No Money Down Deal, But No Cash Flow?
Hoping some of you can offer some insight. Have a chance to pick up a single family rental or 2, with $0 out of pocket, seller covers closing and down. Monthly cash flow is very little or none. Property would have instant 10% equity thanks to seller covering down, and increased rent next year would start to open up some monthly cash flow. Opinions please? My gut tells me to move forward, just looking for moral support I suppose. 
What exactly do you mean by "little to no cashflow"? Does your no cashflow cover payment, taxes, insurance, vacancy, maintenence, etc. or just your payment?
Either way, I see no deal here. 10% equity is nothing. If you had to sell, you'd eat up at least 20% equity to sell, so you're already 10% in the hole. No cashflow makes this a definite no deal.
Sorry. I know you wanted support, but better to here it now rather than after the purchase.
Roger
I have to agree, if you are just barely making payments, do not do the deal. Equity is nothing if you can't afford to pay for the repairs when someone leaves or a furnace goes out.
[addsig]
Thanks for the replies. My numbers put the cash flow at about $50 per month, that is after mortgage, insurance, taxes, maintence and property managers fee. The units are currently rented. Does this make any difference?
Good Day to you:
You are inheriting the rental contracts if they are in place, correct? When they expire, you can up your rent a few $$ to increase cash flow. Is the area appreciating? If so, and you have some reserves, you could hold for a year, increase rents 25 -50 which will bring your cash flow up to a more respectable level as well as your 10% equity is now 12 - 15% based on appreciation and loan pay down. It's kind of skinny, but if you have all your expenses accounted for, long term tenants, and some reserves, I say I'd go for it.
If you don't have the above requirements then try and sweeten the deal somehow, such as lower monthly pmts with a ballon pmt in 5 years, to increase your cash flow now, re-fi in 4.5 years and you're good to go.
Good luck and make $$$
Tom
One additional thing to consider is that you will get some tax benefits from the depreciation of the property. Typically, you can take 80% of the purchase price as the amount allocated to the house, with the remainder being allocated to the land. The current depreciation schedule is about 27 years, so you can divide 80% of the property's cost by 27 and deduct that amount from your job income for federal tax purposes. This should increase your net cash flow for the deal.
There are two things above that you never want to do.
Don't buy a bad deal, and hope it'll get better, either thru uping rents or appreciation. You make your money when you buy. Rent raises and appreciation may or may not happen. Relying on them is bad business, plain and simple.
Don't figure in tax write-offs in your cashflow numbers. Yes, if you own property, you get tax deductions, but this is simply icing on the cake. It does not translate into actual real cash, only cash does that. Also, any deprications must be recaptured at sale, so this "cashflow" must be recouped at some point. Best bet is don't figure it in at all.
Roger
Roger, since when does real estate depreciation not equal real cash flow? Just adjust your withholding for the IRS and as long as you have a job, you have an instant increase in your take home pay. As far as the recapture, you only have to worry about that if you cash out. If you have property appreciation, that will make up for the recapture. Also, if you refi to cash out or do a 1031 Exchange, you don't have this problem.
Joe,
since when does real estate depreciation not equal real cash flow?
Since depreciation doesn't actually give you $$$ in your pocket each month, it's not real cash, at least not in my eyes. As far as the J-O-B thing, most are trying to leave that word behind, and using it to "increase" your cashflow is a short-sighted solution to "fix" a bad deal ( not enough cashflow).
As far as the recapture, you only have to worry about that if you cash out
Since most get into real estate to make money, change that statement to WHEN you cash out, because it some point you will want to do so.
f you have property appreciation, that will make up for the recapture
To an extent, maybe, BUT you have to pay 25% tax to depreciation recapture, and 15% to any appreciation that you add to the sale price, so your appreciation will have to be high to offset recapture.
f you refi to cash out or do a 1031 Exchange, you don't have this problem
Refinancing to cashout could compound the problem because if you needed to sell, then you may have to pay off more than your tax basis, creating a situation where you'll show a paper profit (and owing tax), but actually make nothing because of the loan payoff, giving you a real out-of-pocket cash LOSS.
A 1031 exchange is good if you are "upsizing" your rental property, but there is no "cashflow" for doing a 1031. It also only delays all of the above.
Tax depreciation is not a bad thing. It's just not something that should be included in your judgement of a good deal or not. The deal must be able to make you money every month on it's own, otherwise it will be a money drain, sucking it out of you little by little, as all those repairs start up.
I've seen my share of "tax-write offs" investors go belly-up because they couldn't keep it together when the times got rough.
Roger
Just read what you said in your first post... My gut tells me to move forward.... Hmmm, go by that, your gut saves ya... Moving On...
A month ago I had a simular deal on the table. $50 dollars a month is equal to no cash flow. 10% equity is nothing. You figure if you have to list with a real estate agent they want a minimum 6% commision. I would have the seller lower the price of the property. Cash flow is king, remember you are investing to produce spendable income. Appreication and Tax beneifits are secondary objectives.
You are talking about 100% leverage creating 0-50.00 per month cash flow per month on an SFR, correct? Coupla questions. What term are we talking, 30 year fixed mortgage? If this is true, absolutely positively no way! 10 year mortgage? maybe. Can you afford the vacancy? 1 month vacancy = 1 entire year cashflow. Next query is How long will it be this skinny of a deal? Is this all one mortgage, or is there say like a 3 year 2nd? That could free up some cashflow in the future. Are you a super salesman? You could get to the top end of the rental scale and open up some cashlow for yourself there, but you better be darn sharp at closing renters. SFR's are by far the easiest to rent, but by your numbers, just from the basic post you made, the seller is coming out on top here. Where's the factor that will make you money? Do you want to invest your time, effort and money for nothing? Where is the upside? Answer those and we can go from there. BTW, most beginning investors, myself included, casually dismiss deferred maintenance. If you are going to pay for repairs with tenant money, there must be tenant money left over after all expenses, right? Sounds pretty simple. It is simple, but you have to keep your focus on what your goal is.... why you are investing.
Good Luck,
Shawn(OH)
This looks like your gut talking not your head. Never ever buy for " maybe " in the future buy for now take it from me I've been there. There will always be other deals ones that will be proffitable right out of the box .
No cash flo no deal ever I feel very strongly that that is the only way to stay alive in this buissness.
Ed
Just to close the loop on the thread..... first, I really appreciate everyone's opinions, I hope others benefited from the conversation as much as I did. Secondly, I decided not to pursue the rental. My main reason is because this property did not fit into my current "business model", which is single family homes to lease option. I suppose I got caught up in a "no money" down deal, but feel I have to stay the course, get my portfolio of lease option houses going (have 2 now) and look into multi family and rentals a little bit later, when I have the time to really understand how they work and cash flow and conduct my due dilligance.
Thanks again for all the good replies!
Mike