The math just isn't working :(
Hi all, I have a few questions. I'm very new to real estate investing, and have just spent the past 2 weeks exploring my area (Charlotte NC). Granted, I've only been looking on the MLS...which leads me to my first question. I'm primarily interested in SFRs between 80-120K , and because we don't have cash our plan was to use a HELOC for the downpayment and mortgage the rest. The trouble I'm having is this: it doesn't seem like rent ratios are working out in terms of cash flow. I do know that we are disadvantaged in having to 100% finance, especially in terms of cash flow. But even when I'm doing the math and not including our HELOC (just to see), it isn't leaving much cf. I also know that because most of what we are finding are older ranch style homes, and because we are new at this, I'm being quite conservative in running my numbers. I'm starting to wonder if it would be smarter to do a flip first, and then have cash to put into a rental. Every time we go look at properties, my realtor tells me I will have to offer way over asking to compete with other investors - regardless of the home's condition. So for example, just the other day there was a house for 100K that he said would likely go for closer to 125K. If that's the case, how are other investors making these deals work? I understand they might be all cash, but that doesn't excuse bad math. Here's a run down of how I calculated our costs on a potential offer last week...perhaps you can shed some light if my math is incorrect, or if its just that cash investors don't care they are over-paying for property:
4 BD 1.5 BA - asking 100K, assuming it closes at 125K and rents at 1200.
Annual breakdown:
Mortgage: 6800
Taxes: 1160
Insurance: 1000
Management (8%): 1152
Vacancy (8%): 1152
Repairs (8%): 1152
Cap Ex: 1800
TOTAL EXPENSES - 14,216
TOTAL RENT - 14,400
Even if I bump the rent to 1250, the monthly cash flow is 65 compared to 15. So, are my numbers too conservative or are they correct? Would love your feedback. I have run this same formula on even lower priced properties that need much more work, and never end up with good cash flow. Is the ONLY way to do this buying foreclosures? My realtor said we shouldn't even consider auctions unless we have all cash. Any and all feedback/advice welcomed!!