down payment vs. cash flow

I have an opportunity to buy a house and flip it, or rent it out. I was anticipating putting 10% down on the house. i made the offer at 240k. So at 24k down, doing an interest only loan at 7%, Im looking at a negative cash flow of approx. $2400 durring a calender year asuming I rent the house fro the market which is approx. $1200.oo per month. Debt service @ 16400 <14,400) rental income =$2400. ???

I can out more down to become cash flow positive, but would prefer not to do this. Im a little shakey on a good strategy for this scenario. Thanks, Ryan


This is a very poor deal. I’d look until you find one that will have a significant positive cash flow with a fully amortizing loan and no money out of your pocket.


Thanks for your suggestion. Im used to flipping the unit. Not holding it. What do people normally put down on a rental property. Obviously the more you put down, the better rate qualify for… Can you be a little more specific as to what you look for, and what process you use to determine the viability of a rental? Thanks Ryan

That negative $2400 is the tip of the iceberg…doe it include:

Etc., Etc., Etc.?

Unless this property is in a rapidly escalating market and you can afford several hundred dollars a month of negative, there is NO upside here…it’s a dog…an ALLIGATOR!!!

I have a totally different business model for rentals than most folks do, but if you’re using “more downpayment” to increase cashflow, you’re still not buying low enough…(IMO).



Remember, real estate is an investment and like any other investment it has to make sense.

You have to judge your investment against other investment you could make instead (opportunity cost).

So for $24,000 out of your own pocket you’re getting -$2400 per year. Even if you took that money ($24,000) and put it in a CD you’re likely to generate at LEAST 5% return ( has the 1 year CD average at 5.03%). So after 1 year you’d have $1200 in income versus $2400 in a loss. Assuming a minimum of 5% in transaction costs to sell the house after 1 year the home will have to appreciate approximately 6.7% (to $256,000) at a minimum to break even just based on these limited numbers.

Factor in vacancies, repairs, various other ‘contingencies’ and that number goes up as well. This is all to break even on just a CD. Imagine the opportunity costs of another vehicle that can generate 8% interest.

The bottom line is that it’s really not as complicated as people make it out to be. The numbers should make overwhelming sense or just don’t do the deal. Given the risk, stress, and work involved compared to giving the money to a bank and putting it in to a completely safe (under 100k anyway) investment vehicle it’s a no brainer.

The only way this deal makes sense is if you can reliably assume apprecation in the mid to high teens or greater. Can you reliably do that?

All real estate is local. It all depends on where you live and what the market is like there. I can buy a house where I live and it will cash flow. In general houses that sell for $100,000 rent for $1000/month. Houses here that have a value of $100,000 sell every now and then for $75,000. These houses need fix-up. I buy them put $15,000 into fixing them up. I roll the repair costs and most of the fees into the loan and still have the house for about $90,000. The PITI on that is about $800/month. That is quick and dirty, but that means that I get in houses for little money out of my pocket because the deal funds itself and they cash flow about $200/month.

My typical deal rents for about $1200 and the PITI is around $950. The average deal takes about $2000 out of my pocket.


You must be using some of that “new” math. If you have a house that rents for $1,000 per month, and the mortgage payment is $800 per month, you definitely do not have a positive cash flow of $200 per month! Not even close.

According to the National Apartment Association and other reliable sources (as opposed to the late night TV gurus), operating expenses (including capital expenses) run at 45% to 50% of the gross rent throughout the United States. Therefore, with a $1,000 rent, your operating expenses will be about $500. That leaves $500 to pay the principal and interest. Unfortunately, a $90,000 loan for 30 years at 8% is about $660 P & I, which means that you’re losing $160 per month.


Good info. all of you. Thanks.
A little bit more. I have factored an appreciation rate of approx. 50% over five years. Roughly 10% per annum. I have a brokers license, so my points(origination fees) are non existent. I do understand the value of comparing non real estate investment vehicles. To that end assuming that my property will appreciate 50% in 5 years does the deal make any more sense? The cost of a PM company is $75 per month with a $250 starter. Taxes are 1.25%. Rehab to get it rentable 25k. maintenance $125 per month. Hmm. Not so pretty, but the area is booming with boomers. Grass Valley California. Sierra Foothills, so my assumption of 10% appreciation I think is conservative.

My realtor sent this analysis.
Hey Ryan,

For sure, since you’re in the loan business, the answers about positive cash flow are in your hands. I’m sure it’s impossible without some degree of neg am, but tax benefits might offset.

I can help estimate some of the ownership & business costs:

Property managers get approx. $250 startup fee and approx. $75/month; property taxes are approx. 1.25% of sale price, and out here tenants pay for water, trash, sewer & gas. Handymen get $35-45/hr, specialty trades are $65-75/hr. Gardener might be $125/mo. but I’m unsure. Homeowner insurance, $750/yr (I can get you a quote).

I’d suggest buying with a 5-7 year window if it’s a rental. History suggests you’ll grow in equity by at least 50% in 5 years, $125K. If you can protect your profits from taxes that’s not bad assuming you put 25K down, 25K closing costs/upgrades, and break even (after tax benefits) on rent cash flow. 50K in the bank at 8% yields, what, 30K?

In flat/receding housing markets, rents usually rise & the gap closes. Remember to consider the tax benefits, but again . . . consult your tax advisor, yada yada.

One of your risks is the well. If it failed you’d have a big expense, perhaps $12K to drill new, or more likely that much $$ or more to hook up to muni water supply. A well test will give you some indication if that’s much of a risk.


Ok, well if you can truely count on 10% per year appreciation then it’s a no brainer.

The question is that now you’re banking on the apprecation to make the deal make sense. This is risky.

Here’s what the numbers look like assuming you ‘lose’ $400 a month for the 5 years from negative cash flow. Bear in mind that your P&I should remain constant during this time but your taxes, insurance and other variable expenses may not. However, your rental income should increase by at least 5% per year for inflation so this may offset.

But lets just assume your numbers are correct. You lose $400 x 60 months = 24,000. You have $24000 invested in the property intially that you could be making 5% on in a safe CD investment. So that’s $30909 you would have after 5 years at 5.06% compounded daily. That means that in 5 years you have $54909 (plus lost interest on the 400 per month, but lets just assume that’s offset by tax savings) invested into this transaction.

After 5 years of approximately 10% per year of appreciation the value is $360,000. You have to factor in selling costs of say 10% so we’ll just say (for the sake of ease) that you would net $84,000 from the sale of the home.

Your actual return on this transaction is $84000 - $24000 (the $400 per month lost) $60,000. You net $60,000 on this transaction versus netting $6909 (interest in a CD on $24000) on a CD. Your cash on cash return is 250% versus 28.8%. It really is a no brainer.

NOW let me clarify, this is ASSUMING alot of different things. None of which are 1)guaranteed or 2) easily predictable. The risk is quite a bit higher (vastly higher actually). These assumptions are not ones that I am personally comfortable making, but that’s me. But this is how the numbers break out using YOUR assumptions.