BiggerPockets

Timothy,

Yes you want to make your money right away. IF your goal is long term buy and hold you need to buy the property at a discount. You can not buy property at retail price and expect to rent it out and get positive cash flow. Example: I purchased my primary home for $159K and it appraised for $185. I basically purchased my home retail. My company locked up an investment home 3 blocks from my house for $75K and it is much larger than my house. That home will cash flow but my property normally would not. Are you planning on managing your own property? There are many things to consider.

I don't understand how the price that I pay for an investment is going to automatically make it a poor investment. I understand that the less I pay initially, the more money I will ultimately make but even if I purchase at market value if the rent covers my expenses and mortgage cost then I will still receive cash flow. Even if the rent only covers half my mortgage and I pay the other half myself isn't the tenant basically buying the the house FOR me? Of course there would be no cashflow until its paid off but I'm still being matched dollar for dollar by someone isn't that a good investment in itself?

-Tim

First, you always want some equity in the property. If you have enem a small price decline and have to sell, 10% equity can disappear, leaving you to pay to dump a loser.

Second, read about the 50% rule in the Rental Property forum. A property whererent is only half the piti payment is a major loser.

The idea is to make money, not lose it. Buying properties that don't cash flow (50% rule) at retail prices are complete losers unless you have a lot of appreciation. Why bother?

But if that's what you want to do you'll find plenty of people to take your money.

Even if the rent only covers half my mortgage and I pay the other half myself isn't the tenant basically buying the the house FOR me? Of course there would be no cashflow until its paid off but I'm still being matched dollar for dollar by someone isn't that a good investment in itself?

Tim,

This is not investing. When I first started considering getting into REI, I thought about doing a condo deal with my uncle as a partner. The properties we were looking at would either net cashflow nothing or negative cashflow. As I learned more about REI, I learned that this isn't an investment. You need to be making money not losing it. For that situation, what happens if you have a major expense come up or you can't find a tenant, now you're paying a huge mortgage payment. This is not a good idea.

You should stress too much emphasis on cash flow though. However, I wouldn't buy a huge loser as well. I have a low standard of buying houses. What do I mean? Well, I only look at houses that doesn't have to cash flow at all or breaking even in order to function in my REI portfolio.

Buying properties that don't cash flow with maintenance and vacancy factored in is a great way to get broke. If you were playing the appreciation game (annual appreciation of 15%+) then I can see it as a risky possibility, but the appreciation game doesn't work anymore.

Outside of the savvy investors who got out of the appreciation speculation before it busted on the East and West Coasts, every investor that I've seen do this has either busted (i.e. foreclosed on and/or filed bankruptcy) or has sold out at a loss. Its not a sustainable investment strategy.

Consider this.

Condo Price: 115k
Down Payment: $11,500 (10%)
Expected Rent: $1,100/month
30 year Mortgage at 5%

My plan would be that me and my partner buy this as described and live in it for 2 years. During this time we will build some equity in the house (probably not much). When we graduate (after those first 2 years) we will then begin renting it out. Now the kicker is, we would aim to pay off the property in ~2.5 years.

Once we pay it off we will both have an asset worth about 62k AND monster cash flow from renters.

It seems like this plan would be profitable, yet it doesn't require immediate positive cash flow. Is there something I am overlooking?

PS.. I am a complete newbie myself. I haven't even done a single deal yet so take my response for what it's worth.

I developed my minimum Return On Investment (ROI) or more particularly my Cash on Cash Return (CCR) of 40% from playing the game Cash Flow before I ever bought a property. I've used it ever since.

Now, though, probably 90% of the time I have under $1,000 in the transaction and many times $0 because of how my financing is structured, so instead of ROI I factor off of a minimum cash flow amount versus leveraged amount and I also factor in basic equity in the property.

I want $150 cash flow per unit after ALL expenses on a property that I'm into for less than $50,000. If its over $50K then I increase my minimum cash flow amount semi-proportionally. I have a house I'm into for $110K and I clear $350 a month on it. Most of the time as I go up in value my cash flow versus leverage ratio goes down, which is why I like the lower end. :D

On top of my cash flow, I'm not interested if I'm not into a property fixed up for 70% or less of ARV. That's also one of the prerequisites of my long term financing so it works out well.