Buy and hold strategy question

7 Replies

I have 75K to spend. Lets say I buy in all cash a house at 50K at auction. I put 10K into it so I have 60K invested, so it's now worth 80K. Would the best thing to do is to is to cash out refinance for a 15 yr mortgage and get my 60K back out, and try to do it all over again? And basically keep doing this until I can no longer cash out? Is the minimum cash flow for rentals still $100? Just thinking through some things.

This is a tough question to answer not knowing your short and long term goals. If you're wanting to leverage aggressively and accumulate units in the short run, this is a solid approach. A 30 year note will give you more flexibility, better DTI ratios, and better cash flow, which will allow you more opportunity to grow. If you're using 15 year notes, your payment will be higher and will adversely effect your dti ratios with each house.

If you're going to wash, rinse and repeat on this, it's critical that you maintain great credit. If you get a credit snag along the way, getting a cash out refi will become a lot tougher. I think it's safe to say, nearly all the time, on a 60-80k home, you're going to want to see better cash flow than $100 a month. 

@Jim Zatko  The answer is an emphatic "yes".  Based on what you just described I will ask you a few questions:

1 - How long will it take between houses...meaning how long between the time you buy the first house and buy the 2nd house with the refi cash from the first house?

2 - How many houses does your strategy (goals) require you to hold.

3 - Here's the big one.  Doing it this way, when you are done, how much did all those houses cost you?

First, if all you're getting is $100/month in Michigan, you're buying the wrong houses.  You should be getting no less than $300/month...w/ a property manager.

Second, you want the longest mortgage you can get...not the shortest.

Joe Villeneuve
REcapSystem
A2REIC

i'm just analyling some deals.  The one i'm thinking about would look like this...

850-rent to me

175- prop tax

80- home insurance

300 - mortgage

85 -Set aside for maintains

= 210 cash flow per month.

Also this is toledo OH no MI... prop taxes are higher

You need to factor in vacancy rate and utilities as well.  When looking at deals I look a lot closer at the cash on cash return then I do the actual dollars.  This will tell me how well I'm doing vs. the return I could get on another property or elsewhere.  This is simply comparing the cash you have in the deal vs. what you have left after all expenses/set asides are done.

Bigger pockets has a calculator but you can make a spreadsheet fairly easily as well.

Originally posted by @Jim Zatko :

i'm just analyling some deals. The one i'm thinking about would look like this...

850-rent to me

175- prop tax

80- home insurance

300 - mortgage

85 -Set aside for maintains

= 210 cash flow per month.

You can probably get your insurance lower/month if you add it to your existing HomeOwners.

Why are you doing a 15 year mortgage?  You'll get better CF with a smaller loan amount at 30 years.

I don't set aside anything for maintains, vacancy, etc...per month.  Makes no practical sense.  Now, I didn't say I wasn't covered for it.  What I do is a cash out refi in 6 months for a lump sum amount that I bank.  Here's why.

If you take 85/month out for these items, at the end of a year you'll have accumulated just over 1k in reserved.  What are will that cover that you couldn't cover with a credit card?  You really need about $3k minimum in a fund/per house.  It will take you 3 years to get that.  What do you do if something happens before you get that fund in place?

Like I said, it makes no practical sense to take funds out of your CF to cover this.

Having said that, if this was my deal, it would work since I know I can get the insurance lower, and the 85/month I'd also save would put me over the 300/month minimum I require.

Joe Villeneuve
REcapSystem
A2REIC

that payment is a 30 year loan, and i'm just estimating the insurance. I can't roll it into my policy because i live in Michigan, and this house is in Toledo. Thanks for the advice everyone.

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