Is it ok to buy a house if the cash on cash is great, but...

7 Replies

What are your thoughts on buying a property that has amazing cash on cash return (30-40%), but doesn't meet the 1-2% rule or any other rule for that matter. Basically, I can buy a Triplex with an FHA Loan at 3.5% down. Property is in pristine condition, so no rehab necessary. Because I'm only putting down around 10k, it makes the cash on cash return very appealing.

Is it ok to pay a bit more if the I'm getting it for practically nothing? It still cash flows about $400/month (after accounting for vacancy, cap ex, and other expenses) but the overall loan is a bit more than I'd typically go for. Thoughts? 

Originally posted by @Edward Heavrin :

What are your thoughts on buying a property that has amazing cash on cash return (30-40%), but doesn't meet the 1-2% rule or any other rule for that matter. Basically, I can buy a Triplex with an FHA Loan at 3.5% down. Property is in pristine condition, so no rehab necessary. Because I'm only putting down around 10k, it makes the cash on cash return very appealing.

Is it ok to pay a bit more if the I'm getting it for practically nothing? It still cash flows about $400/month (after accounting for vacancy, cap ex, and other expenses) but the overall loan is a bit more than I'd typically go for. Thoughts? 

 Sure. If it cash flows, what's the  problem? All that I look for is the property to cash flow.

@Edward Heavrin , care to share those "vacancy, cap ex, and other expenses", here?

If you get any of those expenses wrong, your risk can increase exponentially!

Why "exponentially"? Because of the 96.5% debt that you'd be servicing, regardless!

It might help us to help you, if you share both the outgoings and the (2/3) incomings.

It seems odd that a property that is almost fully financed, with rent less than 1% of purchase, cashflows that well. 

Originally posted by @Dustin Beam :

It seems odd that a property that is almost fully financed, with rent less than 1% of purchase, cashflows that well.

 The reason the cash on cash return is so good is because I’m not putting much down. $400/month cash flow  on a triplex isn’t that great in my opinion, but because I’m only putting down 10k to buy it, it’s a good return in that regard. If I had to put down the typical 25%, it would not be a good investment. This is why I’m asking the question to begin with. 

@Brent Coombs I agree that I would have concerns about expenses. In California, typically the biggest concern is property taxes for us. 

@Edward Heavrin $400/month is good. I would work/develop a chart of big ticket items such as the roof, water heater, HVAC system, etc and calculate how much each of those items should cost per year and factor those items into your expenses as well. For example, if your roof is $30k and it has a 30 year life span, you're looking at about $75/month dedicated towards a new roof some day. To me, those random, big ticket items that aren't foreseen are challenging. It's important to understand not only your investment in the property, but also the products related to your property. I think it also helps you to be mentally prepared and to be responsible for those items and to run your investment tight and like a business. 

I think if you posted some of the income and projected expense numbers you are looking at, we could provide a little bit more insight on the deal

Originally posted by @Edward Heavrin :
Originally posted by @Dustin Beam:

It seems odd that a property that is almost fully financed, with rent less than 1% of purchase, cashflows that well.

 The reason the cash on cash return is so good is because I’m not putting much down. $400/month cash flow  on a triplex isn’t that great in my opinion, but because I’m only putting down 10k to buy it, it’s a good return in that regard. If I had to put down the typical 25%, it would not be a good investment. This is why I’m asking the question to begin with. 

 Just to be clear, I didn't question cash on cash return, I realize you can get good percentages on that when you don't put much down. I'm questioning your cashflow. 

For every $1 being borrowed, you will basically pay 0.5% each month for the mortgage (assuming 30 year fixed, 4% interest). So for a 100k loan, each month you're gonna pay almost $500/mo to the bank. 

You stated that you are not meeting the 1% rule, so in the example above, you have less than 0.5% of the purchase price to pay for cap-ex, vacancies, insurance, maintenance, etc. Those are a lot of expenses to be covered by the relatively low amount left over and still have $400/mo in your pocket.

Is it mathematically impossible? I won't say that. I do think you should show your analyzation to get some second opinions in case something is incorrect.

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