Cash Flow Landlords
I have been reading for a long time all the different ways to go in REI. After much consideration I would really like to buy and hold properties and create a very large cash flow. I have purchased my first sfr with a interest only loan which will allow me to cash flow it very well. I am thinking I should just buy a ton of properties with interest only loans(the first ten years is interest only) and simple math says I could have a huge monthly cash flow which is what I am looking for. but my question is what would I do after the ten years is over? the cash flow would drop a ton if I had to re finance to a 30 year fixed. Or would I just re finance in to another intrerest only loan? I'm wondering how many people out there have been successful at having a very nice cash flow (lets say in the 10k or more a month range) and what you did to accomplish that? any and all advice would be appreciated, thanks.
I think you are getting ahead of yourself, you just got your first and you're trying to figure out how to cash flow 10k per month, wow. One deal at a time until you get to where you want to be.
Realistically, jumping to that kind of cash flow isn't going to happen in a hurry. Unless you live in a very large market you have to move slow or risk driving the prices up and ruining it for all investors. The bank is likely to shut off the loans at some point when you reach an unacceptable debt ratio. Most only count 75% of your rental income so eventually you will run out of room.
Using a interest only loan when flipping would be great, but when your planning to hold it is a huge mistake in my opinion, interest rates will go up, property prices will come down accordingly and you could easily end up upsidedown and unable to get new financing when you need it. Using an interest only could be ok if you schedule it to make additional payments towards the pricipal, that would give you some flexibility if things go bad. Personally I plan to pay off in 10 years but use 15 year notes to give myself wiggle room.
Generally speaking, I think most long term holders view it as an equity building endeavor, and then for the cash flow down the road. Basically a retirement plan, not a plan to make spendable income right away.
Thanks for the opinion. I dont think I am getting ahead myself but I AM planning ahead. the reason I ask about long term is so I know how to invest today. I dont want to go a certain way and in ten years say "oops, I shouldnt of done it that way". so Im looking for people who are already years in to investing so they can tell me there results. and it would be a long time before I ran out of "wiggle room" for debt to income ratio. with interest only loans I can qualify for a lot more loans than if I went with a fixed rate. And I already talked with one lender who will give up to 19 purchases with them. on this first deal alone I will positive cash flow 300 dollars. 300 dollars x 19 different properties =5700 a month cash flow(and yes I figured in maint,mgmt, vac rate etc etc). so I know it can be done on paper, but what I am wondering if I am missing something. and I dont think debt to income ratio will be a problem(not according to my broker anyway). the loan also has a cap of 5.5 percent if rates do go up in the first ten years. and I would make the interest only payment only until I had a good cash flow and then I would pay more each month. thank you very much for the advice, I would really like to hear more. again so I dont get to far and realize this is not the way I wanted to go in rei.
dlitedan,
I'm starting to do the same thing you are. I previously had purchased on 30 year fixed because I wanted a set rate until I met my new mortgage broker. She is big on IO loans and went through the trouble to show me how to use them properly. I just purchased my first property using one (flat 3.0%) and it is cash flowing about 600/month after PITI+maint+vac. I'm now looking at two fourplexes that I could purchase at a good price. Seems like the way to go as long as you don't siphon off the capital you are raising. Otherwise, you could very easily become up-side down in the property. I personally intend to put 100% of the cash flow toward paying off the principal unless needed for repairs, etc.
-Chris
I agreee taht you dont want to eat away at your capital but explain this. The area I am investing in has had a steady increase in real estate prices at 6 percent a year. now lets assume that in ten years I never pay anything but interest. wont the property be worth a whole lot more in ten years? plus all that cash flow I put in my pocket will total almost a million dollars(assuming I buy enough properties to cash flow 10k a month). and please dont tell me these stories about how the real estate prices are going to take a huge drop. granted these prices will level off and maybe dip a bit but lets get real, they are not going to plumit and go way down like all these people are saying. history shows that houses only get more expensive and worth more. and history also shows that people get raises and paid more. so theres no way my 100k house is going to be worth 50 k ina few years and my boss is going to say you will be taking a 20 k a year pay cut. these people that talk like this remind me of all those jokers that said y2k was going to destroy the world. save your stories for the weekly world news.
I'm in a similar boat, buying income properties for cash flow. I'm purchasing on 30-year fixed. The equity build up is key for me. Remember, before WWII, you didn't have loan amortization, all that was offered was interest only loans. They are not some new financing tool. They used to be the only thing available. Although, interest only is nice for saving for reserves and principal at the same time. I just went through a lender that said If I had over 10 income properties, they couldn't finance me through their residential division. But, sounds like your broker has a bank that is willing to go higher. Also, the 75% rent thing doesn't mean you can't keep buying income properties. Your allowed to take 75% gross from what I remember, not net. So that is saying maintenance, taxes, interest, reserves, and any other expense are only 25% of your gross income, pretty low expense ratio. I'd take it any day.
I don't see many hang ups for holding long-term. Alot of people here want to make quick money, which isn't very easy in buy and hold income properties
Good Luck!
Quote:On 2004-05-30 23:43, dlitedan wrote: please dont tell me these stories about how the real estate prices are going to take a huge drop.
I'm not old enough to remember the early 80's, but I believe a lot of people bought the farm because of this thinking. I suppose as long as your crystal ball's prediction is correct, you should have no problem in the future.
-Chris
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Live long and be profitable![ Edited by c-brainard on Date 05/31/2004 ]
ok. and I suppose these homes are still in the dip? Thats what I thought. point is prices may dip but they cant stay that way. its called supply and demand. and unless people stop procreating(which now with the invention of gay marriage its sure to at least slow down) then there will always be a need for homes. even if not to own but to rent. and thats funny about the cryastal ball thing since I am not the one predicting the future, I'm actually getting down on the ones that think they can.
Are wages rising at a 6% clip in your area too? If not, then the housing prices are a reflection of low interest rates. Rates go up, prices come down. A 100k house at 5% becomes a 81k house at 7%, and a 73k house at 8%. I have no idea what the rates will do, but it's generally accepted that they will go up, I certainly hope that they don't hit 7%, but I need to plan for that and even higher in case they do. You are correct that time will definately play in your favor, but you have to make it through the bad times. The market historically goes up too, and is a vital part of any well balanced portfolio, but many have also been crushed by it.
I have had rentals since 1992, and come from an REI family, I do have years of experience. I'll grant that I am probably one of the most conservative people on this board, I have seen too many would be investors fail to be any other way, to be fair, I've also seen a town drunk turn into the wealthiest man in town.
Your posts are kind of throwing me off, you seem to really want the cash flow to be able to spend it, but you then say your debt to income can sustain 19 houses. That doesn't add up for me. makes me question the broker. I had a banker who gave me a 100% LTV credit line only to call me up 2 weeks later saying if I wouldn't agree to change it to 75% he would be fired. I didn't need the extra credit but figured I might need my banker again, so i did, and the call wasn't unexpected, i knew he shouldn't be able to make that deal.
To be successful in rentals you have to plan for the worst. What if you jump to 19 houses quickly and your cash reserves don't match your holdings? Maybe you have large cash reserves already, but I doubt it, or you wouldn't be so wrapped up in making liquid cash flow. So, you and your 19 houses get hit with a hail storm that ruins the roofs, in your inexperience you have actual value insurance instead of replacement cost because it was so much cheaper. Or, if you're in kansas you couldn't even get replacement cost insurance for roofing. So, 50k to get things fixed, no biggie, that's only 10 months worth of rent, except you can't get rent for them until they are fixed, and you don't have the money to fix them.[ Edited by mykle on Date 05/31/2004 ]
rmdane,
bankers here want to see your income tax returns, 75% of the your profit is what they allow. maybe it's different in different places.
dlitedan,
I know many people in this area who were buying rentals 10 to 15 years ago that even at todays high prices would only bring 60 to 70% of what they were paying then. Granted that is not a common situation, but it does happen, especially in smaller locations where one or two business coming or going has a great impact.[ Edited by mykle on Date 05/31/2004 ]
dlitedan,
I really think you need to listen to what's being said here. You're getting some very good advice from the other replies. I have roughly the same target cash flow as you, but your plan for getting there is very dangerous.
First of all, forget about appreciation. It's the icing on the cake. Even if you ignore the argument that your properties could go down in value (although they can), you should realize that your properties may not appreciate as fast or at all. There are tons of markets out there that see negligible appreciation. And some of the largest markets in the country have seen slumps of as much as 10 years, where property values have decreased by as much as 20%. So forget about appreciation and don't include it in any plans or calculations that you do.
As for the mortgage, if you're going to hold for a long time, and do not plan on putting every penny of cash flow towards paying off the principle (like c-brainard above), 30yr fixed is the most logical mortgage structure. IO mortgages create an illusion of good cash flow. What are you going to do in 10 years when the cash low dries up? Will you just sell off the property or do you think that by then you will have purchased so many new IO properties that you'll be able to forget about the cash flow on this one?
Here's how I do it. I look at every property from the standpoint of a 30yr fixed mortgage at 7.5%. If the cash flow under these conditions is above my accepted minimum, then I go for it. I know I'll get a better rate than 7.5%. But I want to see acceptable cash flow under less than optimal circumstances. This way, when I actually do the deal, it'll cash flow even better.
Find the middle ground between challenging yourself to achieve more and doing it carefully enough so that you don't get burned and loose it all. You've already taken a big step in the right direction just by asking others for advice.
Good luck.
Now thats the sort of advice I was looking for. all very good, thank you. Yes I have limited reserves. I was going to pay interest only on the loans and save every penny to build up a safe reserve and then I would start paying towards principal. And no I dont think I will aquire 19 properties anytime soon. I'm not sure how long it will take. my broker says after 90 days of owning one I could start buying sfr 4 at a time every 90 days. after I get a good cash flow and experience I plan on buying multi units. thanks again for all the comments, good stuff.