI?
you put 6k down. you cashflow 400/mo or 4800/yr.
using the formula
Rate = (Interest100)/(PrincipleTime)
we get
(4800100)/(60001) = 80%
here’s a list of books you should read.
http://realestatediaries.blogspot.com/
at least get the first one.
PITI is principal, interest, taxes and insurance.
prop mgmt is usually 10%
repairs are a vague figure you guess based on age of property.
for a brand new house, i’d consider 0.
for a 75yr home i’d consider 5k/yr to be safe. but it will vary A LOT
depending on current condition and climate.
We have different measures because we are in different businesses. If we are in buy and hold, we never want negative cash flow. We may put down anything from 0 to 10% down or the minimum needed to make the cash flow properly. If we are flipping, then cash flow is not important because we are going to be out of the property within 2 to 3 months anyway. Define your business and then re ask your question.
I have 2 businesses; my main one is buy and hold. I only do deals that cash flow with minimum money down (never over 10%). I don’t do them unless the cash on cash return is at least 35%. If I find a house that the acquisition and fix up cost is low enough in an area that the house will sell within 2 to 3 months, and the projected sell price versus the cost is at least $10k (goal$15k-$20k) I place into my second business and flip the house. When I flip houses I don’t even look at rental comps because I am selling retail to owner occupants. I have no idea if the property will cash flow or not.
I keep the 2 businesses separate because the tax on one is different than the tax on the other. I usually use the tax benefit from buy and hold (usually negative because of deprecation etc) to offset the tax liability of the flip income (taxed as earned income 30% off the top) That keeps me straight on what I am doing and avoid a big surprise at year end.
So which business are you in?
Look at it both ways
0 down I have 10k in the bank and loose 200 per month
or
10% down no cash and cash flow 200 per month!
Or REOConsultants way
10% down and 20% cash back at closing! Still cash flow 200 per month Hummm!
how do you get the underwriters to agree to 20% cashback at closing?