living solely on rental income

[v_1dlivi]

And because I was curious. If instead of adding a dollar to each month (ie. 1,368, then 1,369, then 1,370, etc.) If you find what the highest principal addition would be ($303) and start using that from day one (ie. instead of $1,500 + principal you pay $1,800 from month one) you only save 6months of payments. Ending at month 113. But that is still an addition $10,000 saved.

I Love playing with numbers.

David

[aak5454]

paying principle is a waste off time and kills cash flow. by default, your rate of return is the interest rate on the loan minus your net income tax rate. Most of my investment loan are under 7%. This is cheap money.

moreover, the equity is locked up on a “saving act” with a one-way door. sure, you get the money out…for a fee…

[steve67]

Hey here is a novel idea…Why not finance the properties, rehab them and then refi with a power arm of lets say 1.9%. If you do 10 houses this way and have a positive cash flow of $5,000 per month the next one you buy you could pay off fairly quickly. The more you do this way the more it grows and soon it starts to grow exponentially.
I have a friend that has a $250,000 line of credit, he will buy a house, fix it, rent it and then over the next few months pay it off. He is basically moving money around.

[carlosgut]

Great post david, Im sure your numbers are correct. Thanks for doing the math!

[propertymanager]

Whoa! This is getting to be a complex thread - since there are two or three topics running simultaneously!

This topic is entitled “living solely on rental income”. The only way to live solely on rental income is to have cash flow. Without cash flow, you’re out of business. REO - I must confess that I don’t understand your concept that you “really do not care if I win loose or draw on some properties”. That doesn’t make sense. I currently have about 25 rentals (not six) and I do absolutely care that I “win” on every one. I certainly do understand that if you have a lot of properties, the profits on some properties can cover the losses on others, but why have losers if you don’t have to? Furthermore, if you have a great monthly cash flow, why mortgage your properties to the hilt in order to pull out cash? That doesn’t make sense to me.

I also don’t understand the statement by AAK5454 that “paying principle is a waste of time”. Another word for “principle” is “equity”. Letting the tenants pay down the principle is exactly the mechanism to build wealth. Over a period of time as the principle is paid down to zero, your cash flow dramatically increases and the number of properties you need to hold to generate a given income decreases. That isn’t a waste of time, it’s a very powerful tool to achieving wealth.

My business plan calls for acquiring 50 rentals with an average positive cash flow of $200 per rental. This will generate a positive cash flow of $10,000 per month and over $1,000,000 in equity (with no appreciation or principle paydown). Now, in 20 years, when all the properties are paid off, the monthly cash flow will be more than $30,000 per month and the equity will be well over $3,000,000 with absolutely no appreciation. IF there is appreciation, then that’s just icing on the cake. In addition, with my conservative plan of keeping at least 30% equity in the properties and only buying properties with significant cash flow, I have built-in insurance against housing properties deflating and any emergencies that may arise.

So, my opinion is to be conservative and survive in the long term. Insist on positive cash flow AND equity with every property. Keep some equity in your properties and paydown the principle. Stay away from risky interest-only loans and only use ARMs that will cash flow at the cap.

Mike

[reoconsultants]

REO - I must confess that I don’t understand your concept that you “really do not care if I win loose or draw on some properties”. That doesn’t make sense. I currently have about 25 rentals (not six) and I do absolutely care that I “win” on every one. I certainly do understand that if you have a lot of properties, the profits on some properties can cover the losses on others, but why have losers if you don’t have to? Furthermore, if you have a great monthly cash flow, why mortgage your properties to the hilt in order to pull out cash? That doesn’t make sense to me.

Some parts of Denver are going up by 8-12% per year so on 250k call it 15k per year to be on the low side why should I care about cash flow or break even?

So that means in three years I can sell one of my houses and buy one of yours free and clear with just the equity!

[propertymanager]

The reason to care about positive cash flow is that it pays the bills and builds wealth in the absence of appreciation. When you are carrying a negative cash flow and betting on appreciation, any decrease in the value of homes (bubble deflating/bursting or simply oversupply) means that you’re losing money each and every month. How many investments like that can a person afford?

Here in my area of Ohio, we do not have a bubble. However, expensive houses have been overbuilt and now are nearly impossible to sell at anything close to the market value of a couple of years ago. In areas where there is a bubble, there could be (will be) a depreciation of house prices that will last for many years.

Of course, the housing market could keep appreciating at double digits forever and then I’d be the fool for not betting on inflation.

Mike

[reoconsultants]

Mike look at it like this! if I needed to sell that property which I might start selling some soon here would I or would I not be able to bring That cash back in cover any negative!!!

Now lets look at the worst case scenario I open the Denver Post and the headline Reads Hey Tenants You only have to pay 50% of your rent for the rest of your life YEAH!! (I see that happening)

So that means I would only get $675 a month for that house Then I would have a negative cash flow of $538.54 per month plus maintenance so lets say home repairs and parts TRIPLE and it now cost’s me 200 per month (yeah right) so that is $738.00 now Divide So that means that 46k will cover me for 62 months just over 5 years!

So you are right maybe I should not have done that!!!

Then lets say that the dreaded bubble Bursts (Reminds me of chicken little THE SKY IS FALLING!!! YEAH WHATEVER) and that house Goes down in value and I am forced by a heard of giraffes with bad breath and rifles to sell everything 20% below(which also just might happen). so the value now is $169,900 on this house so 20% is $33,980.00-46,000=$12,020.00 So lets say that the giraffes make me give 50% to the zebra fund I still made $6,000.00 …

Sorry I know that sounded a little crazy but so does the bubble totally bursting!!!

[propertymanager]

REO,

Everything you said was true. You could use that $46k to cover your losses for a long time IF you kept that money (and didn’t spend it). If you put that money into a savings or money market account, you’ve kept the same safety net that I did by leaving equity in the property. However, MOST people that pull out that cash will spend it and if it is spent on a non-liquid or depreciating asset, that person would be in deep problem with any depreciation in housing prices.

My point was (especially for newbies), that you need to keep a reserve. Having that reserve (either in cash or in equity) will save your business when times get tough. I think that is something that we can both agree on!

Mike

[reoconsultants]

I am forced by a heard of giraffes with bad breath and rifles to sell everything

NOT EVERYTHING WAS TRUE!!!LOL

I have seen investors pull cash buy cars and toys and lose there A@@!!!

Take this advice DO NOT SPEND THE MONEY IF YOU ARE NOT GOOD WITH MONEY THIS IS NOT A GOOD THING FOR YOU TO DO AND TAKE PROPERTY MANAGERS ADVICE LEAVE IT THERE!

on the other hand if you can pull it out at 8-12% and use it to make 15-20% take it and run with it!!!

this turned out to have a great point thank you propertymanager!!

[movistar]

@reoconsultants

Wow now this is a fun post can I play PLEASE I will nice!

100% if we are talking about 100% finance and buying at 100% LTV good luck!!!

Here is a deal I did last week!

In Denver (If you want the address plese send a personal message)

            Appraised Value                      169,000.00
            Repairs needed                                  0.00
            my purcahse price                   122,500.00
            cash I brought to closing            1,421.56
           
            Check payable R.E.O. Consultants recived at closing
                                    [b]$46,039[/b]

       Monthly mortgage                          $1,125.00
       Monthly Rent (already rented)       $1,200.00

I pay water and Trash! so I am at a negative of $4.98 per month but I got $46,039.00 back at closing so divide 4.98 by 46,039.00 so that money will cover my negative cash flow for 9,244.77 months or the next 770.39 years after that I will need to raise the rent to cash flow!!LOL

lets run this another way to see how I could of cash flowed off this property

                           Appraised at    169,000
                           Purchase price 122,500
                           Repairs                    0
                           Cash to closing    1,421.56
                           cash back           12,700.00

Owner carry 20% and dismiss at closing $33,800 (give or take)

80% loan to value no Mortgage insurance mortgage of $135,200 or 899.49 per month! Rent $1,200.00

                        [b]CASH FLOW $300.51 minus trash and water
                                        so right around $250.00[/b]

Question what is more important CASH FLOW and equity or working capital? It all depends on where you want to be!

        TODAYS LESSON WAS BROUGHT TO YOU IN PART BY THE LETTER E AND THE NUMBER 13

Do you have property all over the US or just where you live? I live on the east coast in D.C. do you know of areas around here to buy positive cash flow houses?

[mike_hearne]

@Betty

Hey Property Manager (and others)—like the plan for the rentals; what do you consider to be the best money scenario for flipping (turn around in 90 days or less). In an ideal world, of course. Not having climbed out on that particular limb; is it hard to find a bank that will extend you enough credit? Is it just a matter of debt ratio and credit scores? This forum is great for information and everyone is very generous. Thanks

Betty,

 For properties you will sell in 90 days or less, I recommend using private lenders.  If you buy properties with enough equity (40% or more equity), you can use an individual's private money secured by a first mortgage and deed of trust.  Offer someone who is currently earning 3% on their CD/IRA a chance to earn 10% to 15% on that same money secured by high equity real estate, and you might be surprised how willing they are to work with you.  With private lenders, you can pay CASH as quickly as you can complete your due diligence.  This can be used for buy and hold properties, but you will have to refinance quickly.  In pre-foreclosures, you don't have to borrow enough to pay off a mortgage, just enough to cover your expenses and catch up on payments.  This also elminates the need for credit/job qualification.  Hope this helps.

Michael Hearne