Simple way to spot a good deal, what do you think?

[Brett O]

I just had an idea, if we could figure out the maximum amount of dollars we could pay for a property per $1 of monthly rental income we estimate the property will bring, we would have a very easy way to figure out how much we could pay for a property.

For example if I estimate a property will rent for $600 per month, and I had pre determined that $66 was the most I could pay per dollar of monthly rental income, then I would come to the conclusion that I could pay $39,600 for the house.

$39,600 @ 7% 30yr fixed = $264/Month. So I am within the 50% rule

My question/idea is how do we figure out how much we can pay per $1 of monthly rental income.

I'm pretty tired, maybe I'm making things more complicated than they need to be...

Is this a good idea?

[Michael Rossi]

Now I still maintain that a ratio of 1% can be pretty good if you put 20% down, you will have in most cases true positive cash flow.

Am I missing something ?

What you're missing is that putting money down doesn't alter the quality of the deal. All the downpayment does is BUY the cash flow. Using that theory, you should always pay cash for the property and then you would have a LOT of 'cash flow'. The issue is that there is an opportunity cost to that money you're putting down. That money has value. When you use it to buy cash flow, you're not considering the value of that money.

Another issue is how many properties you can buy if you put down 20% on each one and then they don't generate cash or lose cash each month.

Let's look at a real example:

Purchase price: $80,000
Down payment (20%): $16,000
Mortgage amount: $64,000

Gross rent (1% of purchase price): $800
Operating expenses: $400
NOI: $400

Mortgage ($64K, 30 yr, 7% NOO): $425

Cash flow: $25 LOSS (ouch!)

So, for the privilege of putting down $16,000, you're still losing $25 per month. Yes, it's true that you will be getting the principal paydown, depreciation for tax purposes, and appreciation over time; and those things may make you rich decades from now, if you can afford to plunk down a lot of $16,000 downpayments, while losing money each month. In the mean time, you've put down a bunch of your own money so that you can lose money each month. In addition, even though you're losing money, you'll still get the privilege of dealing with tenants and all their problems (or at least management companies and all their problems).

The point is that there is no reason to pay retail for a deal and lose money on it every month. You can buy property at a discount and actually make money while you're building wealth.

Good Luck,

Mike