Begining Investing...

[Brandon Pearsons]

In my city, RE did not get hit really hard like most areas. There are a lot of investors paying cash for the income properties.

Seems like most returns are about 7% in rent.

Even with a 25% down on a property, these properties are not really breakeven in cash flow.

I would rather purchase more properties than just one, but it is possible to dump all cash into one property which would return about 7%.

What do you all recommend? being cash flow breakeven or slightly negative or putting all funds into one Duplex,etc

Thanks

[Jon Holdman]

You are correct that 100% financing is difficult, and 100% conventional financing is impossible. That's not what Jason meant. He meant that you should evaluate the deal as if you were getting 100% financing. If the deal cash flows with that assumption, then its a good deal. ANY deal with cash flow with 0% financing, but it may return you less cash than if you put the money into some other investment. Owning real estate is not an end in itself. Making money is. If you're going to put your money to work, you want it working hard.

If you find a good deal with the 100% financing assumption, then you put in a down payment your cash flow will be higher. That additional cash flow is from your cash, not from the deal itself.

Lets evaluate your deal, $170K for $1300 in rent. I can tell you with no more information than that this deal is not cash flow positive. Lets do the math, though.

Rent: $1300
Expenses, capital, vacancy: $650 (you've neglected any money for capital items, maintenance or for property management, yet your can get to $552. So, this $650 estimate based on the 50% rule may be optimistic)
NOI: $650
Payment: $965 ($170K, 5.5%, 30 years)
Cash flow: $-315

Ouch!

If you put in a 25% down payment, your payment falls to $723 and you're still cash flow negative $73 a month and have $42,500 tied up.

A better price for $1300 in duplex rent would be about $80K. That would make your 100% payment $454, giving you about $100/unit/month in true cash flow. With a 25% down payment, your payment is $341, giving you $309 a month in true cash flow. That's $3712 a year or a 19% cash on cash return. If your intention is to make money, that's the sort of deals you need.

Now, that's not to say you might not make money on your deal with appreciation (i.e., speculation.) But that's a different sort of investment that investing for cash flow.