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No, Mike, they aren't. Using this model I have yet to have an year that I didn't have positive cash flow in ANY of my properties. And I've had one eviction, property damage, and lost rent due to vacancies. I didn't say profit, because any chimp can make a profit with depreciation. I'm talking about positive cash flow. EVERY year.

To your points:

1. Yes, all of the items that you mention need to be considered planning your cash outs and cash flows. I simply leave the cash flow in the bank every month until I reach $3000 per house, then I maintain that balance. That funding has so far covered everything over and above my budgeted maintenance.

2. You are applying a broad brush to all rentals - you haven't a clue as to the areas that I'm in. I do not buy war zone properties and I'm not buying high-end stuff either. I'm in the sweet spot for rentals in my county.

How well has my strategy worked? I have been told by both renters AND my competition that I have the nicest rentals in the city that I operate in. At this moment I have a waiting list of three people wanting to rent from me.

3. You are quite wrong about the area. The collapse of the subprime mortgage sector eliminated the first time homebuyer market here. That has INCREASED demand for rentals, and has slightly increased rents. (See the Forbes article on Sep 5). So far in three years I have not spent one dime on advertising for renters, and for the one that I rented last month I had 30 people apply in FIVE days. Yes, this IS a depressed rental market, isn't it? I did start using Craigs List a couple of months ago (which yielded my waiting list), but my most effective means of advertising has always been a simple sign in the window during the rehab.

Listen - I can very much appreciate a spirited discussion about techniques, and you are absolutely right to question my assumptions and numbers, but please don't patronize me when you know nothing about my area, my properties, or most importantly, how I run my business. It's counterproductive. And it's a turn off.

Dennis (MI)

Jon,

I agree that this type of discussion is fairly common, but in the three years that I have been in real estate investing I have never heard anyone talk about a model where you buy rentals for cash, rent them, then refi them and pull all of your cash out and still have them cash flow. I still get blank stares from the people that I network with, because all they can see is my 55% LTV and why the heck didn't I pull more cash out.

So from my admittedly limited perspective this was something new so I thought that I'd start with it.

In terms of cash flow, all of my rentals do to different degrees. No, the example doesn't get $1000 per month, but it doesn't need to as the expense ratio including taxes, insurance, vacancy allowance and maintenance is between 40% and 41%.

I'll get over the new member forum and introduce myself. I look for ward to participating here.

Dennis Fassett

For those of you familiar with the real estate market in the Detroit area, you know that this is prime opportunity to build a real estate portfolio.

Why?

Let me ask you this - where else can you routinely find single family homes priced at forty to fifty cents on the dollar, with a minimum of $40,000 in equity, that need LITTLE or no rehab?

Tell me - where else? There is no other market like this.

Is it risky? Sure. And even more so with the sub-prime crash. But is good, solid suburban property ever going to go to zero value?

No.

When you take into account the fact that General Motors and Ford BOTH turned a profit last quarter for the first time in a long time, you begin to see that the real estate market in this area is not as it seems on the surface.

So as I discussed in a prior post, I seriously recommend that you add some “buy and hold” to your mix. I know that you flippers and wholesalers are all groaning now, but stay with me for a minute and let me show you what I mean.

Actual Example
Purchase Price - Cash: $ 45,000
Total Rehab and holding costs: $ 6,000
All in: $ 51,000
Appraisal after rehab: $107,000
New mortgage after rented: $ 65,000
Monthly NET cash flow: $ 175

What’s wrong with this picture? You buy, rehab, and rent. You take ALL of your money out of the property, PLUS some of your profit when you refinance, the house still cash flows, AND you still have over $40k in equity.

Question - - what’s the ROI when the “I” equals zero?

Hmmmmmmm. How about – infinity??

How many times can you do this? How many times could you do this even if the cash flow was zero?

The question everybody asks is, of course, how do you find these properties? My answer – they're all over the place on the MLS right now. You just need to understand the math. And that's pretty straightforward, because you just work backwards.

Here’s are the process steps:
1. Determine what market rent is for your property

2. Determine your costs (taxes, insurance, maintenance, vacancies, etc)

3. Subtract your costs from your rent, and you have Net Operating Income (NOI).

4. Determine the amount of cash flow you want/need every month. Subtract from NOI.

5. What you have left is the amount of money you have available every month for debt service. If you’re familiar with present value concepts, you can use them to determine the maximum loan that the amount will support.

6. Divide the loan amount by the LTV percent you expect to have on the property. That yields your total, all-in price. (Purchase price+holding costs+rehab costs, etc). I call it the NOOP number, where NOOP is No Out Of Pocket.

7. If your all-in number is less than or equal to the NOOP number. Congratulations and welcome to the world of infinite ROI.

8. If your all-in number is greater than your NOOP number, then the deal still might make sense. For example, if it's $2000 over your NOOP number, and you're cash flowing $100 per month, could you live with an ROI of 5% per month, every month??

If this doesn’t make you sit up and take notice, I don’t know what will. When you have the opportunity to acquire properties with equity that are cash flowing, with no out of pocket cost, personally I can’t think of a better way to build a portfolio of assets and build real wealth.