First, is it essential to get a pre-approval letter from a bank(or other financial institution) before actually shopping for properties and making offers??? I have been told that I will be taken seriously if I have one in hand.

Secondly, like many, finding properties that produce GOOD cash flow is hard. But not impossible. I am in the southeastern section of Pa. I have found a few multi's with good cash flow, but I have had to sacrafice my cash on cash return with a higher down payment. At what point does good cash flow become more important than higher leverage and a higher cash on cash return?? Hope that makes sense to the board.

Thanks much to anyone willing to help!!

Chance.....

chance2,

Almost every property will "cash flow" if you put enough money down. Therefore, you could pick the worst property in your market; pay 100% cash; and it will "cash flow". However, I don't consider it cash flow if you have to buy it with a dowmpayment (although technically it is). I judge every deal as if it were 100% financed and judge the cash flow on that basis. When you buy with 100% financing, your return is infinite because you don't have any cash in the deal.

Unless your are quite wealthy, you won't be able to buy many properties if you must put down a significant downpayment for each property. If a person only had to put down $10,000 on each property, how many properties could the average investor buy? Not many I'd bet!

A pre-approval letter or bank statement showing that you have the cash will help, especially with REOs. However, I've never been asked for one when dealing with other investors or desperate homeowners. In reality, a pre-approval letter isn't worth the paper it's written on. It doesn't mean that a bank will loan you the money. I've seen many deals fall through when a buyer with a pre-approval letter couldn't get the financing.

Good Luck,

Mike

I am under the impression that an investor will need between 20-30% of the loan for a typical down payment on an investment property. On the properties I have been looking at that equals around $40,000. And the cash flow is still usaully under $500 a month. Would the 20-30% down payment be correct for a first time income property buyer???

Thanks for your advice on the pre-approval letter.

Thanks again Mike.............

It is possible to get 100% financing on NOO properties. I was in the market for that type of financing until I found out I would have to put up several thousand in cash reserves which I don't have. If you have adequate cash reserves, you may find it easier.

The hard part is getting the properties to cash flow at 100% financing. In my area, rents are low and it is virtually impossible to get positive cash flow unless you can find sales at an extreme discount to the market price.

In my area, rents are low and it is virtually impossible to get positive cash flow unless you can find sales at an extreme discount to the market price.

It is hard to find properties that will cash flow in just about every market. The vast majority of rental properties sell at/or near retail to mom-and-pop landlords who don't last long. If you want to succeed in this business, you MUST find properties that will cash flow.

Mike

Mike, do you have any thoughts on owner-occupied rentals? This is a possibility for me as I am renting right now but I'm torn as to whether I want to leave my situation for personal reasons. I haven't done any financial analyses of owner-occupied rentals but I know that the conventional financing terms at least are much better in general than non-owner occupied.

Sarahheck,

Personally, I don't want to live in the same building as my tenants. Most tenants live a completely different lifestyle than I do. Rentals are my business and I certainly don't want to bring it home with me, or even worse - live with it 24/7. YUK!

Mike

I hear what you're saying and that's why I'm reluctant to leave my present situation. I live in a nice in-law apartment attached to some friends' house and it's in a very nice area. Plus my rent is very cheap. I sold my house a couple of months ago and haven't decided what to do next yet.

However I assume you use some sort of a process to screen your tenants? My idea was by being very selective, I could find good tenants. With that said, there seems to be a glut of rentals right now where I live and landlords are scrambling to put any warm, rent-paying body they can find in a unit.

Please make sure you analyzes the deal before you purchase. Often guys will think they can cut corners to make the numbers work. I done this when I bought my first duplex. I skipped the bathroom. It did not rent out for 2 months I redone the bathroom and within a week it was rented. I lost about $1200 for rent. the bath room cost around $1500 to redo. I agree with Mike about living near your tenants. I don't even like it when the tenants talk to me on the phone. They just want things. I had one call me about kids that egged him. I was like "well use the hose and get rid of it". How ever if you are just getting started this would be a great way to get the ball rolling. You might even get a better interest rate if you live in the house (duplex) My buddy did this when he bought his first house (duplex). The tenant paid the mortgage, Insurance, and taxes for the whole house. now my buddy saved from day one and is building his new home. He was thinking of selling this house which he paid 40k for now it goes for 90k not sure what the cash flow would be. He also remodeled the side he lived on. His plan was once the tenant moved out he would move into the other side to remodel it. Last I hear the lady plans on living there forever. She is older. He never got a chance to remodel the other side yet.

I think the only thing a pre approval letter is good for is so the Realtor you are working with doesn't think your wasting his/her time. If you go to a bank with a solid good deal You shouldn't have a problem getting a loan.

Originally posted by "chance2":
I am under the impression that an investor will need between 20-30% of the loan for a typical down payment on an investment property. On the properties I have been looking at that equals around $40,000. And the cash flow is still usaully under $500 a month. Would the 20-30% down payment be correct for a first time income property buyer???

Thanks for your advice on the pre-approval letter.

Thanks again Mike.............

It sounds like are looking at buying a property for around 175K. So you are financing 135K (if you can get 30 fixed) @ 7% PITI = over $1000 a month depending on your taxes. This means that you need to make rental income of 2K per month or more. As long as these properties are not considered commerical (In Ohio 4 units or more), you should be able to get close to the same terms that you get with a convential home loan. My lender only requires 15% down, so I am not sure where you are getting the 30% down from.

TC,

I am getting the 20-30% down from almost every real estate book I have read on investing in residential income properties. The books state that because banks/lenders see it as more of a risk they require more down payment. But you are coming from personal experience and I tend to believe that more. Only problem is that none of the properties I looked at will cash flow with 15% down. And if they do, it's not much. Anyway, thanks for your input!!

Chance2...

Chance,

If you have to put that much extra down to make it appear to cash flow then you are paying to much. I don't understand how a property can be considered profitable if you have to take money out of your own pocket to make it appear cheaper. Remeber your cash flow numbers should be figured agaisnt the full purchase price, not what you owe the bank.

If I have to run the numbers against the purchase price, they will NEVER cash flow. I have a hard enough time finding ones that cash flow with 20% down. Pa must be one tough market. I guess the only thing I can do is insult the sellers by offering 30% below market for the properties.

TC, don't get me wrong. I agree with you. Why should I have to MAKE the property work with a big down payment. But like I said, that is the only way to make these properties work in the southeastern Pa rental housing market. Unless I find that needle in the haystack. Should I just make some really low offers and see what happens and not worry what the seller thinks????????????

Thanks TC, I am new to this and want to learn from people with experience.

Chance2,

You have to do whatever it takes to find the properties at the right price. Otherwise, there simply is no reason to be in the rental property business. This is difficult in every market. If it truly is impossible in your market (I doubt it), then you should look for another business.

WHAT HAVE YOU DONE SO FAR TO FIND GREAT DEALS?

Mike

Mike, maybe I should get your book.......

chance,

it sounds a little like you might be looking for deals primarily off the mls. if that's the case, problem solved (sort of). if you're looking for properties that need work, they'll usually have a hefty discount to go with it. and of course all the rest of the reasons why people are willing to lose money on a house (ie. divorce, death, unemployment, etc.). those deals are out there. the biggest problem is knowing it when you see it, and being able to act when you do...

-dean

Hey Chance,

I guess I am just lucky to have an over of abundance of properties in my area. There are multiple SFR, Duplex and triplexs ranging from 15K to 40K and all they really need is some TLC and a lot of paint. You have to be willing to grab a couple HUDS.

Are you looking on your HUD website for these properties?

I am in cleveland and using wells fargo as my lender on my rentals. they only require 10% on NOO under 4 units and the rates are only about 1/2 point higher than primary residences.

mike, etc. whom are you financing through in order to get less than 10% down, brokers? i see your question about how many properties investors can get if they have to come up with 10K everytime, and that is what i have been fighting.

any suggestions?

Originally posted by "drweltman":
chance,

it sounds a little like you might be looking for deals primarily off the mls. if that's the case, problem solved (sort of). if you're looking for properties that need work, they'll usually have a hefty discount to go with it. and of course all the rest of the reasons why people are willing to lose money on a house (ie. divorce, death, unemployment, etc.). those deals are out there. the biggest problem is knowing it when you see it, and being able to act when you do...

-dean

Great advice. If you can't find deals right now, don't get discouraged. These deals will not fall out of the sky and land on your lap. Deals are made not found. You have to put some effort into it. I don't buy real estate to get rich fast. It is more set up for retirement. Don't give up. If you get at least 1 house the right way, in 20 years it will be worth it.

Wow, a thank you to everyone for the great advice. I have no problem admitting that I have NO experience investing in residential income properties. The only experience I have in real estate is my current home that I have lived in for close to 8 years now. And it has been a great experience. I have read close to 35 books on all aspects of investing in rental properties over the last 2 years. In that time while hopefully educating myself, I was able to build up a lot of cash. I have a goal of closing on a property by the end of the year. Again, all I see are over priced properties that I have to make work in order to cash flow. And yes, I have beem looking at mls. Primarily realtor.com. I guess I should stay away from that site. I was scratching at the surface. Guess I will have to dig a little deeper...

Thanks again for everyone's advice!!