0 cash flow

5 Replies

Although I've done it, I don't recommend it!

A shorter mortgage than what? How soon do you plan on paying it off? In my experience properties with no mortgage a pretty easy to get to cash flow.

Back in the day (when no approval assumptions were available) I used to get into those if I could do it CHEAP ENOUGH (ie; close to ZERO), knowing I was going to do a WRAP.

all cash

Well, first I would make sure that the property is a deal. If it barely cash flows with a 30 year note on it, then I would pass.

In reference to a shorter note (maybe a 10 year), I think that depends on your investment goals. Are you just saving up for retirement and you have other extra income to supplement your investments if needed? You will need capital for maintenance, vacancies, and other expenses. If you don't have the extra income from a job or other investments to put into the properties then having no cash flow is not a good idea.

15 year mortgages are painful and will back you up against a wall fast but if you have the money...they pay down great and I prefer them for investment property especially with partners. 20 year is slightly less painful.

Originally posted by "mindlessroller21":
would it ever be worth it to buy a property that will not create any cashflow just to acquire the property with a shorter mortage? has anyone ever done this ?

I'm sure many people have done this, but I'll bet that most of them don't fully understand why they are doing it, and many of them are losing money without realizing it.

What's USUALLY in the back of their mind when they do this, but is often subconcious, is that they are COUNTING on the house to appreciate and/or rental rates to go up. These are both a dangerous assumptions, in my opinion, because, as Warren Buffett or Benjamin Graham would say, you have no "margin of safety" if the economy downturns for a while...AND because you are still highly leveraged. See my other post here about the possible consequences (good and bad) of leverage:

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Originally posted by "Ryan Webber":
Well, first I would make sure that the property is a deal. If it barely cash flows with a 30 year note on it, then I would pass.

Well said. This, I believe, is the "gold standard". ALWAYS assume you will have a 90% 30 year mortgage, just so you can compare apples-to-apples...and to that point:

Taking the other extreme: Imagine that you have a house fully paid off, so that your only expenses are taxes, insurance, repairs, and property management. Kind of to "all cash"'s point, it would be "easy" to get this to positive cash flow, but you are not taking into account the "lost opportunity" to make money from the equity! You could also just as "easily" cut the rent down to cover just the expenses. This would guarantee that you would always have 100% occupancy and you would still "positive cashflow", but look at the huge lost opportunity cost!

Common sense would tell you not to do this, but people do it on a smaller scale all the time, by assuming a shorter mortgage and/or a higher down payment. Cash in hand (aka equity in one form or another) is opportunity to make even more money, and should never be squandered. It should always be "working for you" in one form or another.

When analyzing a deal, even a "deal you already own", in order to compare apples-to-apples, you should pretend you have a 30-year 90% mortgage, or pretend to take out a 90% home equity loan on your property, pretend to invest that cash in something relatively safe (or risky as is your risk tolerance allows), add the income from that investment to the rental income, and THEN see if it still positive cashflows. The more it positive cashflows (makes you a profit), the better a deal it is, from a cashflow analysis perspective.

Of course, there are many other "perspectives" to real estate investing, but they are off this topic.

Ben

Alot of this does depend on your age (level of risk/opportunity) and banking connections. I have always had to put 20% down or cross collateralize to get
at least 20% on paper. If hard times come and you can't get the income you thought you'd get (such as the last 5 years) you'll be glad you've got 20% in the deal. There are alot of 100% folks out there stuck now.