Pay $0 down for cash flow house rental - Posted by VfromCali


#1

Posted by wpage on August 15, 2010 at 12:23:26:

Hi Chris I agree you need money in this business but your theory that the rent must be 2% of purchase price is way off base. Your theory is that rental on a $200,000. purchase should be $4000.00 per month. I have been in this business for 36 years and I can tell you that is not going to happen. Even $1600. on an $80,000. purchase (as in this example) isn’t going to happen. By the way, I have not walked away from any property in 36 years. However, I have made a few months mortgage payments from my pocket.


#2

Pay $0 down for cash flow house rental - Posted by VfromCali

Posted by VfromCali on August 04, 2010 at 01:22:48:

I am planning on getting my down payment money from a loan.
Their are homes here for $80k and the going rent on them are $1200.
I dont want to use any of my money, so I want to get a loan for the down payment… even if its a 5 year loan I would still be cash flowing.
$400 – 30 year loan @ 6% interest
$150 – tax/ins
$320 – 5 year loan for the down payment @ 10% interest
= $870/month out of pocket… if rented for $1200
cash flow about $330/month

Does that sound like a good plan?
Thanks


#3

Re: Pay $0 down for cash flow house rental - Posted by christopher w

Posted by christopher w on August 04, 2010 at 10:06:18:

Based on a couple of rules that seem to be very common among investors this deal looks like a dog.

1.The “2%” rule. Based on this rule your rent should be at least 2% of your sales price. Which means at 80K your rent should be $1,600. This means one of two things. Either your rent is too cheap or your purchase price is too high. Or possibly a combination of both.

  1. The “50%” rule. Based on this rule your expenses for the property NOT including PITI are around 50% of your total rent. In this case that would be $600 for expenses plus $870 for debt service. If the 50% rule runs true on this property you are looking at a monthly loss of $270 a month.

If you were able to raise the rents to the $1600 this property would cash flow nicely after everything.


#4

Re: Pay $0 down for cash flow house rental - Posted by James

Posted by James on August 04, 2010 at 09:45:22:

lots of plans sound good on paper. However, the banks will want to see you have skin in the game. Although, you may have to show that you have the funds for downpayment, you still may be able to use a loan for down payment. However, it may costs you more in the long run.


#5

Re: Pay $0 down for cash flow house rental - Posted by wpage

Posted by wpage on August 04, 2010 at 14:13:59:

Christopher I think your rule of thumb of 2% is ridiculous.I don’t know where you get that from but I have paid $150,000. for a home and rented for $1200. and still made a small amount of money. The rule to follow is whether it cash flows after all expenses are included. Nothing more, nothing less.


#6

Re: Pay $0 down for cash flow house rental - Posted by Chris

Posted by Chris on August 14, 2010 at 10:49:02:

Come on, you need money in the LL business. It starts with thousands to close escrow and pay the hazard insurance. And in the real world, you need to repair that pool, replace the HWH, face months’ vacancy and then pay 10% to a PM company. *** After taxes, is where you need to do the math.

Such a PLAN is just childish wishful thinking. An equity stake is needed. Here one sees, why. Guys like you just walk away…


#7

Re: Pay $0 down for cash flow house rental - Posted by dave

Posted by dave on August 05, 2010 at 16:03:08:

The amount of ROI is a subject that can be argued all day long. The risk associated with debt service and the cash flow from deals are not to be tied to a rule of thumb for the following reasons. The many variables of quality of location as well as quality of tenant are just a few factors that can greatly affect ROI. For example a junker duplex in Dayton might cost 10k and rents could be 1000 a month and you would say your getting 120% return. The risk is high and probably one of your units will get trashed and wind up costing you 3k+ to do a turn over. That said the duplex in Dayton may never appreciate as it could sit in a questionable neighborhood. Compare this to a high end luxury condo you pay 500k for on the beach and it only generates 30k a year in rents for a paltry 6% return. The condo might not seem like a bad investment if over the next 10 years it appreciates 150% in value. Some might say invest if its infinite return-- if you have zero money down. The truth is this risk and your ability to manage this investment has to be factored. If your managing a management company or doing it yourself either way its time. Time that can be spent on other deals better or potentially worse is another factor. Too much leverage as we have seen in the sub prime blow up is not good. Be careful with the amount of leverage you put into a deal unless it has a fairly quick exit strategy. There is nothing worse to sit and manage an asset that doesn’t cash flow for the next 10 years or how ever long it take to rid yourself of it.
Having experience with mid size apt buildings down to duplexes my idea is I want rents to pay off building in less then 3 years. I also don’t invest in ghettos.
If I bought a duplex for 80k, The duplex would need to throw off 27k a year in rents for me to have interest. That is about 1111 a month in rent per side.
You can find these deals they exist and when you get a distressed property like this in a decent neighborhood they should cash flow quite well and give you some appreciation if you plan to hold.
In markets like Calif where these numbers are difficult to find your financing better be cheap if you plan to hold so you don’t lose the property to being over leveraged. Lots of other variables are involved too when calculating ROI and what is a good deal. Owner financing could be a deal maker if you don’t have a source of capital. structuring deals with pay offs in the future and no or low interest for 1 to 3 years or owner staying in the deal for a %.
Rules of thumb reduces your ability to be creative and think outside the box.


#8

Re: Pay $0 down for cash flow house rental - Posted by MrSmartmoney

Posted by MrSmartmoney on August 31, 2010 at 07:57:23:

I must concur with Wpage- 2% seems ultra conservative. Its true that you should plan for the worst. BUT if it cashflows it cashflows. If you run into problems because of lack of reserves, or poor tenants thats another problem.