$0 Down - Minimum return requirements?

Question

Question for everyone. If you could purchase a property with $0 (not including appraisal, closing costs, etc), what is the minimum amount of cash flow a property would have to have to make the deal worth it for you?

I know there's the $100 a door target for MFH, but what about SFH? For $0 down and being able to get $100 a month cash flow, principal pay down and appreciation of the long term, I would go for it. Even though it's not much money in your pocket it's building wealth. Getting any lower than that I think would be dicey, making it more difficult to build up reserves for CapEx.

What's everyone else think, what are your minimum return requirements?

Gilbert Dominguez · Answer

If you take the example given to you above using a $20K purchase and end up with a $100.00 per door Net you can say you are earning 6% on your money. So if you are looking at a property where your purchase price would be $400K you would likewise want to earn 6% net on your money.

Of course the ARV or market value as it relates to your CoC has allot to do with things but what you want at minimum is to earn a 6% of your money regardless how much is earns as a gross and what you pay out for borrowed money. This is the way I see it overall.

What is more ideal is earning between 10% to 12% on your money. There are ways to earn this much on your money without the headaches of dealing with actual properties simply by offering to finance other projects for people and participating with them on putting a deal together. I mean if you are having to buy with zero down. You have much more of a chance of earning significantly more if you put 25% down and borrow the rest.

There are two types of people that are interested in zero down as far as I see it. Those that have no money and those that have plenty of money. Those without money are just trying to do any kind of deal they can period and those with money are working to leverage their own money to the max.

Why would you want to earn so much money per door. It is simple because you want to make sure that investing in real estate is more profitable than other more simple types of investments. Bonds, mutual funds, stocks maybe pay between 1% to 5%. Maybe stocks closer to between 8% and 10% but not so safely as bonds.

Real estate has the advantage over time because with time you will be paying off your debt and therefore building up equity.

I would suggest that if you are a person with just enough credit to get a hard money loan to pick up or fix a property do not do it because what if your house does not sell? You will be in a panic knowing you have that hard money loan to pay. However I think its ok for those that have a little money put away and can maintain the payments. Also I do not recommend people take out short term loans of one year or less. Hardy money loans can be gotten with a 5 year term. That allows you more time to rent or sell a property. I know you did not ask about this but I am just throwing in for you to think about.

Sometimes people get pre-qualified for conventional loan but they cannot apply that loan to a fixer upper. In this case they can go to a HML and get the money to do the deal. After the house is fixed up and in good living condition they can refinance it with their conventional loan. That is ok because they can handle it but its not for those that have no money and no credit because even if they do get the HML if the house does not sell they will hit a brick wall and be in worse shape financially than when they started.

Nick G. · Answer

I totally agree @Drew Castleberry look out for deferred maintenance on these properties, $100 $200 $300 a door may not be  worth it if you get hit with an unexpected $5,000-$10,000 in  6 months. Pay extra attention to the big ticket items, roof, hvac, etc....just a thought.

On a turn key property with no money down $100 minimum per door for me.

Drew Castleberry · Answer

@Jeremy Pace

No I'm not looking at this for my first deal, just hypotheticals. On normal deals I looke for $250+, for $0 down I'd be comfortable with $100 but like @Darryl Bass I'd get as many as I could get, but depending on the age of the property. If its an older home I might shy away from it to avoid the certain capex issues that will happen more often than not, unless it was already fully rehabed.

Jeremy Pace · Answer

@Drew Castleberry

Thanks for the clarification, I'll be honest, that's not the way I first read it.  For me, I like to get $100/door minimum, but I have a couple units already, so I'm not really starving for cashflow.  If you're looking at your very first deal, you might wanna get a little more per door.

Darryl Bass · Answer

Honestly Drew with $0 down in this market I would not care if it had a cash flow as long as it pays for itself. I would buy everyone of them and when market turns I would sell off enough to have some free and clear after putting some cash in the pocket. I have done about 8 no money downs only paying for appraisal, but fortunately all 8 have a cash flow between $25 and $250.

Drew Castleberry · Answer

I got the calculations and I'm basing my cash flow after all expenses and reserve accounts. I'm not asking to see where I'm at, I've ran all my numbers and am comfortable what I'm coming up with. I'm asking because I'm curious to find out what other people are comfortable with and to see what their bottom dollar is.

Alexander Felice · Answer

$100 per door is AFTER expenses and PI

so:

rent - taxes - insurance - maintenance (5%) - CapEx (5%) - Vacancy (8%) - PM (10%) = $100

If you base your purchase on rent - PITI = $100 you're going to get in trouble.

Lastly, if you have cash in the deal for appraisal and closing costs like you said, you count that towards CoC

Jeremy Pace · Answer

I think you should budget your CapEx as it's own line item instead of using your cashflow, unless you want to end up on the inside of a bad deal.

$100/door is a pretty standard number, that's true, but you have to think about it in the scope of the cost to acquire each door.  For example, $100/door is a pretty hot return on a $20k SFH, but you'd be sad to make $100/door in a $400k MFH