How to grow when rental costs $60k each time

Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes

8y

I agree with the others - if you don't have cashflow, if you have a loan, then they are not deals.

Just imagine, if you used all cash - you'd really have 'positive cash flow' then - or wouldn't you?

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

They’d be leverage at a purchase price around $85k 25% down 30 year fixed, but take $35k or more in rehab costs. All in around $60k = $200-$250 Net Cash Flow (using highly conservative estimates). After repair values of $150k-$160k or a little higher.

I don’t see a point in not using leverage for rentals. If I felt like I had too much leverage I would just buy some dividends at that point...

Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes

8y

All in at 120K, even if only 60K of that is your own cash. So, you're in at about 75%.

What's your actual rental income?

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

Rents are $1,450 - $1,550

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

Taxes are high though $300/m roughly

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

If youre only getting $250 return on $60k invested, its either a bad investment property or a bad investment area. A decent property should cash flow that amount with next to $0 invested to be a viable investment for me. What would that property rent for?

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

You answered my question befor I replied :-) It sounds like the numbers just aren't a good investment. You're in a high tax area so that will make it more difficult to find good rental properties. At $1500/month you will have to find properties that you are all in for less than $100k

2 Reply

Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes

8y

So, rents are about $ 1500

You make about $ 250 and taxes are about 300/month

that leaves $ 950. If you have a mortgage of 60k, then the payments for PIT shouldn't be more than maybe $ 400 or so? Something seems off.

Have you considered buying those properties with a 203K investor loan?

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

mortgage amount is $85k purchase. The problem is the high rehab costs ($35-$50k). Any creatives ways to put 1/2 of the rehab amount on some sort of loan?

Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes

8y

If purchase is 85 and you put in35k in repairs .....that's 120k. If you say that you now have 60k cash tied up, that would mean that the actual mortgage is around 60k. Am I missing something?

Michael Lewis

Investor · Independence, MO · Member since 2016 · 89 posts · 70 votes

8y

Seems like flipping in that area would be a better choice than buy and hold. Although the profit margins seems kinda slim if you couldn’t cash buy.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

8y

Yep, a 203k type loan or purchase an already rehabbed house for under market value.

Sounds like a good strategy for flipping. I'm a buy and holder too, so I get why you don't flip normally, but could generate some cash to expand your portfolio.

David Fernandez

Real Estate Agent · Vienna, VA · Member since 2016 · 289 posts · 253 votes

8y

Originally posted by @William S.:

mortgage amount is $85k purchase. The problem is the high rehab costs ($35-$50k). Any creatives ways to put 1/2 of the rehab amount on some sort of loan?

William, you can put 1/2 (or more) of the rehab into the loan by refinancing after the property is renovated; however, you said in an earlier post that you don't want to BRRRR since you don't want to leverage too much.

As for your main question, I personally don’t buy properties that don’t cash flow with a loan equal to, at least, all the money I have to put in the deal (purchase price, closing costs, rehab costs, etc). If they meet my minimum cash flow criteria with this type of loan, after accounting for all expenses, they are a good investment.

2 Reply

Alex Corral

Denver, CO · Member since 2017 · 142 posts · 104 votes

8y

I can't make out the numbers either. 85x25% = 21k + 35 rehab = 56, plus closing costs = 60k? 63k (75%) loan amount is PI $360/month @ 5.5%.

2 Reply

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

Seems there’s confusion. See below.

Purchase price = $87,500 (25% down at 4.75 interest rate)

Rehab = $35k (this may go up to $50k, these homes need a lot of work)

Closing = $2,000

Rent = $1,450/m

Mortgage = $342.33

Taxes = $300

Insurance = $50

Vacancy = $120.83

Maintenance = $50

CapEx = $180

PM = $145

Lease Fee (1yr) = 41.67

Net Cash Flow = $220.17

My out of pocket cost = $58,875

Rich Lopes

Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes

8y

Based on the above numbers you COC is barely 4.5% - if you think that's good enough then make sure the ARV is at or above the $122.5k (87.5k+35k), then it make sense to buy these properties. You can do BRRR and get your cash back and perhaps reinvest - otherwise sell it build some cash reserve and buy one one or 2 for all cash when there is a good opportunity.

Rehabbing is a major endeavor and you have to really estimate at least 110 - 120% of the total rehab cost just to avoid any surprises once into it.

Alex Corral

Denver, CO · Member since 2017 · 142 posts · 104 votes

8y

Originally posted by @Rich Lopes:

Based on the above numbers you COC is barely 4.5% - if you think that's good enough then make sure the ARV is at or above the $122.5k (87.5k+35k), then it make sense to buy these properties. You can do BRRR and get your cash back and perhaps reinvest - otherwise sell it build some cash reserve and buy one one or 2 for all cash when there is a good opportunity.

Rehabbing is a major endeavor and you have to really estimate at least 110 - 120% of the total rehab cost just to avoid any surprises once into it.

I agree, if you can force the value and cash out refi, you can get all your investment back. At that point, your COC gets better. I also think you should calculate your loan at 5-5.5%. I dont think 4.5% is available at par anymore.

Alex Corral

Denver, CO · Member since 2017 · 142 posts · 104 votes

8y

Originally posted by @Alex Corral:

Originally posted by @Rich Lopes:

Based on the above numbers you COC is barely 4.5% - if you think that's good enough then make sure the ARV is at or above the $122.5k (87.5k+35k), then it make sense to buy these properties. You can do BRRR and get your cash back and perhaps reinvest - otherwise sell it build some cash reserve and buy one one or 2 for all cash when there is a good opportunity.

Rehabbing is a major endeavor and you have to really estimate at least 110 - 120% of the total rehab cost just to avoid any surprises once into it.

I agree, if you can force the value and cash out refi, you can get all your investment back. At that point, your COC gets better. I also think you should calculate your loan at 5-5.5%. I dont think 4.75% is available at par anymore.

Steven Gesis

Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes

8y

Originally posted by @William S.:

I’m in a market where I can buy a fixer for $85k or so but needs anywhere from $35k-$50k in rehab. Basically I’m all in for $60k...

$60k = $450/m cash flow (Mortgage, Taxes, Insurance, PM)

* I know there’s maintenance costs but leaving it out just for this example. I’d end up around $200/m...

$60k...That’s a lot of cash that I need each time...

This area is desireable and has very little competition so I like that. It also has nice modest appreciation.

I know some may say to BRRRR but the net cash flow is $0/m if I get close to taking my cash out. I'm also a conservative investor. I like leverage but there's a point with me. I also don't want a lot of homes. I don't want to wait until the 30 year loan is up to collect cash flow...

I have 1 rental in this area and it’s done very well. I want to keep buying but the numbers are not as favorable. It’d take me 3 years to save up $60k too.

Does this market make sense anymore for rentals? How do build up cash for down payment/rehab money?

I know when I get to 5 rentals things will snowball, but in the beginning it’s tough to get the ball rolling...

I’m not interested in lower end rentals. It won’t work out in the long run. Too many problems in those areas.

My plan was to buy 3 in this area. Higher rental rates, good area, nice appreciation. After 3, take the funds and purchase strictly cash flow rentals or buy dividend stocks. However $60k is A LOT for me. Any suggestions on how to reach 5 in a more efficient way?

Starting out you need the leverage, you need to get someshere, $60k (one and done) no good, not enough diversity to keep your momentum on track - need to dig deep and need to take the plunge -

The first one was the toughest one for me, then I figured out the rest of the marketplace and dynamic, now this is muscle memory and I enjoy replicating the success over and over again, not only for self but for many others.

OP

Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

8y

Cash out Refi leaves $0/m in cash flow or negative ($145k ARV). I'd be out of pocket $20k give or take too.

ARV will most likely be higher, but still negative cash flow after Refi. No point in that.

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

8y

Thoughts:

1. If you need $3k/year for capex/maintenance after a full rehab you're doing something wrong. This figure should be much lower your first several years after a full rehab, and will climb as the house ages, but pulling imaginary cap expenses forward doesn't give you a good picture of where you are right now. That might be useful if you want to create a cash model of your anticipated lifetime hold of the house. We do full rehabs of our homes before they go on the market and the first several years cap expenses are virtually zero. Now if you are just putting on some paint and running, that's a different story, but you shouldn't have $35-50k rehab costs either.

2. You are paying more than what I would as a basis. Under 200k I won't be all in beyond 70%, or $70k on a $100k house, $140k on a $200k house. You're at almost 80%.

3. Your principal payment is money back to you because it is funds moved from liability to asset - it's just deferred until you sell.

4. Those are pretty high taxes relative to your rent. I pay about $1k in taxes for every $1500 in rent in my area. Tax rates that high either need to be recognized in rental rates (preferred) or in purchase price (reduced).

5. It's difficult to grow in the beginning without leverage unless you have a very healthy pool of money already or a strong W2.

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Rich Lopes

Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes

8y

Originally posted by @William S.:

Cash out Refi leaves $0/m in cash flow or negative ($145k ARV). I'd be out of pocket $20k give or take too.

ARV will most likely be higher, but still negative cash flow after Refi. No point in that.

Agree.. There is not enough room in your cash flow.. Didn't think about that. But if you could use that cash from property #1 and buy another substantial positive cash flowing property #2 which would cover the additional payments + the payment for property #2, that is something you can think about. The net effect would be 2 positive cash flowing properties.

Wilson Lee

Birmingham, AL · Member since 2014 · 178 posts · 75 votes

8y

If it will not cash flow when leveraged. It is not a deal. Keep looking.