Making 100% Leveraged Deals Cash Flow & the 2% Rule

[Carrie Giordano]

Since Finding BP I have a new love for analyzing deals. Before BP, I found deals that might hit the 2% rule and seemed to have good cash flow. However, now I am looking with much more scrutiny. For example, now I am adding 10% versus 5% of the yearly income to my expenses for vacancy, cap ex and repairs. Boy, has this changed my returns!!! While I haven't found these numbers to actually be that high I think it is a good way to evaluate future properties. I know many of the rules of thumb are just that, a quick way to look at numbers I find it interesting that I can find a deal that is 2% and it still might not be a clear winner. I love leveraging deals 100% using a line of credit as the down payment or as a full cash deal and BRRR. But now with the added cushion of expenses I'm finding them harder to cash flow on paper. So my question is really more of a discussion of what is a winner? How good does a deal have to be to cash flow with 100% leverage and is this possible in B neighborhoods? Is it asking too much to make it work on a 15 year loan?

Here's a recent breakdown I did with rounded numbers for the sake of ease...

Purchase Price: $50k

Closing:$2k

Repairs: $5k

_________

All In: $57k

EXPENSES

PM:1200year

Cap Ex: 1200 year

Repairs: $1200 year

Vacancy $1200 year

Taxes $1500

Insurance $450

TOTAL:$6750

INCOME

Rental Income: $1000 month/ 12,000 year

$5250 ($437 month) Cash Flow = 9.21% cap rate

Now lets say it was 100% financed at 5% for 15 years (yes I know I could put 30 in to make it work) = Payments at $450

=  (negative) -23 month cash flow

I would love to hear what others have to say about this!