Cash flow positive with 3.5% down?

Question

Hey everyone,

I'm new to real estate investing and my wife & I have started looking at multifamily properties in MA & RI that we will live in for at least a year in hopes to purchase a single family afterwards. The properties we're eyeing are move-in ready, but not all of them are newly renovated. We'd be willing to put some work into any of the homes that made sense.

Using tools such as the BP rental property calculator and Mashvisor, I'm only coming across properties that, with the minimum FHA down payment of 3.5%, will be cash flow positive after a number of years (lowest I've seen is 3 years, up to 15+ years which would likely be a no-go/red flag).

In today's market, is that something that's typical with this type of down payment? I'm inputting the general rules of thumb for vacancy, maintenance, etc. I just want to make sure we're not putting ourselves into a hole that we can't get out of on the first property in our portfolio.

Ideally we'd be in a solid cash flow position right away, but I'm unsure if that's realistic when putting the minimum 3.5% down.

Thanks in advance, and happy to provide more details.

Tim

Tom Wagner · Answer

Hi Tim, it is really tough to make the numbers work with interest rates near 6%, particularly with 3.5% down. It becomes paramount to make sure you have the best available FHA (or other low down payment loan product) rate available on the market.

Additionally, very few want a cashflow negative rental (especially as your first property) but if you can get to cashflow neutral I'd encourage you to think about your return as a combination of four things: cash flow, principal paydown, (potential) appreciation and tax benefits

The first three can be quantified easily on a hypothetical $600,000 duplex.

$0 cash flow + $8,000 principal paydown (rough calc) + $12,000 appreciation (2%) = $20,000

Initial investment = 600k x 3.5% + $5,000 closing costs = $26,000

So you'll on average, over the long term, even with $0 cash flow generate a return of $20,000+ per year on a $26,000 initial investment. Still blows the stock market out of the water.

Lien Vuong · Answer

In general Boston area it is unlikely that you would be cash flow positive from Day 1 unless you did renovations and created the value add potential. That is more feasible in markets that are closer to NH order or likewise in RI/CT towards the south coast where prices are more tolerable. As Boston proper is a higher appreciation market, people will take a higher tenant class in exchange for cash flow opportunities.

Taylor L. · Answer

It's tough to cash flow when you're that highly leveraged, particularly when you're looking at on-market properties. Have you looked into using the second unit as a short term rental?

Sara Frank · Answer

Hard to be cash flow positive when highly levered + 6% interest rates ... however with rents rising you can also look at it as opportunity cost. Even if you are not cash flowing -- if you are paying a fraction of what you would be renting for thats still $ in your pocket at the end of the day. And equity of course. Cash flow isn't everything, especially if its your first property. Goodluck!

Tim Wheeler · Answer

@Jonathan R McLaughlin Thanks for the advice! Seems like there are plenty of ways to get creative with a deal. My wife & I have also started to entertain SFHs that are livable but could use some updates (likely via 203k). Given our minimal down payment it seems like it might work out better to go this route to start but we will keep our options open.

Christian Ehlers · Answer

Hey @Tim Wheeler great question, ask away green or not! It's extremely unlikely that you'd be able to buy a multi unit with only 3.5% down and cashflow while still living there in a good area. Not sure about your specific location but much of Massachusetts and any towns near the coast tend to be pretty expensive and experience high appreciation, but lower cashflow.

Would the properties you are looking at cashflow after you move out? If so I would highly consider those deals for your first investment property. Instead of only looking at cashflow right out of the gate, compare your rent now to what your living expenses would be in the new property, and then factor in Loan paydown, appreciation, tax benefits AND the CONFIDENCE you will gain from successfully purchasing and managing your first rental property! The most important thing is to get started and at least get a "base hit" to get your momentum going. Swing for the fences on later deals in your career as they come!

Tim Wheeler · Answer

@Christian Ehlers thanks for the reply! We're aiming for either South Coast MA, or the East Providence, RI area. Originally I was only finding deals that would cashflow after we hit the point where we could drop PMI, but after analyzing deals non-stop and going to a number of open houses (to help calibrate our expectations) I'm finding more that seem to make sense. Thanks for pointing out all of the other items - all great things for us to keep in mind. I also never realized "off market" deals were a thing.

Jonathan R McLaughlin · Answer

@Tim Wheeler you are asking the right questions. Try and figure the potential for rent increases, appreciation, pay down and necessary capex/maintenance. 3 years under the circumstances you describe might be great. And if rates come down in 5 years….

So cash flow out of the gate doesn’t have to be your only metric, but I would t ignore it and it sounds like you are being smart about it.

Tim Wheeler · Answer

@Sara Frank thank you -- that's great insight! We've pivoted to looking at properties in better locations that command higher rents. The idea of spending $100k-$200k more is definitely daunting, but the numbers seem to make more sense. Still not sure if this is the route we will end up going for our first property, but at the very least it's another avenue for us to explore.

Cash flow positive with 3.5% down?

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