cash flow & interest rate questions

Just joined today - very informative website!

My wife and I just put down a 10K deposit on a 330K pre-construction townhome 20 miles outside Washington, DC. Real estate in DC is extremely hot and we’re speculating that the trend will continue over the next few years (insert joke here). This is an investment property and we plan on renting it for approximately 5 years. The home will be finished in March-April of '06. Other townhomes in this development are renting for $1650/mo.

Here are details about our financial situation:

  • 797 FICO score
  • 150K equity in current home
  • 20K cash available for investment


  • After reading several threads on this website, it appears that the rei veterans always say positive cash flow is of utmost importance - is this always the case? In order to have positive cash flow for this property, a large down payment would be necessary. You’re probably wondering why we’re buying the place if it won’t cash flow - we’re buying because the area is blowing up and we anticipate above average appreciation over the next few years. We consider the small negative cash flow an investment. Am I off base (man, I hope not!). Is a small negative cash flow really that bad? How much do you recommend we put down?

  • We were quoted an interest rate of 6.25 for a 5/1 IO ARM by the preferred lender. I feel this is ridiculously high, but, the lender says it’s high because this is an investment property. Traditionally, how much higher are interest rates for investment properties when compared to primary residents? What is the best technique for getting the lender to lower the interest rate (or should we look elsewhere)? Obviously, we want to use this lender because of the 5K incentive from the builder …

Thanks in advance for your help!

I already know the “vets” are not going to recommend having a negative cash flow and that you cant rely on appreciation.

I’m in the same boat, homes in my area are going for $200K plus, but rent is around $1100 - $1300 a month. You need a big down payment for a postive cash flow.

I’m actually looking at another area where homes are around $150K and the monthly rent is still in the $1100 - $1300 range.

330K to get a lousy 1650/month, OUCH! This is not investing, you’re gambling. Once the fundamentals don’t add up (income-expenses=profit) than it’s not an investment. Positive cash flow is important because people like myself don’t like running private welfare offices. Why should I subsidize someone else’s living expenses?

Traditionally interest rates are usually about a percent higher on investment properties, this of course with good credit. 6.25% IO Loan for 5 years on a property that won’t cash flow, that’s an insane risk in my opinion. A lot can happen in 5 years, just look 5 years back. I personally wouldn’t take a risk like this. But than again, I am not a gambler.

betting on values continuing to rise is your call. dc is a hot market but its been said many times on this forum that past performance does not indicate future returns. its a gamble, but it could pay off. its your money you are risking, just make sure you can afford what youre getting into if things take a turn for the worse.

as far as your loan goes, keep in mind that investment propertes are more expensive to finance. rates are always gonna be higher. also consider that closing cost will probably be around 8k, and if you only have 20k total, that leaves you with 12k to put down, which isnt even 5%. getting financing for 95% on an investment property isnt necessarlily what banks and lenders like to see, no matter what your credit is. are you doing an 80/15? 95% in one loan?? either way, 6.25 is not bad.

Thanks for the feedback guys. I disagree with Dan regarding the gambling comment, however. Yes, I understand that I’m taking a risk, but, I have done my homework (regarding the price of the home, its location, etc.) and feel that it is a calculated one. Worst case scenario is that we’d have to move into the new home and rent our existing home (which would cash flow because of its desirable metro-DC location).

Back to the interest rate question I had - do I have any leverage to get the “preferred” lender to lower the initial interest rate he quoted me? Are interest rates typically “negotiable”?

Thanks again for your help.

Thanks 6hundy - I should have mentioned that we have a 150K HELOC.

I haven’t decided yet regarding the loan … received quotes for 80/10/10 and 80/20. Do you think a large downpayment (with cash and funds from HELOC) is the way to go?

Where are you? I’m in Frederick and work in Montgomery County. Lifelong Marylander to boot. Good luck and welcome to the site - you’re way ahead of me so I hope to benefit from your expertise. THere are a few other Md’s here and we all lament the market but I do think there are cash flow opportunities out there, just have to find them.

Hey Immy,

I live in Arlington, VA and the new home is in Odenton, MD - right next to Fort Meade. There are thousands of military folks moving to that area because of the BRAC (Base Realignment and Closure). I’m glad to hear that some of the members are actually neighbors! You’ll have to fill me in on where the cash flow opps are in DC :wink: Talk to you soon.



Since you are asking for opinions, I’ll give you mine (although you probably won’t like it). I think that you are making a HUGH mistake and that you will probably lose money on this “deal”. In fact, I would say that you are the poster child for those that will lose money in the upcoming real estate correction (bubble bursting). You are speculating (pure and simple). It IS gambling as 6hundy said. Add to that that you are considering an adjustable rate, interest-only ARM and I’d be willing to bet that you will lose big time on this deal. Look at it this way, even if you are able to sell this property for more than you paid, you can still lose money due to the negative cash flow for several years. The sad thing is that it is not necessary to speculate to make money in real estate. You can make a limitless amount of money doing VERY safe deals.

The veterans say positive cash flow is of the upmost importance and they are right. Positive cash flow IS your bread and butter profit. Why invest if you aren’t going to make a profit? Also, keep in mind that your cash flow must not only make the mortgage payment, but also cover maintenance, taxes, insurance, vacancies, and damage caused by the tenants.

Here’s another way to look at it: How many of these “investments” could you afford? For example, if you were losing $1,000 per month on each property - how many of these “investment” properties could you afford??? Now consider a real investment with positive cash flow - how many of these properties could you afford? See the difference? In the case of negative cash flow properties, the more you have - the greater the loss! With positive cash flow properties, the more you have - the wealthier you become!!!

I’d suggest that you spend the time and money necessary to get educated. I believe the Carleton Sheets course is a great basic education, but others may have other favorites. The point is to read everything that you can, attend courses and seminars, join your local REIA, etc. Do whatever it takes to learn this business and then get out there and make some money.

Real estate investing and real estate speculating are two very different things. I’ll take investing every time!!!

Good Luck,



You can disagree with Dan all that you like (that’s what these forums are for!), but…HE’S RIGHT!!!



n 1: money that is risked for possible monetary gain 2: a risky act or venture [/b]

When you negative cashflow you ARE gambling, hoping on appreciation…in a word, SPECULATING.

You can listen to the posters that have hundreds and hundreds of post, or you can listen to the posters that have 6. Yes, it’s your money…but to say buying a property that is going to have SIGNIFICANT negative cashflow hoping for appreciation is NOT an investment property…

Your mortgage payment is going to be almost $200 negative from the rental income and we haven’t even figured in taxes (you’re gonna love the taxes in the People’s Republic of Maryland), insurance, maintenance, management, and vacany rate…in my estimation, you are going to be about $700 a month ($8,400 a year negative)!!! Right off the bottom-line…

My two cents…


Hmmm what if you are SPECULATING 10% appreciation 33K - 8400 = + $24600

Or lets say this…
Say you have a positive cash flow of $100.00 a month from this property and this bubble bursts and now your $330K property can only sell for $300K. Either way you still are gambling.

Also, isn’t every rei SPECULATING when they purchase a property that they can rent it or flip it?
Isn’t that gambling?

Speculating on appreciation is speculating on appreciation. What if the appreciation doesn’t happen?

Look at the Gulf Coast. Some places along the coast were appreciating very rapidly. How’s that appreaciation looking now? You may or may not be able to see appreciation for a good long time in areas that are prone to Hurricanes. No area is 100% safe from a problem.

YOU CANNOT BANK ON APPRECIATION!!! You can hope and in a lot of places that may well bear fruit.

And, for “Also, isn’t every rei SPECULATING when they purchase a property that they can rent it or flip it? Isn’t that gambling?” – everything is a gamble of some sort or another. If you carry that to it’s full conclusion, going out of the house each day is a gamble – you might get hit by a bus or by a piece of falling space station debris or by lightening, so we better stay inside our bomb shelter.

Making sound, realistic, fact-based REI decisions is NOT the same as betting on a constant 10-20% appeciation for the next 5-20 years.


If the area is appreciating, I would take my $20k and invest it in a cheaper property that can cash flow while it appreciates. In other words you can get into that market and still cash flow, just not that deal. Don’t fall in love with the deal; fall in love with the philosophy.

the rate you are being quoted in very competitive (I use these 5/1s quite a bit). You don’t mention your downpayment, but sounds liek you are doing low down (~5%). Both low down and NOO are adders to the rate. Six percent is still cheap money. At the end of the day, +/-1% (whether its 5% or 7%) does not make much difference in whether an RE investment is a winner or alligator.


im not gonna tell you what to do with your $$$. if you are comfortable then thats all there is to it. i myself am from MD (now live in CA) and am very familiar with the area. the dc area is very strong with its huge govt and corporate presence…there are always jobs and a need for housing. that being said, just make sure you are prepared for the worst case scenario…i.e. a market downturn, cuz it can definately happen.

with reagrds to your loan, assuming your current HELOC is of favorable terms it would be cheaper to use that available line to finance your entire 20% down payment…or you could use it for the 10% down and do the 80/10/10, leveraging yourself even more. either way 6.25 is very competetive.

keep in mind that the more you borrow, the bigger the risk not only for you but also for the lender, and rates will go up to compensate. doing an 80/20 on an investment is not something lenders readily throw money at and i would be suprised if you are even gonna be in the 7% range on your 1st with that much financing.

mortgage brokers and lenders are negotiable to an extent however in this situation (being the preferred lender) they will be less likely. but…ask your preffered lender whats hes charging for origination, points, total closing, etc. ive seen it many times where it can cost you 5k to get 5k in “free” options. my guess is that they are getting a point in origination, effectively costing you 3k to get 5k in options. if you can find a better rate elsewhere it may be worth foregoing your “free” options all together.