If you guys had $200k in cash to invest, how would you do it — to maximize cashflow and minimize risk? I don’t mind risk though – so here’s what I’m thinking…
… I can start out paying cash IN FULL for some rougher, inner city houses at auction or via other methods [foreclosure, REO purchases, whatever] for well under fair market value - fix them up & rent them out as section 8 housing or std rental houses. If I can get a $20k house fixed up for $5k, and rent it out for $600 a month, that’s not a bad deal at all. And I’d have NO mortage payments!!! After spending all $200k on these houses, and renting them out one by one so they’re all cashflowing, then I can start putting less down on other houses … either slightly better ones, or owner financed/bank financed houses. And I’d probably be cashflowing [gross] $4800 a month / $57600 a year - off the $200k I spent.
What do you guys think?
I have been looking at a similar plan. I was thinking to buy for cash and once they are rented and you are seeing the real numbers and know what they are cashflowing, then turn around and start to pull equity out to the level of cash flow you like you best to use the equity to expand into more. This lets you absorb the learning curve and mistakes before you are starting to put on the added burden of mortgages.
Sounds good but where can you buy a house for $20K and get $600 a month in rent? Aside from the numbers don’t forget that renting property tends to bring its own headaches - those who won’t pay, those who won’t pay on time, vacancies, repairs, etc. A rule of thumb is that you should figure that 25% of the time a given unit will be vacant.
If you have $25,000 in each house and $200K to spend, you can buy 8 houses. With gross rents of $600 each, your positive cash flow would be about $300 each or $2,400 per month.
That’s about a 14.4% cash on cash return. Instead of doing that, I’d keep the cash and buy every property with none of your own money. If you can buy properties at a 30% discount to market (which it sounds like you can), then a small local bank will loan you 100%. Under these conditions, you would have a positive cash flow of about $117 each per month. You could buy an unlimited number of properties and you would still have your $200K plus interest. The bank will LOVE that $200K in the bank plus your 30% minimum equity for each property. They will open the spigot and it will keep flowing!
That’s my opinion, although I’m sure others will disagree.