Rental Properties & Breaking Even

[David Graham]

Hi,

I am new to real estate, reading what I can, watching BP webinars, etc. I have yet to decide on the route of REI I want to take, but I'm positive it will be in the residential rental market.

I am having trouble grasping a concept and it may just be because I haven't read enough yet to have it click.

It seems it would take quite a while to break even. For instance:

House: $140,000

Total out of pocket: $40,000 (down payment, closing and rehab)

Assume a $500 cash flow, which, from what I have read seems like that is optimistic.

From those numbers it would take 6-7 years to break even. That's obviously assuming you don't take into account appreciation.

To me that's a long time to $40k, and if I want to do what I see so many other people say, buy one rental per year, that's a lot of cash being floated before you are in the black.

I have seen articles on cash out refinance, but you would still need to have enough equity built up to stay within the LTV for the refi, right?

When we are ready for our first buy, we will likely use our HELOC from our primary residence for the down payment, but pulling cash out of the rental to do the second buy would require substantial appreciation (in theory). Not to mention, it would compete with needing to pay the HELOC off.

Thanks for any insight.

[Mike Dymski]

$500/mo x 12 months = $6,000 net income

$6,000 income / $40,000 investment = 15% return + appreciation + principal reduction + tax benefits

That will be a tough return on investment to beat with any other asset class.

Getting the $40,000 back in cash is not breaking even, it is doubling your money.  You still have the original $40,000 in equity and now have $80,000 in net worth (excluding the principal reduction).  $40,000 compounded at 15% per year = $1,145,000 in 25 years.

You mention rehab...if you are rehabbing, you likely will increase the value of the house beyond your purchase price of $140,000.  Let's say for conversation sake that the value increases to $150,000:

$10,000 + $6,000 income / $40,000 investment = 40% year 1 return + principal reduction + tax benefits.

Many BP investors purchase, rehab and refinance all of their original investment out of the property right away and repeat the process (i.e. use the same $40,000 over and over again).

Hope this helps.