Fundamental wealth generating question with example

9 Replies

Hi Everyone, I'm in the self-educating-need-to-pull-trigger stage, planning out some paths towards investing in my first property. A little bit of overwhelm too. I have a question on the fundamental concept of generating wealth with investing, at least starting out. Let me describe a scenario for investing in my first property, a single family home. These are hypothetical numbers, but generally close I believe.

House price 350k

10% down, 35k. (I could put more down for a smaller loan, but a recent conversation with an investor suggested putting less down to have more cash on hand for rehab or buying other properties.)

Loan 315k, 3.75% for 30yrs, comes to $1,485.82/mo.

Taxes & insurance, estimating at $250/mo.

Total monthly expenses (not too mention setting aside for cap ex, vacancy, everything else) = $1735.81

Rent = $1500. (This is a rough educated guess on the area, it depends on the house, condition, location, etc.) Looking at a second tier city in the mid-south.

Cash flow = -$235.81. That's negative 235.

My question: How exactly am I making any money anywhere here? What am I missing? This makes no sense.

Thank you for any clarity to help me understand what the heck is going on here.

Updated over 2 years ago

In addition to all that, I'm taking ot a HELOC on my current home to free up the cash for the down payment. So I will be owing monthly for that too. I'm confused.

@Christopher Davis you are exactly correct in your question. You are not making any money on this deal. If it doesn't produce positive cash flow, after all expenses and debt service, then it isn't a good deal. Unless you can afford to bleed for 10 years at $235 per month in hopes of selling or refinancing based on appreciation, then you should not buy anything resembling this. Appreciation is a hope and a prayer, not investing. It is difficult to make any real cash flow for a property that costs over $150,000 in most parts of the country.

@Anthony Dooley Thank you very much for your reply. Ok so this explains why all the examples in the Bigger Pockets Rental Property Investing book are homes at $100k. And contrary to what they say, no, the numbers don't just scale up.

Ok so beginning rental property investing assumes homes at around 100k. I can already tell the numbers would work a lot better there. 

Follow up, is there anything else I should know on this general concept and getting started with a first property?

What you found is a property (example) that you shouldn't invest in.

Here are some suggestions of your nest steps and concepts to follow:

1 - Focus on getting a good deal...not a property.  There's a difference.

2 - Don't rationalize a bad deal into a good one

3 - Don't spend your seed money...use it to infinity though

4 - Learn "How Money Works"...and what I'm saying here probably isn't what you think I'm saying.

5 - Learn "How to Analyze Markets"...not just properties.

6 - Learn how to, and then execute, a "REI Plan"...long term and short.

@Christopher Davis

If your strategy is find rental properties then you will need to become an expert in your market.  This means you can do some quick napkin math and know whether you have a good deal or not.  It all depends on your market.  I would start local if you can and the numbers make sense so you can evaluate and you can build a local team.  This is a team sport.  

You are correct typically 100K works but it depends on what the rental market is.  I’m in the Midwest and it’s very difficult to find things for under a 100K that don’t need a ton of work.  It’s all about the numbers.  Don’t buy at negative cash flow.  

Originally posted by @Christopher Davis :

@Anthony Dooley Thank you very much for your reply. Ok so this explains why all the examples in the Bigger Pockets Rental Property Investing book are homes at $100k. And contrary to what they say, no, the numbers don't just scale up.

Ok so beginning rental property investing assumes homes at around 100k. I can already tell the numbers would work a lot better there. 

Follow up, is there anything else I should know on this general concept and getting started with a first property?

As a buy and hold investor, the value of a property is determined by the amount of rent it can bring. Do not be concerned with comparable sales or ARV, until you want to sell it. In every market there is a limit to how much people are willing and able to pay for rent. Use the market rent for a specific street, neighborhood, zip code, etc. and your expected ROI to determine the price that you can pay. As others have said here, that means knowing your market and executing your plan. I wish you good fortune.

Originally posted by @Anthony Dooley :
Originally posted by @Christopher Davis:

@Anthony Dooley Thank you very much for your reply. Ok so this explains why all the examples in the Bigger Pockets Rental Property Investing book are homes at $100k. And contrary to what they say, no, the numbers don't just scale up.

Ok so beginning rental property investing assumes homes at around 100k. I can already tell the numbers would work a lot better there. 

Follow up, is there anything else I should know on this general concept and getting started with a first property?

As a buy and hold investor, the value of a property is determined by the amount of rent it can bring. Do not be concerned with comparable sales or ARV, until you want to sell it. In every market there is a limit to how much people are willing and able to pay for rent. Use the market rent for a specific street, neighborhood, zip code, etc. and your expected ROI to determine the price that you can pay. As others have said here, that means knowing your market and executing your plan. I wish you good fortune.

 I've paid more than the asking price for a property and the deal for me was better than the what the rest of the investors (trying to buy low) bidding on the property would have done.

There are a lot of numbers with dollar $sign$ in front that, if you understand how money actually works, you can exploit to your advantage...big time.  Unfortunately, too many investors focus on the numbers with % behind...which really tells them nothing...of value that is.  It will, however, help rationalize a bad deal into a good one.

@Christopher Davis pretty much no house that costs 350k and rents for 1500 will cash flow.

I recommend analyzing deals with 25 percent down and not look at anything that’s below the 1 percent rule. Ideally more like 1.25-1.5 percent rule. This will help you instantly determine if a deal is worth learning more about or not.

I could tell you immediately that 350k and 1500 rent will always be cash flow negative

Thanks everyone for the replies. I really appreciate the supportive and active nature of these forums!

@Joe Villeneuve - Thank you. I am learning "how money works" right here, and reading all the books. "Focus on a good deal", etc. Vague concepts like this ae difficult to act on since I am in the early learning phase of actually analyzing deals. At my early stage there are unknown unknowns - things I don't see yet in an analysis. Of course I want to find a good deal. Looking for help understanding actual numbers and what a good deal looks like. Real world examples and concrete actionable suggestions. I definitely appreciate your help. 

@Kenneth Garrett To confirm what you are saying, when you say expert in your market you mean knowing the neighborhoods, the rents, the prices, the trends, the up-and-coming neighborhoods, etc, for a given local market? Anything else?

@Caleb Heimsoth Thank you very much. At least you have all confirmed what I suspected with this hypothetical. 

@Christopher Davis

Yes that is correct. Become an expert in a specific neighborhood or two. Know the ARV, market rents, up and coming neighborhoods, trends, employers opening up new business or expansion, job growth or decline, etc. the list is endless.