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All Forum Posts by: Lumi Ispas

Lumi Ispas has started 26 posts and replied 691 times.

Hi Kyle,

Everyone has different guidelines for what a good deal is.  

Usually, if you can buy a property at a discount including the repairs and the cash flow makes you happy, you can call that a good deal.  Most people are looking for a minimum of a 10% discount. If let's say a home is worth 100K, and you can buy it for 80K, and make repairs valued at 10K, you own the home for 90K. That's a 10% discount from market price.

If the home can be rented for $1200 per month and property tax and insurance are $200/month, than your cash flow is $1000. ( I am assuming there is no mortgage and the tenant pays all the utilities for the sake of the example).

In this case, over 12 months, your cash flow is 12 months x $1000 = $12,000. 

In this case, your cash flow is 13.3%, and the way you calculate it is $12,000/ $90,000. This is in case you purchased it all cash.

If let's say you got a mortgage on this property and all the cash you used was 25% on the $80,000 purchase price and then you made the $10,000 repairs with cash, you have only $30,000 in the deal. 

Let's further assume you got a 6% principle and interest, fix loan, your mortgage payment will be $360 per month.  Now your cash flow is reduced by this amount:

$1000 -$360=$640.

$640 x 12 months =$7680 - Your cash flow for the year.

Going back and looking at the fact that you invested only $30,000 cash, we will calculate the cap rate using only the cash involved:

$7680 divided by $30,000= 25%

You can see now that using cash only versus a high interest mortgage for this market is significantly increasing your cap rate. 25% vs 13.3%.

Using the same scenario, you can use buy 3 homes with the same $90,000 and have a total cash flow of $7680 x 3 = $23,040 versus using all the cash in one home and getting $12,000 per year cash flow.

There are other factors to consider of course... This is just simple math. 

Good luck and let me know if you have other questions.

Lumi