Cash flow with rising interest rates

[Marcos Falcao]

How are you guys able to make deals cash flow with new rates (assuming traditional bank financing)?

For example, a retaltively cheap house in the Houston market is listed at $250K. Assuming 6.73% rate, 20% down, 30 year note, and taxes and insurance, we're looking at a monthly note of $1,900 per month. If HOA fees are included, then its nearing $2,000 per month minimum.

The three most recent rent comps in the neighborhood are in the $1,500 to $1,800 per month range. So how are you guys making long-term hold deals work? I know this is just one example, but this is a relatively cheap house so it should cash flow under normal market conditions. 

I have come across this issue with nearly every listing I analyze. Am I missing something? Are there methods around this issue?

[Kevin Bazazzadeh]

@Marcos Falcao here are your levers to pull on:

Equity - To keep traditional debt you outlined; you probably need to increase your equity position. You can do this by using a larger downpayment, or buying at a steeper discount. A lower LTV can make a property cash flow.

Debt - If you want to move away from traditional debt, you can use creative solutions like seller finance to get a more favorable rate. Here you can set terms that aren’t constrained to a bank’s lending requirement. Just have to get the seller on-board, which most won’t be, but you only need one.

Income – Look at ways to maximize rent. You mentioned rent comps at $1,500 to $1,800. Could you rent by the room? Could you add a bedroom to get a bump in rent?

Location – Are you looking in an area that is already established? You could look to buy in a gentrifying area where you can see that the path or progress is moving.

Right now, is a time to sharpen our axes as investors. In this market it is harder to just stumble onto a deal, we need to be figuring out different ways to make deals.