How to evaluate a deal with 0% down

25 Replies

I'm wondering how you tell if you have a good deal if it is financed using a VA home loan (0% down). The numbers are very different on a property that is 80% financed and 100% financed. Especially when multi family properties in Miami start at around 300k. At 100% financed the property does not cash flow, the one I'm looking at now is at -$50 WITH me living in it, but at 20% down it cash flows around $240, with me living in it for "free". When I move out it will cash flow slightly better.

Ryan,

I did the same thing but with a SFH. The way I like to look at it (maybe just to make myself feel better?) is that you’re paying $50/mo for rent, and it’s hard for me to consider that a loss at all. When you move out, you’ll have put down hardly any of your own cash towards the actual investment value of the house, and yet you’ll be reeling in some good cash flow (depends on what it’ll flow once you move out, of course), resulting in a killer cash on cash investment...AND it’ll leave that 20% down payment available for you to make moves on another investment property substantially sooner, leaving you with two properties instead of one. The downside to that VA loan is that you can’t use it on a pure investment property, so using it on one like you’re looking at is good in my mind, since wherever you move next, you may not find a good MF property to use it on. Plus, I believe that you can refinance into a conventional later on if you pay down enough equity, freeing up that VA to be used again!

Where in Miami are you looking? I have had a difficult time finding any decent deals so far.

@Daniel Rogers That's my logic, but being that I have not done it I wanted other opinions. Running numbers with 0 down (because that is what I can qualify for) has in my mind led me to say no to a few potential deals. ( Your payments are higher by 200-300 and there goes your cash flow) So now I am going to go back with the "Is it a deal at 20% down?" mentality. The more people and videos I talk to, it seems that the days of collecting $100 a door are not as easy as they used to be, with some saying as long as it is positive it is still a deal. Now that the economy has more stabilized and more people have gotten into property investment, deals are fewer to be found. Coupled that with Miami which is overpriced due to a lot of foreign cash being invested and high homeowner insurance because of hurricanes deals are harder to come across here. I learned you do not have to eliminate one VA mortgage in order to use another, it just depends on the balance. You'd have to talk to them to know the exact numbers, but just say you bought a house for 175, you should in theory be able to buy another at 175 a year later. I think the total you can have is 405 at once. But it depends on where the property is as the numbers change and who knows what else. Im guessing you are a veteran and know how the government "works" half the time. Always changing

@Ken Virzi You are trying to invest in Miami but live in California? There has got to be better markets closer. Im looking around the Doral to Little Havana area. I will be working there starting next week and the VA loan you need to live in the property for a year, so it makes sense. But I'm looking outside of Miami due to the cost. How many 300k houses will they let me have on a 40k a year job right? My time in the military has enabled me to save and rack up some nice investments, which is what qualifies me for the amount I need in Miami.

Originally posted by @Ryan Bianchi :

@Ken Virzi You are trying to invest in Miami but live in California? There has got to be better markets closer. Im looking around the Doral to Little Havana area. I will be working there starting next week and the VA loan you need to live in the property for a year, so it makes sense. But I'm looking outside of Miami due to the cost. How many 300k houses will they let me have on a 40k a year job right? My time in the military has enabled me to save and rack up some nice investments, which is what qualifies me for the amount I need in Miami.

 Well I live in Miami right now for work, that is the ONLY reason I am looking here. House hack possibly.

@Ken Virzi Ah. Ok. I've been looking up the East Coast, from Port St. Lucie down to Ft. Lauderdale (it's like a 40 mile stretch with favorable numbers) or on the West Coast, the Ft. Myers area. They are a lot more affordable, many houses under 100k which you'll never see down in Miami, and they are growing. House hacking a SFH might be good. The problem I ran into was most homes have violations and need to be cash only. House hacking near the colleges seems to be a good bet too. What area is your job in? And how long are you here? ONLY lol. yea.... I'm not from here and don;t plan to be here another year. The lady who hired me told me I was not going to stay in Miami much longer than another year, and she's right, but she said it's no problem to transfer to another location, and there are several in Florida

Originally posted by @Ryan Bianchi :

@Ken Virzi Ah. Ok. I've been looking up the East Coast, from Port St. Lucie down to Ft. Lauderdale (it's like a 40 mile stretch with favorable numbers) or on the West Coast, the Ft. Myers area. They are a lot more affordable, many houses under 100k which you'll never see down in Miami, and they are growing. House hacking a SFH might be good. The problem I ran into was most homes have violations and need to be cash only. House hacking near the colleges seems to be a good bet too. What area is your job in? And how long are you here? ONLY lol. yea.... I'm not from here and don;t plan to be here another year. The lady who hired me told me I was not going to stay in Miami much longer than another year, and she's right, but she said it's no problem to transfer to another location, and there are several in Florida

 I work with an airline, so I am in and out of the airport constantly. A lot of people who I work with that have been here a long time have moved to Ft Lauderdale, but I would rather not be so far from MIA airport. I have been here 1.5 years and not sure how much longer, but probably at least another year, maybe more. I am just tired of being in limbo so looking to try to normalize a bit.

if it does not cashflow at 0% down, it does not cash flow, but you evaluate it as though it was fully rented out, even if you are living there.

@Ken Virzi maybe look as far as Miramar, that's close by and housing is more affordable. South of the airport is rough unless you want a townhouse or if you go down to homestead. That area is growing but is a bit of a drive and still moderately expensive. Hollywood seems to have some promise if you want to be close too

@Andrew Boettcher That would make sense as I will not be living there long term. But how much cash flow would be "good" considering a property would be 300k ish? I watched a Dave Ramsey episode and he said "any cash flow is good" I know on BP they preach 100 a door, but that is on properties that cost 80-120k. I just don't want to be stuck in this analysis paralysis forever and never take action. I have been interested in real estate for a few years and my last semester in college I decided I will make it happen and that was in December. Since rents are increasing in Miami, even if you break even today, you should see some cashflow increase every year. I know 18 months ago I was looking to rent a room and they could be found for 500, now you are looking at 600. In just one year. Would you consider that? In a smaller city or town I could see that being dangerous, because they probably have only a few major employers, but Miami has a wide variety of employers so even a hit in one or two industries would not kill the city.

And are you factoring in costs for future vacancies, repairs, and CapEx? Cash flow is not just factoring in the PITI, but also the things I just stated.

You could be more lenient on it I suppose if this is a house-hack, but really, in a market that is expensive, I think it'd be very tough for you to find a cash-flowing deal. Could you search somewhere fairly nearby the Miami area that is not so pricey?

The minimum per door in cashflow you accept is a personal choice, but know that the less the cashflow, the less beneficial it may be for you. Besides tenants paying down most of the house for you, you would not really be making money on Day 1, but in it for the really long-haul. You want to make money on Day 1 *and* have tenants provide equity over the years.

305-537-6252

@Nicole A. yes. I factored in 15% for vacancies ( very conservative) and 10% for capex/ repairs and the outrageous homeowners insurance here ~500 a month. Everything down here that is in fairly good condition (needs to be liveable for the VA home loan) is 225+ unless you get into townhouses, butbwith hoa fees can get pricey too. That's the problem. It's tough to get a good cash flow deal with those stipulations. In a not so high crime area. My alternatives depending on how much I can get off the asking price with the few I've come across are about 50-80 miles away for one area or 115 miles in the other direction. With traffic here drive times can greatly vary but roughly 2-3 hours if you're lucky. I figure if I can live for free it would be a good starting point to get my feet wet at least. But considering it's a 300k mortgage it could be a big mistake which is why I'm picking brains right now.

Yup, for a house-hack, it's definitely a great way to live almost/for free. I did that for a while and my house was purchased for $365K. However, I also still live in that same house 9 years later, and now have a lot of equity. We pay extra towards the principle each month because it fits our budget, but we're also not renting out rooms any longer. Even with the equity, if we were to rent out the house today, it would not cash flow.

However, one way to look at it is like you said, it gets your feet wet. You build some equity, and in the future, while the cash-flow may not be there, you could potentially tap into some of your equity to purchase a truly cash-flowing rental (that'll probably be located in a lower-cost market that you'll have researched).

And besides the equity, you could save up a ton of money that you no longer have to spend on housing to go towards your next property.

305-537-6252

Have you considered splitting the difference and paying down 10%? That’s put you in the green monthly along with free “rent” for yourself and help rebuild cash reserves for your next property.

You’re definitely right about the [unnecessarily confusing] multiple VA loan situation. Lots of banks won’t even attempt to do a second one, because they simply don’t understand it. That screwed us on our second home, and we were too naive and simply believed the lender...ended up doing an FHA to go low down payment but got burned with PMI. We were fortunate that it still worked out to a decent cash flow in the end, but it could have just as easily gone the other way, since we weren’t really crunching those numbers like we should have.

Also concur in regards to just getting your feet wet. Few learning methods are as good as taking the plunge and watching the numbers sort themselves out as time goes by and problems arise!

Also, are you familiar with the IRRRL VA refinance? I did that once when interest rates dropped. It’s a pretty easy VA-to-VA refinance program that you can use to spread your loan back out and increase cash flow down the road after you’ve built up that equity, so you can start with low/no down payment to keep your cash handy and ready to make another deal with, and after a few years, if it makes sense, refinance the VA loan to drop your payments and boost your cash flow.

In a house hack situation expecting positive cash flow is probably not realistic. You should be basing your calculations on rental income after you move out.

I assess every property based on 100% financing. That is the only method to calculate the true cash flow from a property. As soon as you have equity you are they "buying " cash flow which in reality is artificial since the property itself is not generating it your own cash is doing the work. In that scenario at best your cash is only earning the equilivant of the prevailing mortgage interest rates. That return is not worth investing for.

You put cash into a purchase only if you are forced to in order to qualify for a mortgage and deduct a 10% return on that cash off the top of the rent to insure your cash is earning it's keep. Once your equity reaches a certain level the property itself then has negative cash flow and is a liability not worth the risk of holding.

@Ryan Bianchi I'm not in your situation but I think the crux of your question is assessing "deal quality". For that I'd use some "neutral" givens that a random guy like me would have to use. I'm sitting here in California so I'd probably do 25% down, 30 year fixed rate mortgage, I wouldn't live there, etc. And I'm not entirely sure what a good "return" would be for Miami but let's just say 10% cash-on-cash. At least you now have the "cash" variable as well as the "full rented" variable so you can see how Property A vs. Property B vs. Property C compares to someone like me who isn't an owner occupant, can't do 0% down, etc. Not that it should change any buy vs. not buy analysis for you but at least then you have a level playing field when people talk about goals in terms of $___/door, cash-on-cash return thresholds, IRR thresholds, etc. Not sure if this helps :-)

Interesting how everyone has a different opinion on it. So is life I suppose. The homeowners insurance is almost 30-40% of the mortgage so it's kind of tough to make numbers work here and with a VA loan needing the property to be habitable without leans and violations. I keep running into properties that don't qualify. Some having 70k in liens on them

I agree with others here that for $0 down and you living in it it’s not a bad deal. You may want to factor into your equation that you are paying yourself fair market rent then look at the numbers from that angle. Also think about your cash on cash (with you “paying” yourself), $0 down makes your CoC look way better.
I’m in the same boat as you with my former primary residence turned rental property in NC ($0 down VA that barely cash flows). Over the last 3 years though the property has appreciated nearly $30k!

@Ryan Bianchi you are not analyzing the property correctly. Analyze the numbers and include the market rent for your owner occupied unit. In other words if it is a four plex and each unit rents for $1000, then the income is $4000 per month, not $3000 per month. Your rent is cash flow. It is not -$50 per month, your free rent is cash flow.

Hey @Ryan Bianchi

I think you are just suffering from lack of intel in the area. I'm assisting another BP member who is also using a VA loan and she felt the same way you did at first. There's an endless list of investors in Miami that have been crying about no deals for the past 3 years and I think that sets a negative environment for those learning. The deals are there for the people looking and they are no where to be found for those who rather cry about it not being 2009-2013 all over again.

With the BP member I am assisting, we are still looking for the right deal but we have come across a handful of deals with $100+ of cash flow per door. It is not common but it is very feasible. Just need to look hard in the right places and perhaps find opportunities that other investors are not seeing. 

I connected with you in case you are looking for further assistance. Happy investing!

Gabe Amedee, Real Estate Agent in Florida (#3388321)
Originally posted by @Ryan Bianchi :

I'm wondering how you tell if you have a good deal if it is financed using a VA home loan (0% down). The numbers are very different on a property that is 80% financed and 100% financed. Especially when multi family properties in Miami start at around 300k. At 100% financed the property does not cash flow, the one I'm looking at now is at -$50 WITH me living in it, but at 20% down it cash flows around $240, with me living in it for "free". When I move out it will cash flow slightly better.

 I will do as much 0% down as I can if the property makes sense, working with OPM and build equity is the best,  you can use the other 20% to buy another rental property at the same time 

(786)-529-4075

@Ryan Bianchi I was in the same predicament as you before I purchased my first property with a VA loan.

What I did was figure out what my current living expenses were (rent and utilities which was about 1500/month). Then when I analyzed a property, I stayed realistic about most likely not being able to cash flow with 0% down. If I could, that would be great but as you have come to realize is that the 0% down increases your mortgage by quite a bit thus killing your potential cash flow. The goal I set was to dramatically cut down on my current monthly living expenses and coming as close to break even as possible so that my exit won't bite me in the ***. 

Anyways, I'll use the house I just recently bought and am house hacking. It is a 4br2ba SFR. My current mortgage is $2400. I rent out 3 bedrooms for a total of $2150/month. Utilities have been averaging around $200/month. So with all of that, I am essentially paying $450 out of pocket per month for living expenses compared to $1500. That's $1000 extra saved every month! On top of that, it is right down the street from work so I save a ton on commuting and I also rent out some unused space in the garage to a coworker for some storage.

Be realistic and see what is going to work best for your situation. $100 per door or $300 per month or yada yada is ideal but everyone's situation is different. 

617-642-6623

@Kevin Phu but you didn’t allocate any to taxes, insurance or maintenance. In Miami taxes and insurance can run about 800 a month. My friend in northern Florida is paying 800 a year! Huge difference  

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