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!

[Frank Jiang]

If you're doing a 15-year mortgage, you're no longer playing the cash flow game, you're playing the equity game.

Assuming you exit on the 15th year, let's compare the cashflow of this property unleveraged and with 100% leverage.

Since the IRR of your property without cashflow is higher than your rate of borrowing 8.79% > 5%, it makes sense to lever up as much as humanly possible AS LONG AS you are comfortable with taking on the risk of lower liquidity.

This assumes all of your assumptions are right and doesn't get into nitpicky stuff like the fact that you don't have PMI on a 100% leveraged property.