In-Depth Analysis with Zero Down?

Question

As I continue reading through more books I have noticed that, often times, it is pointed out that you cannot calculate anything more in-depth than cash-flow when using zero down (as in VA loan). Or as one book clearly stated, "It's not investing if you don't put anything to risk in to it."

I realize that this is directly related to the fact that you cannot run returns that have to multiply 0 but as someone looking to make their first purchase in ~6 months using zero down on turn-key or light rehab, how are the rest of you running your numbers? Are you putting a non-existent down payment in to get your IRR and other metrics? Are you not bothering with anything more in-depth than cash-flow since you have nothing really invested and are just looking for the return? Throwing some numbers into rehab costs?

I just want to make sure that I'm running as deep an analysis as I can so that I don't get tripped up by something later down the road, if possible.

Jerry W. · Answer

@Brian Volland thank you for your service.  You will just have to use the cash flow analysis.  If it makes you feel better you can run a computation of your planned purchase and estimate 20% down and then recalculate your amortization if you want to compare apples to apples.  However with no money down the most important thing is cash flow and length of your loan.  I use 15 year loans that require 20% down.  When I can I try to do seller financing of the 20% down, so getting a property that breaks even looks nice.  If you are using a 30 year loan make sure you are putting at least $100 per month in the bank after all expenses and projected expenses and vacancy.

Steven Loveless · Answer

Wow, sounds like a great way to get into a house for nothing, while keeping some powder dry on the side @Brian Volland.

The only other thing that might be a useful metric would be to do present value calculations on the portion of cash flow that you would effectively hold in reserve for future CapEx, rainy day funds, etc. If you plan on holding $100 back in a bank account/mo from flow as @Jerry W. suggested until you have $xxk dollars in reserve, you can back out the value of that money.

That might give you some indication of when your return is falling off, ie. when it would be better to re-deploy that reserve on a separate property. Take it with a grain of salt, I'm still a newbie but love crunching the numbers.

Brian Volland · Answer

I thought about using these numbers but, based on past experience using a VA loan (yes, the benefit has been reset), I was anticipating rolling the VA fee into the loan. Additionally I was going to use a tip from one of the books and settle on a price, then raise the offer ~2% (assuming it's still within the budget) and having the seller pay closing. It makes for a much cleaner closing but, of course, it means you have to really know what you price cap is and deduct closing costs from it.

Assuming the above reasonable, that really only leaves me with the inspectors' fees. It's something, but I doubt it would give any more reasonable information than if I left them out of the calculations.

Steven Loveless · Answer

Don't know if it is meaningful or not, but even with a $0 down payment you still are "into" the house for some non-zero amount - you probably have paid closing costs, an inspection, etc.

You could always estimate those costs, and use that number as your effective initial investment in the property. I have just started looking at analyzing deals (as I hope to buy my first property this year), but I have started making a habit of rolling any closing costs into my DP when i calculate CoC or ROI metrics. That is actual money leaving your pocket, so you have to account for that opportunity cost.

Brian Volland · Answer

Thank you for the response.

I have been using a couple of calculators, including the BP one, to run quick numbers just to gauge cash flow. The problem is that I'm looking at properties that don't need rehab AND I'm using the VA loan. I'm looking at what are basically turnkey properties that need some light maintenance and/or updating if anything at all. So while I have an initial nest egg, it doesn't go into the calculations because it isn't anticipated to be spent. I cannot calculate ROI, CoCR, IRR, etc or other long term forecasts that will help gauge when best to sell and help plug in future cap expenses. I'm limited to cash flow, NIM, GRM and other relatively limited metrics.

I'm just curious as to what other folks who are anticipating buying with literally nothing planned to be spent up front are using as their metrics. Are they looking at cash flow and stopping or are they using something else to forecast a couple years down the road?

Zachary Curry · Answer

It is still an investment, you are just fortunate enough to have the VA, and let me say thank you for your service! When calculating cash-flow if there are rehab costs then yes calculate those, but other than monthly costs that is all you require to calculate cash flow.

A good tool to utilize is excel, you can evaluate a cash flow in minutes.

Monthly payment is =PMT(intrate,term,principle) it would look like

=PMT(5%/12,180,100000) This is $100,000 at 5% term of 15 years.

Then place your estimated occupancy rate, insurance, taxes, an allotment for improvements down the road into a pivot table to automatically subtract.

IF there are down payments or rehab costs then create a separate pivot table to recoup your initial costs within 5 years and provide yourself a reasonable interest amount while paying yourself back. Say a standard bank rate at the time. This will ensure the property is able to cash flow from day one and you will recoup your money.

I can email you a spread sheet if you would like, just contact me and let me know. Hopefully I answered your question.

In-Depth Analysis with Zero Down?

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