Here are the numbers:
List price $250K
Gross monthly income $1975
Operating expenses $1090 (50% of GMI + water)
7.125%, 30 year fixed, 20% down…monthly payment of $1700 (mortgage, interest, insurance)
propertymanager, I realize this would be negative cash flow of $815 and I would never consider purchasing it…it’s simply a realistic example of what’s common in the area I would look to invest.
Question is, how does one ever find a property that would satisfy a $100/month cash flow? In the example above, even if one were to put down 50%, the numbers still wouldn’t work!
Is it that people selling these types of units are expecting too much?
Any properties I see in my area would never come close to positive cash flow when running the numbers…unless the seller came down significantly in price or the down payment on the property is enormous…or in most cases, both scenarios would have to be in play.
And even with a large down payment, the return on putting that capital towards the property would be minimal.
What am I missing?
Is it that finding properties where the numbers work extremely rare?
Any advice/guidance/comments would be appreciated.
Maybe you can make some numbers work on mobile homes in your area? Of course you have the lot rent to deal with. Have you looked at buying mobile home park communities? It seems they can cashflow even in highpriced areas. or you can the “lonnie scruggs” method. Just some ideas for you to cashflow.
The majority of rental properties purchased in every market are bought at retail. I have yet to see a single property that bought at retail will cash flow. That is exactly why the majority of new landlords fail and why there is so much turn-over in rentals.
In fact, of all the dozens of rentals I own, I believe that only one of these were held by the previous owner for more than 4 years. The fact is that in all markets, the vast majority pay too much and then fail.
The “secret” to being successful with rentals is that you must buy properties at a big discount to market value. In my experience, to do this you must find desperate sellers (not motivated sellers). Almost everyone that is selling their house is motivated to sell it. However, wanting to sell and being desperate to sell are two completely different things.
So, the question is how do you find desperate sellers? In my opinion, you MUST get out of the house and meet people! Join your REIA and make friends with the SUCCESSFUL investors in your area. One of my biggest sources of excellent deals is desperate landlords. With many desperate landlords they are not only broke but also EXTREMELY stressed by nightmare tenants. (If they didn’t study cash flow issues, they probably didn’t study landlord-tenant issues either). I’ve had landlords tell me that they couldn’t sleep at night and were physically sick due to the stress. People getting a divorce, children fighting over a parent’s estate, people with two houses, and failed flippers can also be an excellent source of desperate sellers. While most banks are not “desperate”, they can become quite motivated if they have too many bad loans and don’t want to look bad to the bank examiner.
What have you been doing to find desperate sellers?
Thanks for your input Mike.
I am not doing anything at all at this current time to find “desperate” sellers.
I’m at the very initial stages of basic research and quickly realized the #'s don’t add up unless some unexpected circumstances would present themselves.
I agree with everything you say…of course a seller is motivated, that’s why they’re selling after all! And what is needed is someone who is desperate, someone who just can’t deal with the pain and suffering anymore. And finding these people takes work.
Again, my surprise was the enormous valley that existed between “retail” prices and a price that would satisfy calculations in order to make some $$$.
Good advice on finding desperate sellers although the term sure seems harsh. However, the concept of paying the right price is sound. Also, getting out and meeting sellers is indeed the key. Develop a quick ability to run through numbers in your mind regarding payments, expenses and income to get a gut feel of what price makes the property work for you. Meet the seller personally when you tour the property and explain that you cannot afford to pay more than what you can afford based on cash flow. It’s not your fault, nor the seller’s, that you would buy the property if he can sell it to you for $####. Be polite and humble. Acting wealthy and like a successful investor does not get you seller sympathy. The seller should feel good about what he is doing to help him decide to sell to you, even if the price is lower than they expected to accept.