What To Expect. . .need Advice?
How much cash flow (if any) should I expect from a newly purchased rental property. Most of them in the Seattle area (hot market) have either a negative cash flow (after the mortgage) or one around $300/mo. I invest for future purposes so not too tied up in getting a positive cash flow at the outstart. Most of the properties I look at end up getting the owner a negative cash flow when you take mortgage and other expenses out of the rental revenue. Please share what your cash flows are from properties under your care and what I should expect with a first purchase. Thanks much!
Hey,
Your cash flow is determined by YOU; it is directly related to how well you structured a deal.
I would not touch a negative cash flow rental. Nothing but pain in that deal.
Generally, on a house that rents for $800-$850, I make $200-$300 per month. I am my own PM.
Thank you Bruce! In trying to keep this deal residential for interest rate purposes (under 4 units), I am seeing that it will be difficult for me to even break even at first but maybe that's OK. I am in it for the long haul. Hopefully the seller has an assumable mortgage at a lower rate than I can swing, since rates have moved up since she got her loan. K
If you have to reach into your own pocket each month to pay the mortgage for your rental property how many of these can you buy (or how many do you want to buy)?
If you are making money each month from your rental, how many of these do you want to buy?
Hi Frogger, I would like to be able to build on each investment by making purchases every year based on the equity of the property built the year before. Not sure if that's doable with the low cash profit from the 4-plex and under market. Seems that I will be breaking even at best each month no matter which property I look at, don't know if that's just typical in my market or universal everywhere. K
Keely,
Consiser contacting a few (if any avail) of the REI Clubs in your areas. Then "network" w/a few good people your comfortable with from the club to assist you, find out what's the "norm" in your area before you get involved w/ a negative cash flow deal. Knowledge is
always a powereful tool.
Mark
:-D :-D :-D
Hey,
Do not...Do not...Do not buy a rental property unless it has positive cash flow. Go write that sentence five hundred times.
A Rental property is purchased for income and that is it. If you get some appreciation on top of that...great, but you can NOT control appreciation. What has happened in the past may not happen in the future.
A negative cash flow is NOT just the $100 out of your pocket each month, it is the fact that you are NOT building reserves. How are you going to pay for a major repair or 50% vacancy?????
Negative cash will eat you alive.
Keely,
It's much easier to find properties with negative, or no cashflow than positive cashflow properties.
If you are indeed in this for the long haul; then you will be very wise to ONLY buy properties that are UNDER value - I know it is tempting to go out and buy 'one' right away; but even with your first acquisition, you are setting the foundation for your REI success.
If you can buy a home worth 200k for 150k; you can refi the house in a year and pull out about 30k (this is what i gathered your plan was from your posts). This concept is great; however if you are facing negative cash flow at 150k; what are you going to look like at 180k?????
After all expenses (including some vacancy allowance) you need to be able to put aside enough every month to re-invest in the property on an annual basis to keep the prop up.
GOOD LUCK!!!
Cash flow is the mist everybody looks at that shrouds the mountain. Let's look at the mountain.
Cash flow is directly related to your down payment. It results from the ratio between equity and your financing (that is, financing that you'll make monthly payments on). If you want to gauge your monthly cash flows look at that ratio.
But the true value of that cash flow is another matter (and another calculation).
Because frankly you can make ANY property cash flow positively by simply increasing your cash involvement upward toward 100%.
If you have a negative cash flow, you may actually be close to breaking even when you factor in a rental property tax write-off known as depreciation. You break down the purchase of your property between the building, which is depreciable, and land, which is not depreciable. You can make this allocation based on the assessed value for the land and the building or on a real estate appraisal. Residential property is depreciated over 27 1/2 years (3.64 percent of the building value per year).
I would not suggest starting out with and property that produces a negative or break even ratio! As you build your investment portfolio negative or break even property investing does help with reducing profit tax but should only be used by experienced investors under the guidance of a professional tax accountant.
You may want to consider the following when dealing with rental properties:
Determine the amount of rent you are able to charge by taking a look at what comparable properties are currently renting for in your local market, checking out the classified ads in your local paper(s), and speaking with some leasing agents at real estate rental companies. Be sure to allow for some portion (around 5 percent per year) of the time for your property to be vacant
You may end up paying some or all of your renter's utility bills, such as garbage, water, or gas. Estimate from your own usage what the monthly tab will be. Expect most utility bills to increase a bit because tenants will probably waste more if you're picking up the bill.
Call your insurance company to inquire about how your property insurance premium would with rental property.
Figure that you'll spend about 1 percent of the property's value per year on maintenance, repairs, and cleaning.
Finding good tenants takes time and promotion If you advertise, estimate at least $100 to $200 in advertising expenses, not to mention the cost of your time in showing the property to prospective tenants. You must also plan on running credit checks on prospective tenants.
Rental brokers normally take one month's rent as their cut.
Now divide by 12 to get a monthly figure of cost!
Total all the monthly expenses and subtract that number from your estimated monthly income after allowing for some vacancy time. This is your property's cash flow.
What would I do without you guys, SUCH valuable advice. Thank you so much for taking the time to share your wisdom with me, I have decided with this new information to continue to search for the right property and not get excited just because one out of 50 shows a minor positive cash flow. I was beginning to think that no matter what I was going to have to accept a low to negative cash flow just to get into this place! I have since decided to have higher standards and to keep looking! It is more work but SO worth the effort compared to being sunk in one property. Thank you all so very much, K
Hey keely,
Here's a few tips from a senior loan processor, find a broker who will offer you interest only loans for your properties. This will reduce your debt to income ratio, and create a larger cash flow on a monthly basis, and a larger interest write off at the end of the year. For example, here's how the lender looks at it, you buy a 200,000.00 home, you rent the home for 1500.00 per month, your mortgage payment normally includes principle and interest which would make your payment 1041.67 ( @ 6.25% 30 yr loan- not including taxes and insurance) Taxes would roughly be 200.00 per month, and insurance pmt would roughly be 70.00 per month bringing your total pmt up to 1311.67. you would think, "ok, I got it covered", but the lender will only let you use 75% of the rents you take in, which really means that you are in the negative ( 1500.00 * 75% = 1125.00 per month ) this shows the lender that you are actually running your property at a negative cash flow of 1311.67 - 1125.00 = 186.67 in the negative. Thats a pretty hefty negative if you are fighting debt ratio issues. now compare a interest only loan........same scenario, different program......... Interest only 30 yr loan @ 5.25% ( 5/1 arm ), here's how it breaks down.
200,000.00 * 5.25 % = 875.00 per month
plus the taxes and insurance figures from earlier = 1145.00 per month. don't forget you vacancy factor calculations....
1500.00 * 75% = 1125.00 , 1145.00 -1125.00 = 20.00 negative cash flow.
At this point I would really look for how far in the negative do you want to be? 186.67 verses 20.00 sounds better, but it is still a negative cash flow. Negative is ok, if it makes sense due to appreciation levels , and other factors. Hook up with a good broker and do your homework.......
In response to tinkabout's message...Interest only loans and ARMS are useful tools best suited for use by people with some experience or who have specific goals that those tools fit in the plan for.
The chances are just too good that a new investor with few properties will find themselves 5 years down the road having spent what had looked on paper to be positive cash flow. Facing the rate on thier ARM going up. Owing more than the property is worth because they paid interest only on the loan and property prices have dropped as interest rates have climbed.
For a first property it's my opinion that you should go with a fixed rate and as so many others have said, make sure it has positive cash flow. If it won't cash flow on a 30 year fixed rate it's just not a good enough deal for your first time out. You are building the foundation now, it must be rock solid.
As JohnMichael said, down the road you may choose to do some things that achieve a certain goal that you shouldn't do now. I have a good friend who will buy if they cashflow even $50 per month, when you have 20 houses already you can get away with that. I wouldn't even consider a deal like that.
I close on one tomorrow, my first short sale (don't be too impressed, a realtor did all the work). It will cash flow $225 a month (on paper) on a 15 year fixed loan, 100% financed plus 7k extra for me. It's the worst deal I've done so far, but I have a decent foundation now plus there has been a market change that called for me to wrap it up quickly.
On the 100% plus 7k financing, since I know people will want to know how I did that and how can they do it too... the money for this house is coming from a house I purchased a few months ago. My bank will only allow 75% of purchase price on an investment, I buy ones in need of rehab so that doesn't work for me. They will allow 80% of appraisal for a property I own outrite, so I buy it, fix it, THEN finance it.
Don't ever let anyone sell you on negative cash flow. Landlords become desparate and truly motivated after they have bought a property with negative cash flow. Expecting appreciation is buying your future, and you cannot buy your future. The only thing you have control over is cash flow.
Hey,
There are a lot of good idea and points in this thread, which basically boils down to "Only buy rentals that have positive cash flow".
But there is some incorrect information also:
1) CASH FLOW IS DIRECTLY RELATED TO YOUR DOWN PAYMENT--This is not true. It is entirely possible to put 0% down on a house and have positive cash flow. It is also possible to put 50% down on a house and have a negative cash flow. Rentals are no different than Rehabs, or Retail, you make your money by buying right (read cheap).
2) DEPRECIATION WILL INCREASE CASH FLOW--No, this is totally incorrect. Depreciation is a tax write off; it does not increase Cash Flow. It would increase your taxable loss for the year, but it does not put more money in your pocket.
3) ARMs--ARMs can increase your cash flow, but, in the current climate, they are penny wise and pound foolish. Five years down the road, you are looking at a time bomb. Also, in the example given, both mortgage types produce postive cash flow. The example is showing that lenders only use 75% of the rental income. But most likely this is NOT an issue here, as that is future income (unless you are doing a refinance).
Keely,
Listen to what Bruce just said, and don't let anyone tell you anything different. And I am not just saying that because his name is Bruce. 8-)
Bruce..
How does one find the RIGHT rental , understand it takes work?
Are we talking about finding really really motivated sellers, how much price below market 30%?, what kind of deal one should structure, financing terms etc.?
Thanks :-?
James,
The right rental doesn't necessarily mean that it is below retail. It means that it throws off the cashflow that meets your requirements. Sure it is good to get it below market, but that is not the most important thing. The most important thing is can it generate passive income for you. Do you get a check every month whether you get out of bed or not.
Hey,
There are lots of answers to the question of how.
For me, I buy houses that are in really bad shape and then rehab them. When it is all said and done I am buying at 75% ARV.
But you could also make it a good deal by getting owner financing, pooling cash from other investors, or lots of other ways.
I like to use the pro formanator try that out and see what it say's it's a nice check balance.
[quote]
On 2004-08-13 00:56, mykle wrote:
In response to tinkabout's message...Interest only loans and ARMS are useful tools best suited for use by people with some experience or who have specific goals that those tools fit in the plan for.
The chances are just too good that a new investor with few properties will find themselves 5 years down the road having spent what had looked on paper to be positive cash flow. Facing the rate on thier ARM going up. Owing more than the property is worth because they paid interest only on the loan and property prices have dropped as interest rates have climbed.
Maybe you didn't notice, but I'm from califoria where i'm seeing property apprieciate by 90,000.00 dollars a year. I also work in the mortgage industry as a loan proceesor/underwriter, and I used to originate loans for a living. Typically interest only loans are fixed short term, 3,5,7,&10 yrs and a few monthly adjustable loans as well. An investor can realize a profit on a monthly basis sooner with interest only loans in place, and if your appreciation outweighs the amount of principle payments per year, whats the point in paying principle. Besides that, with an interest only loan , you can make a larger principle reduction to the mortgage if you pay less interest, right? The difference between a 30 year rate and an arm can be as much as 4%. the point is, the amount of interest you pay for a mortgage is relative to how much principle you pay down each year. here's an example.... 100,000.00 mortgage @ 6.5% = 632.07 per month with only $90.40 going towards principle every month or $1084.80 per year. The same 100,000.00 dollar mortgage with an interest only loan in place ( 6 month libor interest only loan @ 3.5% - this loan changes rates 2 times per yr. with caps in place as well) equals a payment of 291.67 per month interst only. Thats a difference of 345.40 per month in payments from the 30 yr mtg. Multiply that by 12 and you could pay 4144.80 dollars towards your principle in one year. Just because a loan is inteest only doesn't mean you can't pay principle.... you just have to understand the road to freedom does not come from paying too much interest. The real question is how long do you plan on owning the property? This question should help you to determine the proper program for your needs. You also stated that some owners can face rates increasing on them, yes this is true , but there are caps as to how far up or DOWN an adjustable rate can go, and as long as the adjustable rate stays below the 30 yr fixed rate you're winning, the key is to not pay high rates, just for a feeling of stability. Make your properties work for you, not you work for your properties...... It's all about the financing, especially since most investors only hold their properties for an average of 3-7 yrs. before selling, or refinancing. Think outside the box........... 8-)
Bruce, your info is also incorrect, you should check your facts before you point your finger.........I happen to live in california, and I am a processor/underwriter for a prominant mortgage co. in the west, I think I know what I'm talking about, thank you......... read on......
Quote:
On 2004-08-13 04:49, Bruce wrote:
Hey,
There are a lot of good idea and points in this thread, which basically boils down to "Only buy rentals that have positive cash flow".
But there is some incorrect information also:
1) CASH FLOW IS DIRECTLY RELATED TO YOUR DOWN PAYMENT--This is not true. It is entirely possible to put 0% down on a house and have positive cash flow. It is also possible to put 50% down on a house and have a negative cash flow. Rentals are no different than Rehabs, or Retail, you make your money by buying right (read cheap).
2) DEPRECIATION WILL INCREASE CASH FLOW--No, this is totally incorrect. Depreciation is a tax write off; it does not increase Cash Flow. It would increase your taxable loss for the year, but it does not put more money in your pocket.
3) ARMs--ARMs can increase your cash flow, but, in the current climate, they are penny wise and pound foolish. Five years down the road, you are looking at a time bomb. Also, in the example given, both mortgage types produce postive cash flow. The example is showing that lenders only use 75% of the rental income. But most likely this is NOT an issue here, as that is future income (unless you are doing a refinance).
End Quote........................
#1) Cash flow IS related to your down payment, the more you put down, the less you pay monthly, a positive cash flow is also predicated on the amount of interest you pay. Both of these will dictate how much cash flow can be made on a monthly basis. Rentals are most definately different than rehabs and retail , for one major reason, rehabs and retail homes are can be quick turn overs, and rentals are meant to be long term investments.
#2.) You wrote, "DEPRECIATION WILL INCREASE CASH FLOW--No, this is totally incorrect."
this statement is not TOTALLY INCORRECT! You said it yourself that it's a write off, and it doesn't increase your cash flow. When the fact is, it absolutely does increase your cash flow by DECREASING your tax liability to the government. Property tax, mortgage interest, and depreciation do play a DIRECT role in how much you will pay at the end of the year, so how can you say it doesn't put money in your pocket? It absolutely does when you don't pay a whooping tax bill at the end of the year!
#3) "penny wise & pound foolish" - ok look at the post above where I gave another mortgage example. I explained that 100,000.00 mtg. would give you a 1084.80 per yr. principle reduction on a 30 yr loan, and the same mtg. on an adjustable mortgage would allow you to pay 4144.80 per yr. reduction towards principle if you made the same payment as the 30 yr loan. Take that $4144.80 per year by 5 yrs. and you'll have made a $20724.00 reduction in principle, compared to the 30 yr mtg, your principle reduction over 5 yrs. would only be $5424.00 - thats a difference of 15,300.00 in 5 yrs. - so how does this equate to a "TIMEBOMB"? The timebomb is your 30 yr mtg. scenario. Arm's aren't for everyone, but to those who have a sound plan as to what they want to accomplish in the REI biz know that Arms are a great way to leverage your profit.
By the way, just so you know 99.9% of lenders out there use a vacancy factor when qualifying you for an investment property mortgage regardless of the transaction type (Purchase or Refinance) . Typically they'll only let you use 75% of the rents brought in, unless you are zoned as rural residential, then they may only let you use 60-65% of rents collected to qualify depending on the lender guildlines. This isn't used strictly for refi's, since most, if not all lenders allow you to use your potential rental income to help you qualify to buy the property.
I think you need to do your homework before you give any more advice. I'm not trying to start something here, I just don't like being told I'm wrong when you are the one who is uninformed!
Thanks to those who read this ........ 8-)
rebeccabrumbelow? what a coincidence, someone very special to me has the same name.
tinkabout, I realize you keep stating your credentials to try to establish credibility, but for me it has the opposite effect. I don't believe you are thinking of what would be best for the investor asking the question, I believe you are thinking like someone who has become accustom to selling a particular product.
A guy looking to buy his first investment property can't find any that will cashflow and you advise him to use an interest only ARM? I think it's bad advice regardless of your credentials or any numbers you use. "Fixing" a bad deal by getting a temporary lower rate just postpones the pain. It wouldn't cash flow at a fixed rate, where's he going to get the money to pay towards the principal every month as you suggest in your numbers? Remember, being new he also needs to build a reserve fund. Bottom line, unless he is the exception he ends up paying the minimum each month and when rates go up and his property value goes down accordingly he is in a world of trouble.
Nice touch using a 6 month rate and then projecting the numbers out as if that will be anywhere close to reality. Like the FED hasn't made it abundantly clear rates are going nowhere but up. How about projecting a worst case senario instead of a best case? Why don't you tell them that if they make the minimum payment and rates go through the roof they could end up paying $916.67 a month just for the interest? That it's very possible they will be unable to refinance to get a fixed rate because they owe more than it will sell for since a property is really worth what it costs per month to purchase it, not what the sales price is, IE it's worth 535 a month, be that 100k at 5% or be it 73k at 8%.
You're in the business, tell me... Why do lending institutions offer ARM loans? More than offer, why do they try so hard to sell us on them? What percentage of borrowers actually pay down the loan as you suggest? What percentage of borrowers who couldn't make a deal work with fixed financing, so resorted to an interest only ARM, pay down the note as you suggest? Of the few that do, how many are making up the difference out of thier own pocket rather than letting the property pay for it's self?
I'm not very familiar with california properties, but I've heard things were already getting soft there and interest rates have just begun to climb. Any plan that counts on appreciation I automatically discard. Appreciation is great when you get it, but to need it to make the deal worth doing is not investing, it's gambling.
You said, "Arm's aren't for everyone, but to those who have a sound plan as to what they want to accomplish in the REI biz know that Arms are a great way to leverage your profit."
Now we are getting somewhere. I suggest that a guy just stepping up to the plate, having a hard time hitting the fastball, shouldn't ask for sliders instead.
Cash flow and downpayment. I think people are getting too caught up in the words on this one. Sure how much you put down will affect the cashflow. So the suggestion is to "fix" a bad deal by putting a bunch of money down on it? Go ahead if that's what you like, I'll wait for a better deal.
You said, "Make your properties work for you, not you work for your properties...... It's all about the financing" I couldn't disagree more, it's all about the purchase. Every property I own was someone elses failed attempt at REI, I never forget that.
Hey tinkabout,
mykle already did a great job on responding to your comments, so I might end up repeating a lot of what he said.
My points (1 to 3) were directed at specfic posts inside this thread; I create a TITLE for each point to summarize the previous post and to make it clear to which post I was referring. I don't like using the quote function, because I think it makes the overall thread too long and unwielding.
With that said, you have to review the posts I was referencing and NOT just the one sentence.
1) DOWN PAYMENT--This was in response to something about mist covering a mountain. It was talking about ratio between equity (down payment) and financed amount being the determination of positive cash flow. And this is NOT correct. Adding more and more and more down payment does NOT guarantee POSITIVE CASH FLOW. You can have a mortgage of $0 per month and still have negative cash flow. By the same token, you could have $0 in a property and have postive cash flow. It is NOT the down payment, it is the overall deal. I think, give or take, this is what I said the first time.
2) DEPRECIATION--Go look at the post about depreication, it stated that depreciation could offset a negative cash flow. This is NOT correct. Having a greater loss does not put more money in your pocket. If you have positive cash flow (to start with), you can use Depreciation to offset that Income. BUT...that gets us in to the issue of decreasing your base, so when you sell your gain is higher.
3) ARM--I think your example is cute. Comparing a loan that can adjust twice a year to a fixed one is comparing apples and rocketships. The simple reality is people are acquiring an ARM in order to be a breakeven or positive cash flow on a rental and not to make MORE cash flow. Those positive cash flows can, and will, dissappear overnight. Having someone purchase a long term investment on what is, essentially, short term money is extremely bad business. You also might want to factor in the cost of refinancing to your equation.
4) VACANCY--No one disputed the 75% vacancy number. In your post (I think it was your post) you confused real cash flow and cash flow used to qualify for a loan (go look at the last few sentences).
5) FUTURE INCOME--I have yet to meet a loan processor/underwriter that allows POTENTIAL income on SFR. How do you figure out what that number is?
Hmmm very interesting, I just went through this myself. I purchased a newly built duplex for 235,000 rents for 1750 a month, I put 20% down and I couldn't decide if I should do a 5yr arm or 30 yr fixed, I factored in all of the payments including a refi in 5 yrs and it ended up to me going with the 30yr made me feel safer about the loan and it didn't change the payments that much. I admit I didn't look at % only I had the 5 yr at 5.75 and the 30 at 6.375.