How much CASH FLOW can $40k buy?

[Mitch Kronowit]

Good evening all,

For those of you familiar with my approach, you already know I'm interested in holding onto property long-term for the appreciation potential. However, my wife and I are willing to take a good hard look at the other side of the coin, i.e., pursuing cash-flow to see how that might work for us.

So here's the $40,000 question: Where would you invest that amount of money in order to maximize your cash flow?

- Purchase an inexpensive property for all cash, fix it up, and lease it out pocketing nearly all of the rent check?

- Leverage the $40k into more expensive properties?

- Purchase a note?

- etc.

Please, I'm only interested in real-world practical applications in this current market because $40k is what we really have to invest. Don't bother telling me I can purchase 40 properties using $1,000 down because some "Guru" said so.

Thanks everyone!!! :beer:

[J Scott]

I can't really comment on which market, as every market is going to be different, and I'm only intimately familiar with one area...

As for what type of rental you should buy, consider that if you can find a bank to lend at 80% LTV, your $40K will purchase about $200K worth of property. That's assuming the property doesn't need much rehab.

If the property is going to need some rehab, the total equity is going to drop. For example, if you need to reserve $20K for rehab, that only leaves $20K with which to purchase, and at 80% LTV, that's $100K worth of property (plus the $20K in rehab).

So, realistically, you're looking for property that will require between $0-20K worth of rehab and will cost between $100-200K.

To get 30% COC, you're probably going to be looking for units that cost less than $50K all-in (and generate about $1000/month in rent). In fact, at those numbers ($50K all-in, $1000 income, 50% rule, 30 year fixed loan at 6%), your COC is right about 32%.

So, your $100-200K worth of property will buy you 2-4 units, depending on condition. Since most of the great deals are properties that are at least somewhat distressed, it's probably the lower end of that range (as you'll need cash for rehab), so expect that you'll be looking for 2 units.

Now, as for whether you go for 2 SFH or a duplex, that's going to depend on the market, your management preferences, etc. Generally speaking, duplexes are going to be easier to manage, have the benefit of economy of scale and often return a bit more than SFHs. That said, they tend to appreciate more slowly than SFHs (as they are often valued based on their income potential), and can be more difficult to sell.

But, if you're really trying to maximize cash-flow over all else, a duplex is probably the way to go given your cash availability, your most likely lending scenario and your goals.