All Forum Posts by: Matt Donley

@Wes Brand When I refer to the "cash flow rule", I'm just referring to the idea that you should never buy a property that results in negative cash flow. Not sure if it's accepted as an "official" rule, sorry if that was confusing. I actually found a Bigger Pockets article that discusses a scenario similar to the one I brought up https://www.biggerpockets.com/renewsblog/2015/01/2...

What it comes down to is reducing risk. If your property is negative cash flow, that could mean you won't be able to handle payments when things go bad. I think that's the moral of the "cash flow rule." It's about flexibility, options, and managing risk.

@Wes Brand it sounds like what you're saying is the cash flow rule is just one of many tests you need to run on a property in order to evaluate its potential. When you look at cash flow in and of itself, it's essentially meaningless if you ignore other factors such as cap rate, appreciation, etc. 

You make a good point about saying if it works at 20% down, but not at 3.5%, it's probably a bad deal to begin with. And maybe my example is flawed, yes PMI needs to be factored in, etc, I'm just trying to illustrate the point that cash flow calculations completely ignore equity, and I think that's flawed. Maybe it would become clearer for me if I actually ran an analysis on a property myself from multiple financing perspectives and see where cash flow lands at the different options. 

I'm very much new at this, still learning ;)

@Will Chamberlin your approach makes sense, and thanks for the validation. I feel like the cash flow rule is less applicable the more money you put down, because it doesn't give you any real valuable information about the deal. If I spend a million cash on a property that produces $100/mo cash flow, it's obviously a bad deal, but using the cash flow rule blindly shows otherwise. There must be some formula to use with the cash flow rule that could provide an apples to apples analysis on a property no matter how it's financed. 

You probably hit the nail on the head by saying you always look at it through the perspective of 100% financing. Maybe that's the ultimate way to run the cash flow analysis, but you are raising the bar on what you'll accept as a good deal, possibly leaving opportunities on the table which may have otherwise worked out as good investments. I guess it comes down to what the individual investor wants to accept as risk.

I hear so much about how important it is to have positive cash flow when analyzing a property to buy and hold. What I don't hear is how the deposit you put down on a property affects the cash flow (by directly affecting the amount of money you need to borrow), and how that should affect your analysis. 

For example, let's say I have $20,000 to buy a $100,000 property, but can qualify for a low interest FHA loan that only requires a 3.5% down payment ($3,500). Since my mortgage payment will be relatively high, let's say this causes my analysis to show a negative cash flow.

On the other hand, imagine if I had chosen to put the entire $20,000 as down payment. My mortgage  payment would be lower, so let's say it's enough to provide me with positive cash flow. 

So what's the difference? Should I turn down the deal just because I plan on only putting 3.5% down, just so I can keep extra cash on hand? Why does the deal suddenly get better when I tie that $20,000 as equity into the house? Whether my $20k is in cash, or is tied up in equity, why should that affect my decision based off of the cash flow rule?

What if I was paying 100% cash for the property? Of course the property is going to cash flow better than if it had a mortgage. But the deal may actually be terrible if you calculate it with a mortgage. 

What am I missing here?

"pay them to take on all the risk" 

This is where I lost you. Maybe I'm not understanding your relationship with your contractor, but I don't understand how you are parlaying the risk involved with flipping a house onto your contractor. It is still your responsibility to properly assess a deal and estimate repair costs and after repair value. You own the risk as the investor that everything falls into budget, and that you sell it for what you expected to get for it. 

I can understand a situation where a contractor provides a contract price to do a specified scope of work and takes responsibility to complete that scope of work for the promised price, but if they go to replace the siding (for example) and discover the sills are completely rotted, they are going to give you a change order. I doubt any contractor would be willing to offer a "blanket contract" to cover any and all surprises in order to "eliminate risk", and if they did, you're paying him too much. Perhaps you're working with the contractor on different terms? I think we need more explanation on this aspect of your approach.

I think there's a lot of value in "getting your hands dirty" as a casual investor, because the money you save affords you the ability to absorb some of your mistakes. But where your plan comes into play is when you're trying to scale your real estate business. Sacrificing a portion of your return per project is offset by the ability to increase volume. I really doubt you "just sit back" as you put it. You're using the time and mental bandwidth you're saving to focus on other projects and responsibilities.

I'm a novice myself, so this is purely speculation on my part while drawing from my construction experience. Interested in what your thoughts are :)

Looks like zillow used to offer this, perhaps it's a premium feature now? Can't seem to find it.http://www.zillow.com/blog/heatmaps-new-and-improved-3898/ 

I'm curious what is currently available out there for visualizing rental property trends in a given area by heat map in order to become more familiar with average rental rates and property values? I know there are things like Zillow research, but upon first glance it only focuses on major cities, and it's hard to extrapolate the data into something meaningful.

I was looking more for something that displays a heat map. So you see a map of your area, and you can see which parts of the neighborhood rent at a higher price, for instance, or sell at a higher price. There is a lot of data you could display in a heatmap that would really provide a lot of value and help you identify potential deals more confidently. Not sure if there is a service out there like this already?

Otherwise, I was thinking of even hiring a VA to record local data for me once a week, and put it in a database. I know Google Maps has an API where you can generate a heat map, I'm also looking at some other options. Has anyone done something like this before? (Sample heatmap below) 

Hey John, I'm from RI too. Grew up in Bristol, then lived in Warren for a while too. Currently traveling with my wife (i work online) I'm looking into making the jump into real estate too once we get back home, it's cool to see someone else from Warren on here. I'm working my way through the bigger pockets book on rental property. It's very good, I'd recommend reading it. Ten bucks on kindle.

Thanks Anthony. I'll check out the website.

It seems like real estate is the type of thing that is easier when you get out there and build a network of connections with people you know and trust. This would probably be a good step for me once we get back home. Thanks for the tip!