I am thinking of buying a property for $210,000 with 3% down. My goal is to own the property by letting some else pay for my equity. My rental income will be around $1,700 and total expenses will be $1,800, making net cash flow of $200/month (Total of $36,000 over the period of 30 yrs). Lets say if I account for $50,000 for total expenses for 30 years, plus 36,000 of negative cash flow - Total of 86,000. Assume there is no appreciation on property after 30 years. I will be able to own the property worth $210,000 by paying $86,000 + 3 % down pay. What's wrong with this analysis?
@Sam Shah Sorry, I'm lost on the math here. Your income is $1700 and your expenses are $1800. Your monthly cash flow should then be -$100. Also, I'm going to go out on a limb here and say that $1800 is NOT all of your expenses. Given the numbers, I'm guessing that you're only including mortgage costs, insurance, and taxes. If so, I encourage you to think about this as a business and realize that you WILL have expenses beyond that. You should account for vacancies, repairs, capital expenditures (roof, AC, etc), and (optionally) property management.
Please refer to the 50% rule. Paraphrased, it states that over time 50% of your money will go into additional expenses. At minimum, you should add 30% above your monthly payment. So, I'm guessing the monthly rent should be $2,400 to break even. And, that's with no cash flow into your wallet.
I fell victim to your logic as well, and had done so for over 10 years until I had to pay for an HVAC replacement ($7,500, which was cheap) and started wondering where those funds came from. That's when I realized my mistake and have been learning and trying to rectify the situation.
Ryan- Thanks for your feedback. I am accounting from total of $50,000 for repairs (Roof, HVAC, etc) over the life of 30 years. I am going to fund the repairs through my savings. Instead of making the down payment of 20% (i.e 40,000), I am only going to pay 3% down.
@Sam Shah The down payment and the repairs are only tangentially related to each other. If you pay less than 20% down, you'll end up paying private mortgage insurance (PMI), which is generally 1% of of your mortgage amount, monthly. That's $170 extra you'll be paying monthly, if my math is correct.
PMI has nothing to do with vacancies, repairs, or capital expenditures. You have to plan for those as well. If you're suggesting that you personally put aside $139 per month ($50k / 30 / 12) to pay for those expenditures, that's your call. However, I don't think it'll be enough over the course of 30 years. That's just my opinion. On a similar property, I put aside $415 per month to cover additional expenses.
As a lender the first question that comes to mind, are you going to live in the property for a period of time? Ryan in the above post did a great job with the expense and income side.
Ryan-Thank you once again. I appreciate your help.
It's really difficult to find positive cash flow generating properties in Philadelphia market with a price under $200,000. Please let me know if there is a way to research/find properties that will generate positive (even if it's small) cash flow in the long run. I am new to the real estate inventing and I have already started loving this site and forums. Thanks a lot.
Sometimes --- and I say sometimes --- rent appreciation can overcome the low returns in the first few years. For example, look at how fast rent has risen in the NYC metropolitan area. Such rapid rent increase is one reason why developers cannot build buildings fast enough around there. In any event, this is a pretty advanced strategy and there is a significant risk. Also, while Philadelphia is a nice area, the rents you get there are not really comparable to the NYC metropolitan area. So it may not be the best way forward if you do not have much experience.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
There is no problem finding cash flowing properties in the Philly area, I have 20 of them. Your issue is the 3% down. Very little is going to positive cashflow at 3% down ... which is why most commercial mortgages want minimum 25% down with a 1.25 debt coverage ratio.