BiggerPockets

Ok here is my situation. I just bought a duplex which closed 2 weeks ago. This leaves me with a positive cash flow of $750 per month from the 5 units I own. The problem is I made a deal with myself that I would not buy another property unless I had at least $1000 in reserves for each unit I own. $1000 seemed reasonable to me, that's the only reason I set this figure. So 5 units, would require me to have $5000 in the bank. I currently only have $2500 in the bank. So here are my two options, a patient one and non patient one. The first patient option is to save the $750 per month until I reached the $5000 safety net plus $2000 for the safety net on the new duplex and $3000 for the closing costs. That's $7500 I have to save before I would feel comfortable buying another duplex. So at 750 per month that would take 10 months. Option two, the impatient one. I approached my aunt and asked her if she would like to invest some of her money into my rental properties and I would pay her back in monthly payments with her earning 8% on her money. She said she would love to get 8% on her money. I could borrow about 13,000 from her and pay her back 400 per month for the next 36 months. I could use this money to increase my safety net and buy more properties. The only downfall would be the decrease in cash flow from 750 per month to 350 per month until I purchased another building.

I am very comfortable with debt as I work in the financial industry, so I am very careful not to become overly leveraged. I would like to go with the second option as it would allow me to continue purchasing rental properties, but I don't want to make any mistakes financially which will run my business into the ground.

Steve

i use the 50% rule.

I don't need much cash for the rentals I buy. 100% financing will get me the cash flow I am looking for. I know mike will disagree that he hasn't seen a building cash flow at 100% financing, but they do in my area. I can buy a duplex that will bring in rent of $1200.00 for a purchase price of $40,000. They are nice places, not dumps.

WOW, this is a crazy set of posts...really...on a forum for real estate investors nobody blinked when he said that he uses a " 50% rule" for determining whether he makes cash flow?????

There's no such thing as a " 50%" rule for cash flow. No creditor will give you repreive because you're " at 50%." Either you can pay your bills or you can't; it's that simple. Either generate cash, or you burn cash, that's it.

[size=18]Also, it's unacceptable for an investor to NOT KNOW the exact amount of cash flow they generate! [/size] Professionals calculate exactly what positive cash flow dollar returns from each dollar invested. Without knowing exactly what you earn on every property, you cannot possibly be making wise investment choices--on what basis are you evaluting Investment #1 versus Investment #2 if it's not on cash flows or ROI? The color of paint on the walls or the new carpet???

Please, please, get a set of financials (Profit & Loss, Balance Sheet, and Cash Flow Statement) for your investments. Spend a day or two to fill them out and learn from them. Even if you *feel* that you're generating positive cash flow, I'll bet you're leaving a LOT of value on the table by not knowing exactly what's going on with your units. I have a spreadsheet you're welcome to.

:shoot:
-Jeff

I'm not sure you understood me correctly...maybe you did. On the current buildings I own, I know exactly how much I make on each unit. I record all the rent and list every expense as it comes in. What I assumed he meant by how I figure out cash flow was what figures I used to see if my buildings would be profitable when taking into account all the variables like vacancies, damage, maintenance, etc. The things that are hard to put an exact figure on until it happens. I use 50% of the gross rents for these expenses and I try to make $100 per unit. I hope this is a little clearer as my short response was a little vague.

edit...when I look back at his responce, I think I must have read it wrong. Sorry for the mix up.

Jeff, I would like to see your spreadsheet as well for comparison to my current one.

Thanks!

That post is about 4 years old... you might want to check the File Library... I know there are several that have been posted.