question about cash flow on rentals

[Rocio Lara]

hello. i am a new investor who plans to rehab and hold properties. my original idea was to rehab properties but my husband prefers holding them for now due to the current market. so we have been trying to calculate numbers that will give us about $200-250 cash flow but we just don't see that happening. after paying back our loan (LOC, hard money, etc) and leaving money in reserves, there's barely any cash flow left for profit! is this a common problem or are we missing something? we don't have cash, so all of our calculations are based on loans and lines of credit. are there types of loans specifically for rentals? if so, can you share what those are? we are hesitant to do conventional financing because that only allows for a handful of properties and we would like more than a handful. thanks. rocio

[Marc Freislinger]

Read up on the 50% rule in the rental property forums. That may help you understand the expenses involved.

If you can't make the number work where you are, maybe find some place where they do work, and invest there. Have you talked to any wholesalers in your area who might have properties, or find properties, that meet your specific needs?

[Rocio Lara]

okay i will read up on that. thanks marc. i haven't asked any wholesalers yet but that's another option that i'm considering. there's gotta be a formula that works for us. i guess it's only a matter of time.

[Jay Orlauski]

Hello, , purchasing SFR is going to present quite a challenge i think - in terms of positive cash flow. I started with duplexes and had pretty good cash flow. I have been looking at houses recently and even with the market the way it is , the cashflow is just not quite there unless you can afford to put more money down - but then you have to look at your over return on investment. Recently I have started looking for at fourplexes - we are only looking at 3 1/2 % but that is because we will be owner occupied - but normally there is 20% down on anything over 4 units. with that in mind , you may want to consider getting as many units as you can afford - i.e a 4-plex , a 6plex, 8plex or 10plex. Obviuosly the price per unit goes down when you purchase like this , so your cash flow will be nicer. As far as hard money lending goes - someone can correct me on this , but you might be better served using hard money to flip houses rather than try to get cash flow from it, considering how much it cost to service hard money. You may want to consider flipping a property first , then using the profit from that to pick up a rental property. Even some of the best deals I've calculated with fourplexes will barely yield $50 - $300 a month profit - not too shabby but the numbers look a lot better when you start looking at 10 plus units. depending on what you are trying to achieve - buy and hold may be better deal for now if you can only get an SFR - it is a little difficult i think to unload a flipper right now unless you can find a really cheap fixer upper or know how to work the foreclosure market.

[Rich Schroeder]

I've found that SFH's have been very easy to find and to make cash flow. Although I did have to move to get to them. SFH's are easy to buy, easier to sell (than multi family). You don't have to pay utilities, you don't have to worry about the renters on top making too much noise. there are lots of positives for SFH's. Also, if you decide that being a landlord is not your cup of tea, you will be able to unload your houses much quicker.

In regards to cashflow. do as advised above and read about the 50% rule. I recommend buying using the 2-3% rule as opposed to the 2% rule as times havde changed and the SFH market is rich with deals right now.

In regards to financing, you will be hard pressed to find financing unless you have money in the game. I would recommend saving money to put into the business.

[Eric M.]

Hard money and buy and hold don't mix well together.
Only buy and hold if you can replace your hard money loan with a cheaper alternative.

[Josh Green]

Originally posted by Jayme Tlaloc:

Hello, , purchasing SFR is going to present quite a challenge i think - in terms of positive cash flow. I started with duplexes and had pretty good cash flow. I have been looking at houses recently and even with the market the way it is , the cashflow is just not quite there unless you can afford to put more money down - but then you have to look at your over return on investment. Recently I have started looking for at fourplexes - we are only looking at 3 1/2 % but that is because we will be owner occupied - but normally there is 20% down on anything over 4 units. with that in mind , you may want to consider getting as many units as you can afford - i.e a 4-plex , a 6plex, 8plex or 10plex. Obviuosly the price per unit goes down when you purchase like this , so your cash flow will be nicer. As far as hard money lending goes - someone can correct me on this , but you might be better served using hard money to flip houses rather than try to get cash flow from it, considering how much it cost to service hard money. You may want to consider flipping a property first , then using the profit from that to pick up a rental property. Even some of the best deals I've calculated with fourplexes will barely yield $50 - $300 a month profit - not too shabby but the numbers look a lot better when you start looking at 10 plus units. depending on what you are trying to achieve - buy and hold may be better deal for now if you can only get an SFR - it is a little difficult i think to unload a flipper right now unless you can find a really cheap fixer upper or know how to work the foreclosure market.

paying for your own cashflow does not make a deal.

[Bryan Hancock]

Welcome to BP…good questions.

I am a bit confused about what you are trying to do. I think you are trying to rehab and hold properties. Since you don’t have cash this is going to be rather difficult unless you can somehow raise it from other places via private lenders. Hard money is often used to rehab projects and that financing can later be taken out by permanent financing that is used to hold/cash flow the project. There are often seasoning issues with this strategy and lenders generally won’t recognize the forced appreciation as collateral for a new, permanent loan.

I think it is a good idea to buy and hold in this market because it is hard to sell and financing is VERY cheap. A standard, 30-year fixed loan is generally a good product for long term buy and holds. Amerisave.com has some great quotes on competitive loan product for 30-year debt on rentals.

Yes…It is HARD to find good deals that will cash flow in the real world. You have a ton of competition for good deals, which makes them very scarce. Read the rental forums to learn more about real world cash flow. I don’t think you guys are missing anything. The people that are missing things are generally the ones that think their operating expenses are going to be like 10% of gross rents.

If you don’t have cash you aren’t ready to be a landlord…plain and simple. Get some cash and you will be ready. You can start by selling contracts for other investors and learning. You can acquire more than a handful of properties over time by doing so prudently and not getting overleveraged. Cash and conventional financing (yours or someone else’s via sub-to) will be necessary to do this in most cases.

[Jay Orlauski]

paying for your own cashflow does not make a deal.

I agree with you. I just meant from a return on investment standpoint. The same money invested somewhere else could be earning interest - so it is matter of whether you could earn more if it was tied up in a positive cash flow unit - or could be put to use somewhere better?