Henry,
You’re certainly not saying that the only expenses are the condo fees and taxes…are you?
The property you mentioned certainly does not have positive cash flow if it is mortgaged. It might be a good deal if the owner sells it, but it is a TERRIBLE rental.
Mike
I just dont think some understand fully expenses. Just imagine you had no job and you had to count on your rental properties as your sole source as some on this board do. Now take every single thing even remotely related to operating your rental business and separate that from anything personal that has absolutely nothing to do with your rental business. Those are expenses to be included in your property expenses.
propertymanager:
What does all of this mean to those of us (me) who are cash-poor, and need to utilize a home equity loan to finance our first property - or take a 100% mortgage?
Is positive cash flow possible without having a large portion of the property paid for, thereby lowering the mortgage payment?
It seems that finding a rentable property that meets these criteria would be difficult, or impossible. Is it?
Right now I’m struggling with the decision to use my current home’s equity to make a purchase, or to wait until I have sufficient cash saved for the down payment.
Thanks,
Chris
Chris, it is a numbers game. The equation has two sides. Instead of putting more money down, find a property that you can buy cheap enough that after fix up it still cash flows. What I buy I call trash houses. I can buy a house that you can stand in the living room and count the stars. That house will be $50k below market price. I can put a new roof on a house for $3,000. Add that to normal fix up and I have $15,000 to fix up a house that is at a $50,000 discount. I don’t need any money down with that. What I do is I will take one major problem. I will take one problem like foundation, or roof, or HVAC, no more than one but that is usually all that is needed to get a huge discount. The last house I bought in December 2006 had a garage door that was off the track and the trees were grown up around it. I paid a garage door company $150 to re-hang the door and my son and I took a chain saw and whacked down the trees and paid a guy $60 to haul the limbs off and I got that one for $40,000 below market price.
ChrisABQ,
If you are cash poor, can you afford an “investment” that loses money each month? I am not cash poor, but I still can’t afford too many “investments” that lose money. Regardless of the ability to afford negative cash flow, why would I do it? The purpose of being in business is to MAKE MONEY, not lose money.
Yes, finding properties that will cash flow is difficult! If it were easy, everyone would do it. The reality is quite the opposite. I heard one guru say that 95% of the REI students will never even do a single deal. Of those that do, the vast majority will be out of business in a short period of time.
You can see evidence of this at REIA meetings and on these internet forums. Every few months, nearly all of the faces and names will change. An entire new group of newbies will be around and only a very few seasoned investors will still be present.
That’s just the reality of things.
Mike
Of course there are other expenses, but those are the major ones. Also I never said it was a good rental. Some people are in this business to buy properties as investments and in certain parts of the country like Boston, you’re never going to find a good rental unless you have a large down payment. Some people just go with the negative cash flow and make it back up on their taxes when they deduct the interest expense and take their 1/27.5 depreciation on the property.
property manager:
You said: “If you are cash poor, can you afford an “investment” that loses money each month? . . . The purpose of being in business is to MAKE MONEY, not lose money.”
Exactly the reason for my original question. No - I cannot afford an investment that loses money. Hearing that 45-50% of the gross rental income goes to expenses, and the rest is left over for paying the mortgage and (maybe) some profit is both eye-opening and discouraging. Although, I’d rather go into this knowing what I’m getting into rather that fooling myself into believing that every property is a good investment. Thanks for being honest.
So, all of that being said, I must go back to what I already knew, and that it that I must make my profit when I BUY my property, not through speculative market appreciation.
Chris
BINGO! If you follow that strategy, you will be one of the FEW that survives.
Good Luck,
Mike
Propertymanager,
Why do think that is? (That so many people don’t continue.)
Is it that they lose interest when they are not able to find the deals you seasoned investors talk about?
Is it a lack of knowledge and they make too many mistakes at the beginning and cannot recover?
To scared to take the first step?
Because they are expecting to get into a get rich quick (less than a year) business?
Is it because they came in only thinking that having knowledge of rehabbing and wholesaling is all they need and they having some business knowledge is not necessary?
Is it lack of funding?
I am a newbie and am courious why so many fail. And I don’t want to follow that path.
I am having a hard time here in York, PA without any local REI club to meet other investors. I have met a couple though and have been trying to work with and learn from them but I do not feel comfortable with them I sometimes feel like they are taking advatage of me because I don’t know everything they do.
Sorry to get off the initial cash flow subject that I started myself (thanks for all the input on that evveryone) but your last remark lead me to this post. I don’t want to fail so I want to know why people do.
My belief is they dont have a plan. They do initial research and are flooded with ideas from everyone and dont know which way to start? Rentals or flipping but how? Why do you want to do rentals or why do you want to flip properties? How are you going to go about doing this? You need a plan. Stick with the area you want to concentrate on in real estate investing and become an expert in that field. Make sure the properties make you money the day you buy them. Do you research. To answer your question why most fail is they fail to make a good plan, they hit a bump in the road and give up. Its much easier to just settle for a job. Its hard work but the payoff is phenomenol. Dont give up. Good luck.
i am loving this thread… been reading it every day that it’s been here… it’s helping me to stay motivated as i look for a MFH this year… thanks to all of you “seasoned” investors, i know what REALLY need to do, and that is WORK to find/make a REAL investment.
Bravo. People have written volumes on being successful - you summarized it all in 8 words. IMHO, that’s why 95%+ people are never going to be rich/wealthy.
Rick,
I agree with everything that dwj said. Those things are all part of it, especially the part about not having a plan. However, my opinion is that most people are looking to get rich but are too lazy to put in the WORK that is required. Is that too blunt? Sorry, there’s not even one politically correct bone in my body.
If you have been reading the recent threads on this website regarding expenses, you’ve seen a lot of people say “but it’s hard to find a property using these expense numbers in my market”. What they are really saying is that they want it to be easy. The truth is that there is NOTHING easy about running ANY business. I have owned and do own several businesses and I can tell you that being in business is a constant hassle. Once you get past the hobby phase, there is a hassle almost every day.
Because it is not easy to find a property that will actually cash flow, most new landlords simply buy a property at retail and delude themselves into thinking that they are making money. That is easy to do until your portfolio starts to grow. As you get more rentals, it becomes increasingly impossible to ignore the real expenses. For example, when you have one rental, most landlords do not include postage as an expense. Just yesterday, I put about $40 worth of stamps on bills that I sent out! When you have one rental, most people pretend that they don’t have any office expenses. It seems like I’m at Office Max every other day spending $50 or $60 on ink cartridges. When you have one rental, it may be years between evictions. I posted a three day notice and took the paperwork and a check to my lawyer just this morning.
In short, since the truth is unpleasant, most newbies simply ignore it and pretend that everything will be ok. When reality strikes, they’re out of business!
Perpetuating this entire myth are the gurus. I’m a big Robert Kyosaki fan. I enjoy his books and think that they are good from a philosophical standpoint. I’ve seen him on TV and in videos saying that getting rich is when you have enough passive income coming in that you never have to work again. I work hard, but I doubt if I work as hard as he does. For someone that proclaims that he doesn’t ever have to work again, he seems to be continuously working. He seems to always be speaking and promoting his products.
I attended a big REIA convention recently. I was riding in the elevator with a guru that proclaimed in his presentation that he was rich. In the elevator, someone asked him how he was doing. His reply was that he was worn out from being on the road all the time! Evidently, he is still working like a dog too.
In conclusion, my opinion is that most people are looking for a get-rich-quick scheme that does not exist. The truth is that they are not willing to do what it takes to succeed.
Mike
Good informative post Propertymanager…
You might want to use online bill pay to trim that $40 postage habit.
Will the equity that is being built by renting the property not offset the negative cashflow in the long run?
That would be a waste of time. If you can carry a properties negative cash flow until it accumulates considerable equity, why not just use that money as a down payment in the beginning? Your building equity with your own money, therefore profiting very little with just appreciation.
If you’ve got money to burn, there are more productive ways to handle it then slowing building equity in a property with negative cash flow. Just spend the money upfront and have a property that can support itself. Not only that, but you will have to eventually sell it at a price the average investor can cash flow, so you might not be building as much equity as you think.
Your better off taking a little more time and find a property with a lot of equity and that cash flows. Negative cash flow properties are for aggressive investors who don’t own a calculator and own properties for the sake of owning properties.
crod. With rental properties cash flow is king. If you arent getting it when you buy it then whats the sense? Right?
I still consider that guy is rich enough to quit working. It all depends on what level of life the guru wants to have. Is he content with just having 1 Ferrari or 50 Ferraris? When someone is so successful at Real Estate the next step i guess is doing infomercials and selling your books to millions for mass market profits. Bill Gates was the richest guy on earth and he still works, why? I guess most people can never stop working and be content with what they have. I was just thinking about what my future would be like if i was successful at flipping houses. Would i make a small fortune and go off to live on a nice beach house in south America with my supermodel wife and not work again(what would i do with my free time…)? I think that if I reached that level of success id still want to have a bigger house then my neighbor and still work at making more money to have a better life then the people around me.
life sucks sometimes < lol
I agree to some point. Inregards to the flipping. You can become rich by flipping but you wont become wealthy if all you do is flip. What will you do if you flip and retire? Where is themoney going to come from once you stop flipping?
I think that the reason that guys like Gates and others that are wealthy beyond anything we can dream still work is not that they are still chasing bigger and better. It is that there is an inherent urge or drive in them to continually improve and do better. It is not about the dollars, it is about winning. If you played sports well and then moved on in life, you probably felt the loss of having that challenge to win until you learned to channeled that into something else. Sitting on your butt in a big house and not doing anything may sound great, but in reality it will usually cause most doer kind of people to just get depressed.
My two cents,
DB
