Analyzing A Deal. What are we doing wrong?

[Adam K.]

We found a good deal on a duplex in Puyallup, WA. Duplexes in this area have been going for $380,000 and above. After running the numbers, it does not seem to be as good of a deal as we thought. Are we doing something wrong in our calculations? We are using our VA loan, and will be living in one side at first, however we estimated the rental income for both sides once we move out. We are also not putting any money down, since we are using our VA loan and are not required to.

[Chace Fraser]

Hi @Adam K.

If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.