First I wanted to thank you all. I’ve had a blast reading all the posts over the last couple of weeks. Yes, I was one of the newbies to join and immediately post a “real estate agent question”. After Keith screamed in a message, and then explained to me what I should do, I’ve really enjoyed the learning process. I can’t thank you veterans enough for taking the time to help us “newbies”.
I’ve done a “cashflow” search in this club and read all the messages. (Keith - you’d be surprised how many time you’ve posted about cashflow) I’ve also bought my fair share of books and I’ve been reading as much as possible.
Here’s my question - Why is it that you all say that it’s not suggested to buy a property if you have to put 5% down in order to cashflow? If I’m interested in buying and holding, how does spending that 5% down hurt me if I can create a cashflow situation?
I’m sorry if this has been discussed previously. I haven’t been able to find the answer to this question.
Great to have you on this board. I hope your education continues and you are able to be successful.
Why you shouldn’t put to much money in a deal to make it cashflow? Well first it is because you can find enough “DEALS” where you don’t have to.
Another, is because you need to figure out your CASH ON CASH return, sometimes called Cash ROI (Return on Investment). Rather than completely rewrite what that is, just view that definition here: http://www.wcrt.org/phpBB2/viewtopic.php?t=1172
Now while the Debt Service Coverage Ratio (DSCR) is normally reserved for Commercial Real Estate, the concepts of it can cross over into Residential real estate. There is a great post that details why you shouldn’t just throw in money to to increase the DSCR (or return on the loan), find that post here: http://www.wcrt.org/phpBB2/viewtopic.php?t=1171
Hope that helps, and good luck and continued success!
<<I’ve done a “cashflow” search in this club and read all the messages. (Keith - you’d be surprised how many time you’ve posted about cashflow) I’ve also bought my fair share of books and I’ve been reading as much as possible. >>
What does that say about my feelings about cashflow for buy and hold investors?
B. No, I wouldn’t be at all surprised…you’d be surpised how many people don’t read/undesrstand the principal and then come back later to tell us about the alligator eating their, ummm…posterior!
I bought my first couple of houses putting 10% down to make them cash flow enough for my criteria. They cash flowed without my cash, but I wanted more that $150 per month. I later found out at you can look harder and find deals that will cash flow without your cash in. If you have to put cash into the deal to make it cash flow (in my town) you just bought retail. If you buy at wholesale prices it will cash flow without a down payment.
By the way, the cash on cash return is around 30%. Try to beat that in a CD or stock fund. It is a great investment for any cash you may have to put into a deal.
I think this topic is a very interesting one, and until now nobody brought an opinion close to mine, i e: i believe giving 5%-10% down is perfectly correct to create a positive cash flow situation.
As correctly stated before, we maximize roi minimizing down payments, but we shouldn t forget that roi has other equally important variables: appreciation, equity build up or tax shelter.
In my opinion, you can correctly invest 5%-10% ( versus 0% down in other deal), when this deal can easily overtake others in appreciation potential, granting a superior roi although the higher down payment.
Paulo
I beg to differ that appreciation is a valid reason to put in money on a deal. I hope you like playing poker or blackjack, because basing an investement upon the potential appreciation is gambling in the same way. Yes you can have some knowledge on certain hands/players/situations, just as you know the locations, etc in real estate, but it is still a gamble.
We all know that you make your money when you BUY, but you get it when you SELL. Equity is nothing more than that. Y ou need to sell to realize your profit in appreciation. People say, but I can refinance it out, YES, but you still owe on the loan and you then need to pay off that balance.
So get a deal where the numbers make sense on the buy, and don’t gamble the price will go up.
Just ask all the investors and residents of Harvard, IL how their investments looked when Motorola shockingly closed up their plant there and now homes sit empty and rotting because no one will buy it. No one has a job to afford it there.
ok,
Getting a positive cash flow and you still think it is gambling…
So, if you are doing all your purchases without putting any money, what are you investing? Only your time?
Suppose you have serious money, which would be your criteria?
Zero Down again? How many good deals would you bypass? And what about the profitability of your serious money? Putting it in the bank, maybe?
I only play a game for serious, and it is chess.