What is a good cash flow goal on a no money down deal?

Question

I currently work with a local portfolio lender. I have a history with them, and they typically will have no problem with lending me 100% of the purchase price for small SFH's that have very low purchase prices ($25k - $40k). The bank has trust in me that if I make an offer on the property then the rental income will cover the mortgage, and even if it doesn't, I have plenty of disposable W2 income to cover the payment. Also, there are a good bit of these types of SFH's in my area. Basically, with this lender, I can pick up decent rental properties with no money down pretty easily.

Here is my issue. I typically set a cash flow goal of $150-$200 per door. However, when I run the numbers (accounting for all expense) on these small SFH's it is very hard if not impossible for me to hit this cash flow goal with no money down. I can usually get $80 - $100 pretty easily but not much more.

My question is should I be willing to lower my per door cash flow goal, considering that I will have no money into these house? Or should I just pass on these houses regardless?

I'm sure people are going to have different strategies and thoughts. I'm interested in all points of view.

Jason Hirko · Answer

@Bruce Clark If you said you can get $75 a door with no money down, or $150 with say $10,000 down, it would take you 11 years to make that $10k back on the difference. So if you are getting a 9% overall return (excluding principle) or more, then you should finance 100%. If not, you're better off putting the cash down.

Lee S. · Answer

@Bruce Clark like I said, it's nonsense. Yes, in a perfect mathematical laboratory it makes sense, but we don't live there. I've called Thomas S. out on this 3-4x in the past month and so far he is not willing to respond. Me thinks it's because he read this somewhere and he thinks it makes him sound intelligent but he is unwilling or unable to defend it. I just don't want him filling new investors head with the BS.

Bruce Clark · Answer

@Jason Hirko I really like this way of looking at it. This is probably the best way of determining whether I should put money into the deal or just finance 100% of it. Great tip.Thomas S. I can really see both of you points. I understand that an investor should be cognizant as to the capital they have invested and the opportunity cost of having the capital tied up. However, you have to have your capital invested in something in order to realize a gain. It does not make sense to me to constantly be deducting 10% from your cash flow based upon an assumption that you would get that 10% from another investment if your capital was not tied up. In doing this, you are essentially determining that any investment that makes 10% is breaking even, when it isn't - its earning 10%. Am I missing something?

Lee S. · Answer

Thomas S. same story every time, it's complete nonsense. A property is not "cash flow negative" because it has a small or large amount of equity that could be getting a return elsewhere. You can argue that the equity would be better off elsewhere, but you continue to imply that the investor will actually lose real money if they leave equity in a property that has a positive free cash flow after all expenses.Enough with the nonsense. Maybe you need to understand that one goal of most investors seeking passive cash flow is to have enough to live off of at some point, they don't necessarily care what the return is at that point if they are sitting on a beach drinking a margarita every day.

Thomas S. · Answer

The reality is that when a investor analyses any investment property for cash flow the numbers need to be always based on assumed 100% financing. If a property can not cash flow with 100% financing it will never cash flow since equity is valued higher (usually10%) where as mortgages are presently in the 5% range. For every 10,000 of DB or equity in a property the investor must deduct $83 from the rental income to pay for the equity. This obviously reduces the cash flow from the property itself since it is the equity that generated the cash flow and not the property. Based on this a investor determines what cash flow they wish to receive from a property assuming 100% financing and invests accordingly. Throwing cash at a property only creates false cash flow for those investors that place no value on money. They in theory could pay 1M cash for a property believing they have positive cash flow with rents at $1000/month. Unbelievable but true (to them at least).

Bruce Clark · Answer

@Ali Boone your comments are right in line with what I was thinking. I do not know how many loans they will give me but I am prepared to keep asking until they say no.Thanks for the input!

Ali Boone · Answer

Well, technically any income with no money down equates to infinite returns. With that in mind, it's hard to say they would be bad deals. I would say more of the consideration would be whether those margins are enough to make up for any unexpected repairs or whatever. If they are then, well...how many loans do they want to give you? If there's no max, then buy 1000 of those properties! :)Just make sure risk is mitigated....like is the local tenant pool stable enough to let you always have tenants in? Is there any risk of the rents decreasing and suddenly you aren't in the plus on a 100% loan? Etc.