I've analyzed a couple properties and the cash on return values are favorable (roughly 10%). Both properties require no repairs to make the houses ready for a renter. However, I'm concerned that I will deplete my cash, fast, if I'm putting a down payment of 10 - 20% on these properties for a traditional 30-year mortgage. On paper, I think these look like they are good deals but I'm concerned that my cash flow is going to dry up quickly and prefer me from making future investments. Am I analyzing these properties incorrectly - are they not good deals? Are there other financing options out there that would preserve my cash flow?
If you are getting a 10% cash on cash return you wont be using your own money to make any repairs as they do not need really any work. Once the tenant pays the mortgage down a little, or your market has some appreciation and your home value goes up, you can get your cash out by refinancing the deal and do it again. Not sure if your analyzing the deal correctly if you can share some of the numbers we can help you find out :)
I would love some help with the numbers! I was using the four-square method that I found on BiggerPockets - 1) Income, 2) Expenses, 3) Cash Flow, and 4) Cash on Cash Return. In my area, I'm pretty sure I can get $800/month rent (#1). For expenses (#2), I'm assuming $683/month which largely consists of the mortgage. This would put my cash flow (#3) at $117/month ($1,404/year). I think I can get the seller down to $89,900. For the mortgage, I'm assuming 10% down, 30-year fixed mortgage, 4.125% interest rate. I'm assuming $8,990 down and closing costs of $5,371 for a total investment of $14,361. Dividing annual cash flow / total investment, I'm getting a 10% return. My only concern is with this kind of cash outlay, it's going to take a while to build back my cash reserves to purchase the next property. Any advice would be appreciated!
@Valerie Phipps hi Valerie, when analyzing a deal as a buy and hold make sure you consider repairs (let's say 7% of monthly rent), vacancy (5%), capital expenditures (7-8%) and property management if you are not managing the property yourself (8-10%). 0% if you are doing it yourself. And consider property taxes and insurance and any utilities you may pay. If after these considerations you are still seeing solid positive cash flow then you may have a good deal.