The only chance of finding positive cash flow is...

[Joe Edwards-Hoff]

I'm only a couple weeks into researching real estate. Well, I actually own a home and rent it, but that is besides the point. I'm just trying recover an unwise past investment. Hopefully my current refinancing goes through and I won't be paying the difference anymore. (Renting to good friends though, and I still have use of the premesis and my 1k sqft shop.)

Anyway, I got started listing to Rich Dad Poor Dad, and other things they do. I am almost done with 16 hours of Bob Allen lectures. I've heard good and bad about both, but what's important is that I got inspired by these audiobooks and now I am doing my down to earth research.

It seems like both Bob and Bob (Kiyosaki and Allen) quoted that if the yearly gross rent was 10% of the purchase price, it was a good deal. At one point someone even mentioned monthly being 1%. Now, on here I am seeing 2% for monthly, and then 50% (40-50) being the expenses. That is obviously a different picture than what they paint. Which I'm sure, sadly, a few people on here probably learned the hard way.

So, if we use those realistic numbers, you really need to have a good LTV ratio if you want positive cashflow. And that is what I currently think I want.

So what options does that leave you with? I guess the main purpose of this post was to figure out what I would need to be looking for if I wanted positive cash flow. Preforeclosures? Maybe REOs. Maybe get lucky with a FSBO. If there are any other avenues for acquiring properties with a LTV I could profit off of, please let me know.

[Jon Holdman]

Actually, you want a property that cash flows with a 100% LTV (loan to value) loan. That means the property itself cash flows. Then, you start putting in cash (a down payment) and there is more cash flow. That additional cash flow is from your money, not from the property.

Commercial properties often use the term "cap rate". That's the return you generate if you pay cash for the property. The idea there is that you will make money as long as your interest rate is lower than the cap rate. Once you finance the property, you will make the full cap rate on the down payment. You'll make the difference between the cap rate and the interest rate on the financed portion.

Keep in mind all those gurus are selling education. They're goal is to get you to spend more and more money on ever more expensive education products. So, they have to present RE investing as if its easy and fun and a way to make a fortune with no effort. If they told you it was hard work, you would just walk away rather than buying something else.

The 50% rule seems to be solid. Lots of people have argued with it, but every time someone has real data for a significant portfolio (the results from one house for one year are not meaningful), its been borne out. So, if you buy a property where the rent is 1% of the price, and you're paying 6% interest, you're going to be just break even. That is, your gross is 12% of the purchase price. 50% of that, or 6% of the purchase price goes to expenses. With 100% financing, 6% of the price goes to interest. That leaves you with zero. Now, if you put in 25% down payment, your interest is only 4.5% of the price, leaving you with 1.5% of the price as your return.

1.5% of the price as a return divided by 25% of the price as your down payment gives you a 6% cash on cash return. Not high enough, IMHO, to be interesting.

Further, you actually have a principle payment. While you will get that back later, its money out of your pocket for now. And, if your intention is to live off your rentals, it money you can't live off of.

Even further, this neglects costs of buying the place (2-3% of purchase) and any fixup.

I think your question is "where can I find good deals"? Thats a pretty frequent topic here, so do some digging and you'll get ideas. REOs have been working for me, though this has become more competitive. Direct marketing (letters) works for some people. Making sure EVERYONE in the area knows you're buying works for some people. I've not heard many people say they had luck with FSBOs, which are often the case of the seller wanting too much for their property and being unwilling to pay a commission to get it.

Bottom line? It is REALLY hard to find good rental properties. You have to put a LOT of work into it.