NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE'S EQUITY? - Posted by Rod

Posted by Sean on May 02, 1999 at 10:50:37:

…have to be perfect in order to have a lease-option done. There’s an article here about that very subject.

check out http://www.creonline.com/art-105.htm

As far as your original question, the answer is 2-fold:

  1. Yes, it’s ok to buy a property with negative cash flow as long as you can handle the cash outflow.
  2. The reason most business fail is not lack of profitability but cash flow problems. I would heavily caution you to be careful before you assume you can handle a $150/mo outflow.

NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE’S EQUITY? - Posted by Rod

Posted by Rod on April 30, 1999 at 11:22:43:

I have a house under contract for $60,000, currently rented for $550 + all utilities. The comps are 85-95K in the area. So I will go in with equity to use as a line of credit to buy other properties. However the best loan I can get with 100% financing is 10% interest and 6 points putting my notes around $700 monthly (PITI). This leave $150.00 out of pocket each month. I can afford that, but is the negative cash worth it?

I have 30 days to close, are better rates out there? Should I flip it or take that sweet equity??

Thanks,
Rod

THANKS FOR ALL THE INFO!!! - Posted by Rod

Posted by Rod on May 04, 1999 at 07:01:00:

Thanks to everyone that responded. I will really think this over now. This site is like being apart of a huge partnership! Thanks agains guys!!

Rod

Re: NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE’S EQUITY? - Posted by Bud Branstetter

Posted by Bud Branstetter on April 30, 1999 at 14:56:59:

With 15K of fix up your after repaired cost is 75K. If the value were only 85K then no way. If the FMV was truly 95K you would still have very little room to flip if any. The rehabber would probably want to make 20K profit. Would you want to make less if you rehabbed it? You identify 15K in repairs. WHAT? Carpet and paint don’t cost that. Replace AC? Foundation problems? Roof? New kitchen? Give us a list.

Is there less expensive money? Depends on your credit and ratios. Why not 95% financing?

Re: NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE’S EQUITY? - Posted by Bham

Posted by Bham on April 30, 1999 at 14:19:00:

I’d say hell no. If this is your first deal, negative cash flow will sap your enthusiasm real quick. My advice is find something else, something that has positive cash flow after ALL expenses. Don’t make the mistake of thinking this property is “too good to pass up.” You’ll find positive cash flow properties if you keep looking.

Only way I’d do this is if I thought I could flip it QUICK and make a quick 10K, and then I’d do it by tying it up with an option.

My 2 cents

Re: NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE’S EQUITY? - Posted by JohnBoy

Posted by JohnBoy on April 30, 1999 at 12:05:10:

Here’s the problem you may have with trying to take out the extra equity after you close. Most lenders will only allow you to use 75% of the income to qualify for a loan on the property. If your already at a negative cash flow your going to have a difficult time finding a lender that will let you borrow additional funds against that property. The only other way that might make this possible is if you have enough other income coming in from other sources including a job. They will take all of your income and deduct all of your expenses to figure what your debt ratio is. This new deal is already going to increase your over all debt ratio by the $150 negative and the bank will probably only allow 75% of the $550 as income, which will add another $137 to your debt ratio. $550 x 75% = $412.50. That’s the maximum the bank will allow as income from that property to qualify for an equity loan.

Can the renter afford to pay more each month on the property if you offered to lease/option it to them? Then you can boost up the monthly rent to show more income to the bank. Use two separate contracts on the l/o. One for the option and one for the lease. Then just show the bank the lease without the option contract to show your monthly rental income.

Is the tenant under a lease currently? If so, how much time is left on the lease? If the tenant can’t afford a higher payment then tell them you won’t be re-newing their lease when it expires. Then you can sell the house on a lease/option for a much higher rent and get $3k - $5k down as non-refundable option consideration with a preset purchase price at 5% - 10% above retail value.

You have a nice piece of equity to deal with here. So you need to figure out all your options if you can’t get the equity out. How long would it take you to resell at retail? Calculate all your carrying costs until the property re-sells and if everything pencils out for you and the $150 negative isn’t a problem then it might be worth going through with the deal. Just don’t have to count on getting that equity out right of way incase the property takes a while to sell and if your tenant has a lot of time left on their lease.

Things we need to know - Posted by Bud Branstetter

Posted by Bud Branstetter on April 30, 1999 at 11:47:08:

Does the tenant have a lease or are they on a month to month?

How much fix up is need to sell at top of the market? Paint? carpet? etc?

Re: Things we need to know - Posted by Rod

Posted by Rod on April 30, 1999 at 11:50:04:

The Tenant is month to month. House will need about 15K to fix up for market. Are you suggesting putting the tenants out and selling at FMV?

Re: Things we need to know - Posted by JohnBoy

Posted by JohnBoy on April 30, 1999 at 12:19:01:

If you can’t get the equity out then how would you cover the cost to fix up the property? Talk to the tenants and see if they would be interested in buying the property. See if they can handle a payment of $750 - $850 a month. If they’re interested, then sell it to them on a contract or a l/o. Preferrable a l/o. See if they can come up with any money to put down. If they’re not interested or can’t afford the higher payment, then yes, put them out. Give them their 30 day notice to vacate. Most states require a 30 day notice to vacate to be issued on or before the first of the month to get them out by the first of the following month. In this case that would mean giving them their 30 day notice today to get them out by June 1st. If you wait until after the 1st of May to give them notice then they will have until July 1st to vacate. You might want to wait until after the 1st of the month and get the $550 rent to buy yourself an extra month to find another tenant/buyer that can afford to pay more. By offering terms like a l/o or contract for deed you might be able to get someone willing to take the property in it’s current condition without you having to put the $15k into to get FMV. Sell on a l/o for $85k - 90k as is. There is a lot of people out there that would be willing to jump on something like this because they can’t get a bank loan and your willing to carry them.

Re: Owner has the one next door also - Posted by Rod

Posted by Rod on April 30, 1999 at 12:34:21:

The one next door is also rented at the same amount and selling for the $60K (72K asking price). These folks plan on moving as soon as it is sold. It will probably need more work possibly around 25K. Has some water damage from previous bad roof. Does the house need to be perfect for a lease/option?