Bad deal or just bad math?

21 Replies

Hello everyone,

Just double checking my math on my current home. Can anyone give me insight regarding these numbers? I am pretty new so I am not sure if they are right..

1. Bought a house for $127K. at 3.750 interest using a 0 money down 30 yr-fixed VA Home loan. (paid $1k in earnest money).

2. Monthly payments for the house are roughly $826. Principle is about $194, Interest is $394, and escrow is $237. Utilities are $220-250.

3. The house is a great house in a great location, and I think I can get 1300, maybe even 1400 dollars in rent a month.

Now, I used the BP calc to determine cash flow.. and I feel like its off or I am missing something. It is claiming my P&I is 550ish.. which isn't wrong, but I pay the escrow on top..so its effectively $300 dollars more a month than what the calc shows. So,

Scenario 1: $1300 rent + tenant paying utilities seems to cash flow out close to $200-300 dollars.

Scenario 2: $1300 rent + myself paying utilities seems to be negative $57 cash flow or so.

If I didn't have the escrow, it would be like $400 a month in cash flow.. I guess I don't understand how escrow account works..

 I would assume that follows me wherever.. So am I misreading my math here, or did I not fork out enough for a down payment to lower monthly interest payments and its biting me hard in the cash flow area? Or is this one of those scenarios where its better to take the loss for a bit until I can maybe do a refinance and offset some? or am I actually ok on this..

Your escrow account is your insurance and taxes, and you definitely need to pay those

The calculator most likely has your taxes and insurance listed separately, as expenses (which they are...they are not really part of your debt service for accounting purposes, and you'd be double counting them if they were included in both places). 

These are typically billed annually by your insurance company and taxing authority. But are collected monthly (in 12 installments) by your mortgage servicer, held in escrow until due, at which point they are paid by your mortgage servicer.

And it's generally a best practice to have your tenants pay their own utilities if at all possible.

Bad math...really bad math....unless I'm missing something.

Rent at 1300

PITI at 826

Cash Flow at 474

Insurance at ?????

CF with PITI should still be over 250-300/month

@Caleb Heimsoth I figured that would be a given, not doing so would be a big no-no I'm sure. I wasn't sure of the exact implications of having it.

Thank you @Jeff Copeland for clarifying. That is exactly what was wrong, I was not accounting for it being an expense and didn't adjust that column properly at first. I know some investors pay half or will cover the utilities to make rent more appealing/keep things running. But it is nice to know the best practice. I wasn't sure!

@Joe Villeneuve $474 CF is right, but I figured: Rent - PITI - (capex, vacancy, maintenance, management being roughly $420) = $54 CF

If right, Is $54 CF worth it for a first rental investment? I would imagine as I pay things down it will go up, in which case it may be best to hold on to. As long as the property is filled and is positive and not negative cash flowing, am I wrong in thinking this? 

Originally posted by @Travis W. :

@Caleb Heimsoth I figured that would be a given, not doing so would be a big no-no I'm sure. I wasn't sure of the exact implications of having it.

Thank you @Jeff Copeland for clarifying. That is exactly what was wrong, I was not accounting for it being an expense and didn't adjust that column properly at first. I know some investors pay half or will cover the utilities to make rent more appealing/keep things running. But it is nice to know the best practice. I wasn't sure!

@Joe Villeneuve $474 CF is right, but I figured: Rent - PITI - (capex, vacancy, maintenance, management being roughly $420) = $54 CF

If right, Is $54 CF worth it for a first rental investment? I would imagine as I pay things down it will go up, in which case it may be best to hold on to. As long as the property is filled and is positive and not negative cash flowing, am I wrong in thinking this? 

 You're rationalizing (rationalization is the most expensive word in a REI vocabulary...NEVER USE IT) a bad deal into a good one because it's your first? Why would it being your first make it any different than your last? Based on this added info it's a terrible deal. You're wasting you cash a limited use of credit for $54/month? When, not if but when, you have a month or 2 with problems...then what?...and the limited deductions from CF for CAPEX and vacancy are just feel good moves...totally ineffective. At the end of the year, if you never have to use those reserve funds, you'll have a big $3500 +/- total saved. What are you going to do with that?

Terrible property...not a deal at all.  Look for deals...NOT PROPERTIES.

@Joe Villeneuve I can understand where you are coming from on being objective regarding everything. Taking into context everything I have read, I gathered (perhaps rationalized, oops) that the first house is in fact harder to manage because of overall low cash. Hence, why many new investors have trouble getting their second deal. Or maybe it is a bad investment on my part, despite doing the best research I could ( I did a lot, except for the unknown variables)..it is my first house/investment property so I have accepted I will make mistakes... if rent were 1400, which it could go for possibly, it would boost 57 up a bit..

If I give it time, I can use the next property's cash flow to offset my mortgage and build a second cash flow stream.. I have a solid W2 income at the moment and family partner with capital, and I am not terribly worried about surprise expenses if it means I can eventually pay down the first mortgage maybe refinance it using a different loan and reusing my VA loan again but more wisely..

If I can turn the 57-157 CF property to 500+ CF and get another property at a low interest rate on the side just by hustling it a bit I wouldn't say its a bad thing...

But i am new...and maybe that is just a Band-Aid for a bad wound and I am just naive..

@Travis W there was a podcast recently that discussed low cash flow properties and I currently own two (albeit both bring in over 250 a month now). If you bought the property right and it has appreciated, or is appreciating, and you can sell it for a good gain and use that to fund your next house hack. If you can do this I’d suggest a duplex or triplex, but that’s a personal choice. If not, I would live it and look at subletting the basement or AirBnB’ing a room etc. $56-57 dollars a month is going to be a wash as soon as you fix one thing.

Good luck,

Originally posted by @Travis W. :

@Joe Villeneuve I can understand where you are coming from on being objective regarding everything. Taking into context everything I have read, I gathered (perhaps rationalized, oops) that the first house is in fact harder to manage because of overall low cash. Hence, why many new investors have trouble getting their second deal. Or maybe it is a bad investment on my part, despite doing the best research I could ( I did a lot, except for the unknown variables)..it is my first house/investment property so I have accepted I will make mistakes... if rent were 1400, which it could go for possibly, it would boost 57 up a bit..

If I give it time, I can use the next property's cash flow to offset my mortgage and build a second cash flow stream.. I have a solid W2 income at the moment and family partner with capital, and I am not terribly worried about surprise expenses if it means I can eventually pay down the first mortgage maybe refinance it using a different loan and reusing my VA loan again but more wisely..

If I can turn the 57-157 CF property to 500+ CF and get another property at a low interest rate on the side just by hustling it a bit I wouldn't say its a bad thing...

But i am new...and maybe that is just a Band-Aid for a bad wound and I am just naive..

 Band -Aid rationalization.

Someone a while back, when asked if it was OK to lose money on their first house, and was told it was OK because "it was a learning experience".

I went out to lunch and came back before I said anything...(I like BP and didn't want to say anything that might get me banned).

What I wrote in reply was this:

"Great.  If it's OK to lose money because you are learning, I want to meet the REI that has lost the most money.  He/she must be a F...g genius".

No, It's not good to lose money (or have low cash flow) on ANY property...especially if you know it going in.  It happens, but it isn't acceptable.  

Originally posted by @Travis W. :

@Joe Villeneuve I can understand where you are coming from on being objective regarding everything. Taking into context everything I have read, I gathered (perhaps rationalized, oops) that the first house is in fact harder to manage because of overall low cash. Hence, why many new investors have trouble getting their second deal. Or maybe it is a bad investment on my part, despite doing the best research I could ( I did a lot, except for the unknown variables)..it is my first house/investment property so I have accepted I will make mistakes... if rent were 1400, which it could go for possibly, it would boost 57 up a bit..

If I give it time, I can use the next property's cash flow to offset my mortgage and build a second cash flow stream.. I have a solid W2 income at the moment and family partner with capital, and I am not terribly worried about surprise expenses if it means I can eventually pay down the first mortgage maybe refinance it using a different loan and reusing my VA loan again but more wisely..

If I can turn the 57-157 CF property to 500+ CF and get another property at a low interest rate on the side just by hustling it a bit I wouldn't say its a bad thing...

But i am new...and maybe that is just a Band-Aid for a bad wound and I am just naive..

 ...and if you think you can fix it with appreciation, rent raising, depreciation, and all the other future events you have no control over, you're wrong.  That's not investing...that's speculating.  That's OK...with your future profits, when you have a repetitive CF coming in.  You don't have that now.  You're gambling with your "seed money".  Lose it, and you're done.

Also, based on your last "If I give it time..." scenario, how long would that take?

@Scott Titus I thought I heard a similar theory voiced somewhere also, that it was alright temporarily because loan-pay down will eventually catch them up. Unfortunately, I have no duplex/triplex's in my area.. there is 2 exactly, and they are both major dumps with terrible tenants. My next deal I was searching for was/is a multifamily in a town about 30 mins away. Live in it, rent one side, and rent my current residence. Use one of those cash flows to help me pay down my first loan. Refinance it, reduce my monthly payment on it, open up my va loan and get a 3rd property for <4% with more money down this time (i used $0 for this house...) and go from there..

I could maybe rent out my house and live in the basement as it is now.. not sure what else i could do there besides pack everything up, rent a bedroom somewhere and sell my house and look for something else..

@Joe Villeneuve That is a solid takeaway. I never considered losing money and have never deemed it acceptable. If I did I don't think I would be here asking you wonderful people on BP how to not fail horribly. I would love to have 500+ monthly cash-flow from my one and only property. I am currently making -1200 a month as i am living in the place, and as it stands, that high CF isn't a thing for me... I am still looking for that.. and doing my best to not speculate. After a certain dollar amount i know that moving the goal posts for rent etc is futile and appreciation is fickle.. but yah, The time frame i am looking at is essentially a year and a half from now.  

That's not what I meant by looking at the time it takes.

If  you are only making 57/month...that's only $684/year.  How many years will it take to get enough cash put aside to get your next property?

If you were making $500/month...$6k a year, how long?

Remember, there are only so many VA loans with 0 down you can get...I believe it's 1. That means the next property will require a 20% down payment. IF you were to buy the same property again, that means ~$25k. At $684/year, it will take you over 36 years to get into your next property. Even at $6k a year, it will take you over 4.

Using your CF build up isn't the way to do it...unless you're starting when you're 3 years old.

If your total out of pocket for this property is even $900 a month and you rent it at $1,300 a month, that's not a bad deal. With zero down you still end up with $400 cash flow.

the biggest mistake I see is the down payment.  Had you put 20% down your cf would have been 200/month.  If Capitol is/was an issue I understand.  I really only see one way you can benefit from this house and that’s to house hack.  If you can get the other rooms rented for 700-800 a month and make either double payments so you can refi in a couple years or save up Capitol.  As an investment it looks like you paid market value and with no down payment you can’t expect cf.  is this a learning experience yes.  But is it feasible to rent the entire unit not in my opinion.  Getting room mates for 2 years and moving on is about the only way I can see you truly making an investment with this property.  Even then it only gives you a down payment for another property of similar quality or allow some you to refi so this one will cash flow.  Hope this helps. Keep moving forward!

@Travis W. , you're making it sound as if this one is already not your primary? If so, where is your family living? [ie. How many primaries are you expecting to buy through VA loans?]

Afaik, VA loans are not intended for purely investment properties, right?

ie. If you need to refi out of VA sooner or later, it'll mean: higher interest!

And if you're already struggling to show cash flow with interest rate in the 3's...

Unless I'm missing something. Thank you for your service...

@Justin Marshall Yah, that is where i feel i messed up. I don't think i can house hack it.. its in a average sized town where the average age is 55, not much to do, and generally not laid out well for more than a couple people... I don't know now.. maybe its best to just sell it and try to start over..

@Brent Coombs This one is my primary.. I am a single guy. They aren't for investments no, they must be owner occupied for a year, but unless what i read about is wrong, you can refi out of it and reuse it.. effectively allowing you to get a property every year for no money down (which i am now learning doesn't mean anything good because your PITI will most likely be astronomical mixed with mait/vac/pm cushion...) But yes, higher interest.. which is why i was hoping with my W2 i could eat away at the principle until it makes sense.. probably not feasible though... and thanks.

Do a mock 1040 schedule e to see the how the numbers work out with tax benefits. My first rental I financed 110k and rented for $1250...I “rationalized” it as ok because it was purchased to be my retirement home. That was 10 years ago, it is still a rental and appreciation, inflation and principle paydown have made it a winner, but not a slam dunk. You have already sunk money into the asset, if you can make it work, maybe hang on for a while and see how it shakes out. Warren Buffet says he would rather pay market price for a quality business than get a dog for cheap. You say a great house in a great location? Those are rarely steals but they rent to nice tenants and nice tenants are worth their weight in gold.
Also, if you pay utilities your tenants will have no incentive to conserve. The only reason to pay is in a multiunit with only one meter or if, say, the water bill is tied to the property and you don’t want tenants moving out and leaving a 1k water bill behind. Then you should charge them monthly so they can only skip out on one month.
PS. If you are cutting it thin, do yourself a favor and be very selective on your first tenants, don’t be won over by personality, it is 1) ability to pay...meaning salary, preferably two salaries and not alimony or anything that can dry up unexpectedly and 2) reliability (there is a reason insurance companies charge higher rates to lower credit scores).

You left out a VERY important number... what is the value of the home compared to your purchase price (ie... is there any value in the deal itself?)

@Travis W. the escrow is your annual property taxes and homeowner's insurance, divided by 12 and added your payment. This is not a good rental property, in my opinion. You paid full market price, therefore if the renter always pays, it is never vacant, nothing ever breaks, and you manage it yourself, you will make $400 per month. Which doesn't happen. This is why you must buy an investment property below market value if you want it to cash flow. 

I would just live there and find another property to invest in as a rental.

@Travis W. , being a beginner investor is one thing, but, what have you really learned so far? Can you find "deals" yet? And if you feel you can, your excess W2 might be better utilized in saving up as much investment deposit/s as you can, rather than worrying about paying back your current mortgage quicker, given such a tiny interest rate? 

[Because, other than your primary at any given time, all your other properties will have been refinanced into investment loans anyway, right?]

In other words, I suggest you place less importance on the zero down and low interest rate that you've relied on in looking for your current primary, and more importance on finding discounts from current/value-addable value. You need to know the answer to: Why (and at what price) is this next property a super-bargain?

Then, if you also want to take advantage of your VA interest and terms, then that's a bonus!

But please, each deal should stand up on its own merits, at civilian investor interest rates!...

@Travis W. I would not depend on making enough cash flow to cover your expenses...many people here have said that it's gambling and personally that's not a bet I would want to make unless you have capital to cover your losses.  I was fortunate in my specific scenario because I knew the units were renting significantly under value...but even more importantly was that I had still had cash flow coming in from an already established purchase.  

If you had at least another strong cash flowing property I could see the risk, but personally I wouldn't advise it.  I would stick it out and house hack it, sell it for a gain and 1031 that into another property.  

@Brent Coombs . i feel like I can find deals, and I clearly learned my lesson here with low cashflowing. I'm not sure if there is a misunderstanding here, but.. my plan was in fact to save for the next property and make sure it was decently cashflowing. I don't know if it's just being recommended that this is a bad deal because expenses aren't covered by cash flow alone.. which I figured may be the case with my first/only property. I feel like no investor starts out with cash flow to cover expenses, unknown or otherwise.. unless I am wrong.. none the less. I may look at selling come this year and just.. starting over. Idk, I'll have to sit down and look at everything again at some point. 

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