phoenix, AZ · Member since 2014 · 13 posts · 0 votes
I'm in the process of running the numbers on property that I'm interested in AZ. I do have an agent. However I'm running into a road block with the numbers. I don't have the 20% down so, my plan is to do owner occupy and qualify for FHA first time home buyer. When I run the rental property calculator, I come up with negative cash on cash and negative monthly expenses. I eventually do want to rent it out. Not sure how to make the numbers work? I have been reading the book "Hold" one of the points made is that profit should be locked in immediately, otherwise you are paying to much. Any thoughts or suggestions to point me in the right direction would be so helpful... in how to go about trying to get the numbers to work better. I was told that I could, but that would take me into neighborhoods that have higher crime? that line seems hard to navigate through.
Investor · Plano, TX · Member since 2014 · 188 posts · 149 votes
10y
@Erica Vargas, its hard to be cash flow positive with a FHA down payment standards (3% down I assume). Once you house-hack, look at increasing the down payment to investment style loans, ie. 25% down with a 30 yr mortgage and work the numbers. If you're at cash flow positive, at least 200 to 300 per month, then it should be sustainable.
Investor · Plano, TX · Member since 2014 · 188 posts · 149 votes
10y
@Erica Vargas, its hard to be cash flow positive with a FHA down payment standards (3% down I assume). Once you house-hack, look at increasing the down payment to investment style loans, ie. 25% down with a 30 yr mortgage and work the numbers. If you're at cash flow positive, at least 200 to 300 per month, then it should be sustainable.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
10y
Hey Erica, unfortunately it's not something you can necessarily control. The only way to get numbers that work is to buy in areas that have price-to-rent ratios that support not being in the negative. AZ unfortunately isn't one of those areas any longer.
The good news would be that you can invest non-locally in areas that probably have lower purchase prices, so maybe you could do 20% down?
But yeah, it's not you or the property....it's the area. Not much you can do about it other than move areas. I'm not an advocate of going to the high crime areas either....those numbers that pencil out on paper often don't hold up due to bad tenants who can cost a fortune.
phoenix, AZ · Member since 2014 · 13 posts · 0 votes
10y
Thank you Mike, that sounds realistic and sound advice. I wont get caught up in the numbers just yet.. as I was playing with the numbers on different down scenarios it did look more promising. I guess at this point I have to do what I can with what resources I have. I'm definitely eager to start.
phoenix, AZ · Member since 2014 · 13 posts · 0 votes
10y
@ Ali- Thank you for reaching out. I agree 100% with your assessment of the Phoenix market. Phoenix is just a closer market to me were I could commute from with my job. I am open to looking at other markets though... but from my understanding it is wise to have a team in place?
Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
10y
Hi Erica,
Maybe I'm confused, you're always going to have a negative cash on cash if you're the sole occupant (no rental income). Is this a SFR in which you'll be the only occupant or is this MF such as a fourplex where you will potentially have 3 tenants? What numbers are you using? I ask because in general you're cash on cash will be greater with the less you have to put down.
As Ali mentioned, you can't really make numbers "work", they are what they are.
@Erica Vargas, its hard to be cash flow positive with a FHA down payment standards (3% down I assume). Once you house-hack, look at increasing the down payment to investment style loans, ie. 25% down with a 30 yr mortgage and work the numbers. If you're at cash flow positive, at least 200 to 300 per month, then it should be sustainable.
Although this is an accurate statement i actually do not like to think of cashflow this way. Increasing the DP to make your property CF+ is not a sound strategy. You could technically do that in most places.
I know i quote him a lot, but ask Mr. Leybovich what his strategy is and he will tell you that he needs to be CF+ day one in a scenario of putting 0% down. Is this difficult, yes. Can it be done...absolutely and I can prove it with the past few places i have bought. Thanks Ben for the harsh posts/blogs! :)
To Ali's point, Phoenix, AZ is no longer a viable option for purchasing and renting CF+ day one. Can it be done, yes, but you will have to get a better supply of properties that are off market, likely distressed/needing repair, etc. Definitely not a bad thing, just takes building out a solid pipe of deals that hit your target goals.
Good luck, I hope you are able to find a good deal and
Investor · Plano, TX · Member since 2014 · 188 posts · 149 votes
10y
@Brian Larson, I'll attempt to answer some of the feedback. I agree increasing your down payment, to get into a positive cash flow seems a little backwards for an investment purpose. But putting 10k into a investment to generate negative $100 vs. putting 30k to get a +$100/mo, I would take the latter. The math computes to -12% CoC return vs. 4% CoC return. The only reason I suggest the latter is because if nothing else is possible, it teaches more responsible investing methods. Furthermore, getting $100 of positive cash-flow is much more motivating than losing $100 per month, regardless how low your down payment was.
The challenge I've seen with all these rules; the 2% rent rule, the 50% of expenses rule, the 0% down to CF properties, 70% of ARV-cost for flips etc. etc., become harder and harder to achieve. For newbie investors, these rules confuses the hell out of them and most fail to take the plunge. Just earlier, another BP poster was stuck in a rut analyzing a 75k deal generating 1200 in month of rent. It took him 6 months to find the deal, but every other person discouraged him from taking it because it failed the 2% rule. Rather than have every rule in the book be met, I suggested a means to make some of the rules work. But taking the first plunge, will improve the process moving forward for those who are new to RE.
The challenge I've seen with all these rules; the 2% rent rule, the 50% of expenses rule, the 0% down to CF properties, 70% of ARV-cost for flips etc. etc., become harder and harder to achieve. For newbie investors, these rules confuses the hell out of them and most fail to take the plunge. Just earlier, another BP poster was stuck in a rut analyzing a 75k deal generating 1200 in month of rent. It took him 6 months to find the deal, but every other person discouraged him from taking it because it failed the 2% rule. Rather than have every rule in the book be met, I suggested a means to make some of the rules work. But taking the first plunge, will improve the process moving forward for those who are new to RE.
I do not disagree that there are a lot of 'rules' and you can be successful even if you dont play by them all. The example of the $1200/mo on 75k purchase and NOT moving because of 2% is bad.
I think most agree (although few say it) that the rules are simply there as guidelines and not hard and fast rules so we are in agreement there.
I guess my point is the combination of both paragraphs i wrote. 1. Phoenix is likely not the best market for a new investor that is looking at MLS/turnkey property to be CF+ 2. adding DP $ to make it CF+ doesnt make #1 better or the investment better. I agree with you that it is better to get a deal and i am fine if someone wants to put the standard 20-25% down to make a little CF. I just think that increasing the mortgage to 'make the numbers work' as asked isnt the right way.
Rental Property Investor · OR · Member since 2014 · 19 posts · 12 votes
10y
when buying always remember that Fanny and Freddie will be tacking on mortgage insurance premiums that will be with the loan for the entire term of the loan
you should always purchase a deal on actual numbers. If the numbers don't work, then don't force the deal. Negative cash flow is a no-no, especially for newer investors. You should invest for cash flow and expect any appreciation as icing on the cake. When we force something, I find that is when I make a mistake.
Keep looking until you find a deal that works.
If your goal is to live in the property, then that may change your analysis. But if you decide to rent out and the house can't carry itself, then beware