What's the Norm in Out of Pocket $...$0 Out of Pocket Seems Unatainable in Dallas

[Jimmy Watson]

My wife & I have been trying to wrap our heads around what's a good buy and hold deal.  For instance, we are looking at one currently that could take around $25k out of our pockets, but it would cash flow around $500 a month (before vacancies & maintenance). 

From local investors, I'm getting "That's way too much out of pocket!"  Or, That is a fantastic cash flow!"

I think both statements are correct. For me, that does seem like a lot out of pocket...but it's a great cash flow. My naive ARV range is $75-$125k. I'm being told my max LTV will be 75%. I'm not finding (and maybe I'm not looking in the right places) the deals that would get even close to $0 out of pocket. To top things off...things are skyrocketing in the Dallas area it seems, which makes it even more difficult to find deals that aren't going to take $15k+ out of my pocket.

Thanks for reading.  Although I'm frustrated and venting, I would really like some input on how to relate out of pocket vs cash flow.  Is the out of pocket amount plus the amount from cash flow a personal amount (comfort level)?  Should I be looking at this as cash on cash return and if I'm comfortable with the monthly cash flow?

Thanks!!!!

[Nathan Lenahan]

It is tough to find good deals with ZERO out of pocket costs. Even harder to find them on the MLS if that is where you are looking. Your cash flow will decrease from both vacancies and maintenance, which will diminish your return.

The only places I am seeing rentals with equity are fixer uppers and they are hard to find at 75% equity even after renovation.  I general rule of thumb is using the rent ratio (gross rent/purchase price).  In DFW a rent ration of 1.2 is pretty good though some investors will tell you 1%+ is good enough.  I typically try to aim for 1.25 and see how the net cash flow looks like after that. 

You could also look at using commercial loans because some will lend up to 85% LTV/LTC. They also tend to amortize over shorter periods. Our current loan we are working is for 20 years with 5 years interest rate terms. Commercial banks also look for a specific debt coverage ratio (typically 1.2+) which is the monthly rent/monthly mortgage payment.

 We use investor cash to purchase and rehab and then finance out with no cash out of our pocket.  We have to buy very well to cash flow with 20 year amortization and meet the equity requirements but it is possible.