To Sit Still or To Expand?

[Steve Borgman]

My business partner and I bought our first deal about 1.5 years ago. We had to rent it at a slight negative cash flow, with the rent paying for the mortgage payments, but not covering the tax payments totally. The renters have been fantastic, but are moving out of the country, so we need to fill the place again by August 15.

That's not the total point though. We have tried to refinance twice, and although we have good credit, the reason for not being able to do so was that we had not been landlords long enough: This was in February, at the 6 month mark since the house had been on the market (by us) 6 months previous.

We would like to refinance, pull out some equity in cash, and make our next investment, but are currently stuck because of no liquid cash, yet now is one of the best times to buy.

Any creative solutions you can think of? Or is now the best time to hold and be patient?

[J Scott]

Now is definitely a GREAT time to be buying...

But maybe not for you, if you plan to pull cash out of this property...

Here's the deal:

According to you, the rent from the property you're holding covers the mortgage but not all of the tax payments. And you consider this "slight negative cash flow."

Personally, I would consider this "major negative cash flow," as you haven't even factored in the costs of insurance, maintenance, vacancy, administrative costs (like evictions, etc), any utility costs during vacancies, lawn care, etc.

After you figure all those things in, you're likely much more negative in your cash flow than you think. And while you may say to yourself, "I haven't had any vacancies and maintenance has been non-existent, these things *WILL* change.

Many around here talk about "The 50% Rule," which basically states that on-average across a large cross-section of the investor population, about 50% of the income from a rental unit goes towards expenses. This leaves the other 50% to pay the mortgage.

It sounds to me like you are assuming expenses to be a very tiny percentage of the income, which will come back to bite you in the long-run.

So, before you take money out of this property, consider that it may take what is currently a negative cash flow situation and turn it into a disaster. Do you have cash to cover several months of a vacancy? How about to cover a major maintenance issue?

That said, now is a GREAT time to be buying more property...just make sure you're in a position to buy, and make sure you're buying right.