I have trouble seeing how ANYTHING cash flows

General Real Estate Investing
1

Many people use hard money loans and cash flow SF rentals. But lets make it a step easier than that, lets say you bought the SF property in CASH no loan.

ARV: $110,00
PP: $49,000
Repairs: $20,000

Lets say the property rents for $1,300

Well every month you are going to need to pay for, just using some basic numbers:

Property Taxes -$300 per month (3,600 annually)
Insurance -$100 per month (1,200 annually)
Basic Maintenance -$100 (1,200 annually)
Contingency Money, if the A/C roof etc has issues -$100 (1,200 annually)
Property management - $100 (1,200 annually)

=$700 a month in expenses

You bought the property free and clear with CASH, no loan. And already you are looking at your $1,300 - $700 = $600 for the month from buying in cash…

Now what if you had a loan? Principle and Insurance for it is probably going to be $600 a month as well, in which case you would have no cash flow, or negative cash flow.

And this is not even including misc. fees such as pest, administrative, advertising and legal fees

Someone help clarify here please, there must be something I am seeing wrong

2

Hi,

First just like your example I never buy my rental (Portfolio) property retail, I always buy it for 70 cents or less on the dollar.

Now expense and debt service / positive cash flow should be estimated at basically 50 / 50 although sometimes this ratio could run heavy either way for a few years!

Your example of $700 expenses seems just a little high, however $600 dollars for debt service and positive cash flow breaks down like this:

$286.00 - Is equal to a conventional mortgage payment for 30 years at 5.750% interest, this is your cash on cash return for acting as your own lender.
$314.00 - Is your positive cash flow and represents a 24% positive cash flow above cost’s

I hope this helps.

              GR
3

Thanks Goldriver for your indepth reply, I truly appreciate it. I do have additional questions on your reply if and would really appreciate if you could provide some additional insight.

Would you please explain how you break down the $600 debt service to the $286 for the conventional mortgage payment and the $314 for positive cash flow?And how you calculate 30 year term and 5.75 interest to arrive at $286 conventional mortgage payment component of the debt service. This is an area that I am confused on and could really use some clarification

High? Shouldn’t $700 be a low amount? After all, there are still expenses not included such as
$50-150 per vacancy in advertising
$X yard maintenance
$400 legal fee’s
possible HOA fees etc

Thanks again I appreciate it

4

Hi,

At a $49k purchase price regardless of down payment the cost of residential cash non-owner occupied is 5.750%, because were investors we would always choose for initial acquision the lowest possible payment which standardly is a 30 year mortgage, we surely would not buy a $49k property and ask the lender for a 3 year loan term as the payment on a 3 year loan at 5.750% is $1,485.00 per month.

We as investors want all the cash we can get in order to buy other property figuring our long term returns will exceed the cost of mortgage lender dollars! Tenants are actually paying our loan!

The 50 / 50 rule generally implies 50% is allotted to expenses and 50% is allotted to debt service and positive cash flow!

If all cost’s of ownership can not reasonable fit 53 / 47 or 47 / 53 or 50 / 50 then pass, go buy a different property.

Sometimes as a new investor you just can’t wrap your mind around the fact that all properties don’t make good rentals, just like all properties can not be bought and rehabbed for less than current value, this is really apparant in older cities with old properties now requiring major rehab in a poor real estate market!

Now I might look at a property and feel I can rehab and re-sell or rent because I have a professional construction background and I can act as my own general contractor and know how to cost effectively rehab a property that someone without my skills who is required to hire a general contractor and pay an additional 10 or 12% and truly believes the project is delayed and requires 22 change orders for additional work outside the original scope.

I have owned brand new rentals and figured virtually zero maintence or repairs for anything the first 5 to 7 years, current age and condition count very much so if you just bought a completely rehabbed property that just had a permitted remodel and new appliances you could probable figure almost zero for 3 to 5 years or more depending on the scope of the remodel.

You wrote $3600 for property taxes, I would not buy this property in this area if I have to pay this kind of property taxes as I would be looking for something that would rent for $1600 a month and maybe cost me $20k or $30k more to acquire, because the cost of cash on cash is relatively cheap in a 30 year mortgage!

Good luck,

             GR
5

Thanks for your reply GoldenRiver

But, I am still confused on how you are calculating the break up of the $600 debt service. You break the $600 debt service into two components

A: $314 positive cash flow
B: $286 conventional mortgage
multiplying 600 x .53 = 318 and 600 x 47 = 282 gets close to your values, but not exact.

Would you please show me how these values are calculated? Thats all I need clarification, and the rest I am good on for now.

You established:
Interest- 5.75%
Term- 30 years
Monthly Payment- $600

6

Hi,

$49,000
5.750%
30 years
$286 per month

$600 Debt Service and Positive Cash Flow
Minus
$286 Payment $49k @ 5.750% - 30 years
Equals
$314 Positive Cash Flow

                  GR
7

Thanks for the clarification, I think I am seeing it more clearly now. I made an excel file real quick. Hopefully it is correct and shows I understand it now, if not please let me know if I made a mistake.

Thank you very much for your time and feedback I really appreciate it.

http://img401.imageshack.us/img401/361/exampleqn.jpg

8

GR is tough to argue with, but I would guess in a situation like that the mortgage would actually be for $69,000 or so, versus $49,000.

Doing a 65% cash out refi of the $110,000 ARV would give a mortgage of $71,500, or $2,500 more than the investor is cash “in” the property. At that amount, the mortgage is $384 leaving cash flow of $216 a month… not bad for a property you got paid at refi to own. Rinse and repeat!

9

Wait. Why would a bank let you refi a house for $110,000 if you just bought it for $69,000?

10

When it comes to commercial property, I would go for a self-storage facility. The maintenance is very low due to the inherent simplicity of design. Cash-flow is almost never a problem.

11

SamanthaM,

At a high level your initial post is correct. There is a problem as you highlighted. It just depends on how you set up the assumptions.

As you have seen with later replies, people would either buy for less or do other things to change the results. In effect, there are only so many variables in the equation so you need to change the value of the variables to make it work.

Some investors do over leverage their property and they get caught out when something unexpected happens.

12

Very true. A guy I work with bought several properties with interest only loans. He got caught with his pants down when the market crashed.

13

Samantha,

As far as my rentals go your taxes and insurance are very high. I average between $2500-$3000 on those two items combined, or $250. I have my properties on 15 year amortizations, so am getting quick money through amortization.

Here’s my last deal:

$90k purchase price - $10k in repairs out of picket. $72k loan at 6.25%. Payment with escrow is $740. Rent is $1040. I manage it myself including maintenance, so my actual return is somewhat lower than indicated. I just crpeted it, resided it, painted everything, and went all the way through it, so my first few years maintenance will be much lower than you indicated. Eventually it will catch up though, I basically front loaded the maintenance into the purchase price. Still, I am cash flowing $300/month plus $219/month principal minus maintenance. Soon I will refi the place and get a lower interest rate and some cash back, but I have to season it for six months. Remember that as you go the interest expense goes down and the rent goes up, so the cash flow goes up as time goes.

Please note that this is by no means a great deal. I consider it solid for a SFH in my rapidly appreciating area. ARV is 130k.