I have a question about cash flow on a rental after pulling equity out. I have noticed that in my area its hard enough to find a property to hold and rent with enough cash flow to follow the 50% rule even when buying at 65% LTV of ARV. How do you cash flow a propery after a refi?
EX -
purchase price 90k
ARV - 145K
MTG around $500 mo (loan of 90K)
Taxes $150 mo
Ins - 125 mo
50% rule - $500
Total expenses - $1275???
Rent for area - $1k -1100.00 mo
This doesnt even cash flow at 65% LTV…how could you possibly refi and pull the equity out and even think about covering expenses?
It does not appear that there is room in your deal to refi.
One way of using the equity, I would think, would be to get an equity line and use it only when needed for other deals. This way those dollars are not attached to your mortgage and can be supported and paid for by the investment they were used in. Then you would not be trying to cover it with your rental property but you would still ahve access to it. Correct me if I am wrong but I think you would still get the tax benifts for the line as well.
LP - Thanks for your response. My issue is that 65% LTV are the better deals I see in my area and it seems that it doesnt cash flow enough even without the refi. Are you also suggesting a HELOC? I thought those reflect negatively on yur credit. Just trying to take some of the info here and apply it to my area and what I see available. I was looking at the possibility of a duplex also since you can collect 2 rents and also reduce your vacancy risk…if you still have one rented, at least you get 50% income vs 0 on a SFH.
I know its seems high, but most here suggest that the extra expenses usually avg 1/2 of the months rent to be safe and not put yourself in a neg situation if something comes up.
This does not work in a heavily restricted subdivision and can only be used for a few of your properties.
I don’t really look for properties in heavily restricted subdivisions because chances are, they won’t like my renters and thanks to some really screwed up recent court rulings, homeowners associations have some serious teeth.
Rent your house to college guys or gals or work force types. Rent per bedroom with common facilites @ $500.00 per room for a 3 bdr, 2 bath. Instant cash flow. 4 bedr, 3 bath and even better, although this takes a little bit of work on the rent collections and maintenance. In some high end areas, work force housing is almost unavailable.
How about that large shop in the backyard, garage or carport? Can it be enclosed with an added bath as a separate efficiency apartment? If your area is not heavily restricted this might work. One efficiency at $500 and one 3 bdr at $1000 equals instant cash flow if you don’t spend a lot on the conversion.
I work my deals to cash flow first and I first do a small rent rehab. I don’t care if my tenants are rough on the property as long as I make the cash because I plan to do a major rehab before I sell and after a refi.
Repair costs and final rehab for the sale are hopefully (if I’ve bought the thing right) is built into the ARV when I finally market the property.
On that property going by the rent it receives. Purchase price should be around 30k fix up 5-10k and refi with a 50k mortgage to pull your money out plus a bit of tax free profit and still have a good positive cash flow.
You misunderstood the 50% rule for evaluating cash flow. Here’s the deal.
Throughout the entire United States, operating expenses run 45% to 50% of gross rents. In your case, if the rent is $1,000 per month then the operating expenses would be about $500. Operating expenses include everything except the mortgage payment (principal and interest), so you don’t need to add taxes and insurance.
With the $500 left after operating expenses, you would pay the mortgage (P & I). Anything left over would be your cash flow. Unfortunately, in your case the cash flow would be zero.
Obviously, this is not a good deal from a cash flow point of view. If your numbers are correct and you have $55,000 of equity, then I’d sell it and smile all the way to the bank!
Here’s my two cents in a few words. Interest Only Loan. Option ARM. Since you’re renting why not maximize your cashflow that way. Plus if you plan to sell in the next couple of years it shouldn’t be a problem at all.
55 k would be a sweet deal. but he is not including rehab cost, closing or holding costs in his numbers. would think it still qualifies as a rehab and sale though. i am having the same problem going by those “rules” of purchase. I guess they are out there though. I just have to find them. i hope I do because that is the only way i am going to get into this rei business. and to quote you mike, (cash is king)
You are absolutely right - you must include all of your costs in calculating the profit from a sale. He didn’t list a rehab that I saw, but that is certainly an issue. As you said, so are closing costs, holding costs, and income taxes on any profit. However, my point is that it might be better to make some money flipping this property than to break even or lose money each month holding it as a rental. Not everything works in every market at all times.
i am having the same problem going by those "rules" of purchase. I guess they are out there though. I just have to find them. i hope I do because that is the only way i am going to get into this rei business.
I’m curious what you are doing to try to find deals?