Is cash flow realistic with 100% financing?

Question

I've been looking at rental properties for about a month now, and have learned a lot during that time (I'm also a voracious reader, and am reading about real estate all the time).  My down payment & closing costs are going to come from a HELOC on my personal residence, which will cover anywhere between 10-20%.  I'll get a 30 yr for the bulk of the purchase price, and a 15 yr variable on the remainder, if any.  So, although I'm technically using my own money in the form of equity, its still a loan so I therefore consider it to be 100% financing.

Most properties I've come across are at a negative cash flow, some severely so.  A few looked good on paper, but upon further inspection/investigation, the amount of repairs necessary would suck out any possible flow for a couple of years.

I'm not looking for a high cash flow to start, I fully realize it's not going to happen with my financing.  But it is starting to feel like there isn't any cash flow possible.  I'd be happy with just $100/month in order to set some $$ aside for potential repairs and improvements.

I am just being naively hopeful in thinking I can find a property that fits my perameters?  I have no problem at all waiting for the right property, but I just don't want to be waiting for something that's never going to come, and would instead prefer to rethink my investment strategy.

Thanks in advance for your feedback. :)

SL

N/A N/A · Answer

Hi Minna!  I noticed that (re: low end & cash flow) on paper, too, although the concern there is A. problem tenants and B. resale down the line and lastly C. the seller usually overstates income/understates expenses so upon diligent research, I've found that the cash flow often is minimal or disappears altogether--and the repairs necessary (usually involving heating & insulation, since all the low ends I've looked at include H&HW) to make the property flow are quite high.  I've started looking at pricier units in better neighborhoods (not the best, but not the worst) because that $20K difference in price really doesn't affect my debt payments significantly, but it can make a property easier to rent.

Right now, I look at MLS properties; craigslist (which in my area is mostly MLS anyway); classifieds for FSBO; and a couple of bank REO sites.  I don't do much in the way of driving around looking for distressed properties or FSBO signs because I don't live in the area where I'm "shopping" for a property--its about 45 minutes away (my agent lives there).  Where else would you suggest I look?

N/A N/A · Answer

SusieLL your research is telling you the right message, be sure to listen.  The message it is telling you is that RE is overpriced now, still.  Sit on the sidelines in cash and await the inevitable capitulation phase of the bubble burst....could still be 2 yrs away.  Stay sharp by continuing to hunt for deals and toss in lowball bids that would work $wise.  But don't be suckered into buying too high too soon, or you will be one of those unrealistic LL's wondering how prices could fall so far beneath where you bot the box. :violin:

Wade O · Answer

It's not true that an agent can only find what's on the MLS--though state laws do vary.  In my state, an agent can approach ANYONE on your behalf, as long as you are working in an agent/client relationship.  (As opposed to the transaction broker/customer relationship, which does limit the Realtor to the MLS.)

However, the advertising and other non-agent methods probably have weeded out the "motivated" (as you used the word) sellers before your agent has a shot at them.  If the "We Buy Ugly Homes" investors are beating you to the deals, then maybe you need to pick up their tactics.

Of course, so much depends on your own financial situation and the market you're in.  With decent credit and some reserves, you could get into a program or partnership and build up some real money to play with.  Other than that, I know of some good deals in Tennessee, but nothing in your neck of the woods.  That, of course, is the other option.  if your area (or even 45 minutes away) can't afford you positive cash flow, maybe you should be looking elsewhere.

Wade

Ricky Bobby · Answer

Yeah, I hear ya. Sellers in my area don't seem to be getting the hint that if your home is on the market for 6 months and hasn't had an offer it's the agents fault. Umm, no, your home is waaaay over priced. Just because your neighbors home sold for $X doesn't mean you can get it 12 months later!

I think the people who need to dump ASAP are more pre-forclosure-type properties, not MLS-ers.

As the market declines further also I think you will see more dealing going on. Most markets are slowly changing from a buyers market to a sellers market. "Investors" in my area acted too fast last year and now some are having their butts handed to them, losing thousands a year because they can't get rent to cover their costs, and their places aren't selling. You are doing it the right way IMO - slowly and methodically.

I think true investing involves a lot of legwork and knowledge. People 1-2 years ago just dove headfirst into it without doing much research, they were just hoping to play the appreciation game. There is so much more to this IMO than crossing your fingers, rolling the dice, and hoping your home appreciates in a year. That's speculating, totally different then investing IMO.

Minna Reid · Answer

Advertise. Put up I buy houses signs. Advertise where your target market would be likely to look. Try to get them to call you. If your target is multifamilies, join an LL association (how would they know youre not an ll yet?). Call all the rental ads in your area to see if those LL's want to sell. Maybe stop at local housing court and see which LL's are involved in eviction cases and call them all- they're probably fed up. You know maybe thats a little bit of a stretch, but I think the goal should be to find the deals outside the MLS. Once its on the open market its much less likely to be a deal anymore.

N/A N/A · Answer

Hi fosters,

Luckily the city I'm looking at also has the R of D online, and they don't charge to view the documents (Just to print them) so I can find out quite a bit that way--the mortgage is usually there and depending on the lender and/or if it is a variable rate, I can usually find the rate and figure out their payment.  I can also see if a divorce has been filed, whether there are any leins, etc etc.  It can be very informative.  I actually find that kind of research to be a lot of fun, but I'm dorky that way. :)

What I'm having less success with is finding truly motivated sellers.  Seems like EVERY agent tells my agent they have a "motivated" seller.  :roll: However, they still reject my offer that will clearly cover their mortgage payoff and agent fees, and ask for considerably more in the counter.  *MY* idea of a motivated seller is someone who wants to dump the property ASAP, even if they don't make any money on the deal or even take a small loss.  Apparently to a seller's agent, a motivated seller is anyone with a property currently on the market.

Minna Reid · Answer

hey Susie - Your realtor is probably not very likely to find motivated sellers for you, as they can only find you whats on the mls.Is your realtor your only method of finding sellers?Maybe you should explore other ravenues.
Also - I was looking at lots of multifams as well and found almost nothing would cash flow, until I started looking at low end neighborhoods. Seems to me the more ghetto it is, the better the cashflow.

N/A N/A · Answer

Noob,  could you define what you mean by situation?  I'm not entirely clear on that.

One thing I do immediately is go to the registry of deeds and look up anything I can on the property--what the current mortgage amt is, what the terms are (if included), any liens (current and discharged).  So I guess I'm finding out the financial situation that way.

There are no REI clubs in my area, at least none that I've been able to suss out.  (I'm in Maine.)

There are LL associations, which I plan to join as soon as I have a property.  Unfortunately I can't join until I am a landlord.  Once in, I expect I'll get some good connections that way.

The properties I've looked at are all in the 150-250k range for asking price, most also seem to have been purchased within the last 2 years, so they often don't have much room between the mortgaged amount on the property and the asking prices (growth in the area I want to invest in is slow, but reasonably steady).  Most have also been sitting on the market for 4+ months.  They are all 3-4 units.

Ricky Bobby · Answer

It's good to see someone else doing this too - it means I'm at least on the right track :). I have no idea what I'm doing (I hesitate to say I am "new" to real estate investing because I'm not doing any investing by definition) but this is what I've been doing as well.

Luckily my city has records online so I can see how much a house was sold for and on what date without getting off the couch. I'm focusing on properties that have a large amount of equity in them and cross-referencing them with "motivated" sellers. I know they can afford to negotiate. That way I don't waste my time along with others time on looking into properties that the sellers won't negotiate from. I'm doing it with the intention of rehabbing a property however, not as a rental.

The scary thing is, I've found quite a few in my area that listed for the exact amount they bought it for 1 to 1.5 years ago.

Like you, there is no REI club here. I'm just reading this web site quite a bit.

Tom McGiveron · Answer

susie,

it's great that you're realizing the work it takes to find an investment property.  make no mistake, they're definitely out there!  you just have to factor in the competition - that's out there sucking up as many deals as possible - take a look around, you'll start to see all the activity of fellow investors in your area.

have you considered joining your local rei club?  that's a very big and important step.

give an example of a house or two that you've worked some numbers on.  asking price, situation of property (if known - and you should know this), and your cash flow analysis.

what you'll find is you have to take your investing to the next level in order to find out where the deals are.  you've got to be out there and you've really got to be bold.  sitting in your house on the computer or driving by houses isn't going to cut the mustard.

keep on pluggin.

in 12 months on forums like these - i've exchanged emails with over 25 "investors" - who aren't investing - and more than half have dropped off the face of the earth...

don't do it.  keep plugging away.