Hi: I am a new investor struggling to find SFR property that will have positive cash flow. After my calculations of Gross Rent minus Vacancy Rate minus PITI, I also add (deduct) a 5% return on the down payment and fix-up money to get a realistic net operating income. What I come up with is an offer that is approximately 70% to 73% of what banks in my area are listing their foreclosures for.
I cannot seem to find any properties based on these figures and make an offer that will be considered. How do other investors invest in property and pay 0-10% down and not have serious negative cash flow? Are other investors paying too much or am I being too conservative with my calculations?
Your question was made in response to a topic that it didn’t really fit with, I have split it off into its own thread and moved it to the correct forum to make it easier to work with.
In response to your question. Make your max offer the most you could offer and still cash flow, don’t go 1 cent higher. Maybe they will accept it, maybe not. Bear in mind as prices fall nationwide, foreclosures skyrocket, and lenders struggle with massive REO inventory they will start taking lower and lower deals out of pure necessity.
I agree with Rich. Stick to your guns and don’t be afraid to make offers. Realize that it may take 5-10 or more offers to successfully buy a property at a price that’ll make you money.
It gets complicated but basically what you’re dealing with is a classic problem in breaking into any business. It’s known as the barriers to entry. When almost anyone can do a no money down deal, there’s a lot more demand and the prices get pushed up to the point where only those who have the resources to make it cash flow will end up buying the property. Or those who haven’t done their homework and you find them later being foreclosed on.
Most investors that I know of actually put money down on a deal, some have plenty and do 10-20%. That’s about the only way properties cash flow around here. Others have been lucky and the rising market has bailed them out of bad positions. However with the housing market in somewhat of a slump depending on where you are, you can’t really count on rising housing prices to bail you out of losing situation. Other investors may have longer horizons and are willing to put up with negative cash flow for a few years and just wait for rising prices to make their money. They do have income from other another job and the tax writeoffs on depreciation and interest are worth it if you’re in a high tax bracket.
Make your offers and see what happens. The longer they’re on the market, the more willing the banks will be to take a lower offer. Most of them around here will drop their prices 3-4% each month until the property sells. You may have a bit of a wait. I’ve looked at the sale prices of some brokers that deal mostly with bank foreclosures and the sale prices are typically 5-10% off from the original asking price, every once in a while I see 20%. Your market may be different. Good luck.
Gross rents - vacancy - PITI is NOT EVEN CLOSE to being an accuract formula for cash flow even if you add in another 5% - NOT EVEN CLOSE! If you buy a rental using that formula, you WILL be out of business in no time due to lack of cash flow, which is the number one reason that new landlords fail.
It is hard to find properties that will cash flow in EVERY market. What you must do is find sellers that are DESPERATE to sell. That can be a disgruntled landlord, someone with 2 mortgages, someone who is getting a divorce, an estate sale, someone who has lost their job, properties that need work, etc, etc, etc.
The only way to find these deals is to get out of the house and meet people. To start, join your local REIA. Tell everyone you meet that you are looking to buy properties.
Let me give you an example of what to look for to find a bargain. I found one recently (2 family) that had a condemned sign on the door. If that’s not a tipoff to someone that can’t handle it and needs out I don’t know what is. My clue was 4’ long with red letters. I have a letter on my table that is going out in today’s mail to the guy.