Rehabbing Value?

[Tyler Carpenter]

I know that usually when you buy a foreclosure for rehab, you are getting a good deal. My question is that if I buy a place and rehab it for 50% of the ARV and get a refinance, should my NOI still give me a positive cash flow after I have taken the equity? Or is it a ok to be paying a little bit each month and figure out that down the line, I will be breakiing even and then back into the positive cash flow?

For example: Say I buy a place for 70K and i put 30 in it for rehab, my ARV is worth 200k, and I take 170K out on a refi, should my NOI reflect a positive cash flow on the 170k that I refied on since I bought the place at a "wholesale" price? Or is it good if Im breaking even or just paying a little each month, because in theory I have made 70K in equity that can be used to start another rehab project. Any suggestions or help would be much appreciated. Thank

[Rich Weese]

MikeOH-
You and I are both astute investors with lots of experience. However, we'll have to agree to disagree on one area. I'm not hung up on CASH FLOW and neither are many other investors. I DON'T want all my properties to cash flow!!! I own many F&C properties that provide more cash flow AND more tax consequences than I want. I also try to offset those with buying owner financed cash neutral or heaven forbid, even small NEGATIVE cash flow properties. It all works out better. Why do I want to share my income with the IRS?
I, like some other investors would rather have 10 properties that BREAK EVEN than 1 that makes money as you said.
My normal example again is;
100K property(or properties, depending on where you live) that I buy and finance to 90% (combo of owner finance and institutional loans) a cash neutral property.
Same scenario to provide $100 mo at 7% loan rate would require additional $14K down or reduction in loan. OR I could buy a 2nd property with the 14K, cash neutral.
These are buy and hold, just like yours are. Take any period of time of 10 years or longer since 1968(avg is 6.34% appreciation nationally) through 2005. By growing your portfolio, you'll be miles ahead of your cash flow example every time.
I can buy the same great discounted properties you do for same investment and have double or triple the # of properties you'll have.
Remember, there are 4 benefits of owning RE.
1.Appreciation
2.Tax benefits
3.principal reduction or payoff
4.Cash flow(if any)
The first 2 are the largest ways of creating wealth, by far in any study ever done. The last 2 are minimal over the LONG run. Leverage always pays off greater.
I haven't taken into account the cash flow NEGATIVE you receive. If you only have cash flow properties, you'll be sharing that income by some % with the IRS, so you won't keep the entire $100. If you only generate a small cash flow that is offset by depreciation, you may keep the 100 bucks, BUT if you have enough free and clear homes receiving income, you'll not have nearly enough depreciation to offset the income and up to 40% will go to the IRS, or more in the future with Obama.
I'm old enough to remember the top bracket at 91%!! Not fun at all. I learned that the goal WASN'T to make money, but be able to KEEP the money. This method I described allows you to do that.
Your method is NOT wrong, but also it is far from being the ONLY way to MAKE money. My way has worked well for nearly 40 years for me and will continue to do so. If the tax rates go up over 50%, your cash flow WON'T be what you thought it would be.
There is no way to spin this. Same amount invested, or refied, and same properties purchased, over the LONG term, My scenario will win every time
IF appreciation continues and Income taxes are still owed.
As always, I enjoy the exchanges with you, but will stick to my beliefs on this one. Our differing points of view will be good for less experienced investors to think about and decide their course. Have a great day. Rich
p.s. Teach me how to take a part of a reply and bold it so replies are to that part by itself. That is way cool!!