Can't figure out why I have negative cashflow

18 Replies

Because your monthly expenses exceed your monthly rents.

Are these actuals or estimated numbers?

I think the mortgage payment is too high which is causing you to have negative cashflow. Have you heard of the 50% rule?

Basically the 50% rule assumes that 50% of the gross rent goes towards the expenses. This works for your property ($625 vs $593 monthly expenses) is less than 50%. The other 50% is supposed to cover your mortgage expense and profit. Whatever remaining after covering the mortgage payment is your cashflow. The problem is your mortgage payment after refinance is $757 which is $132 greater than 50% of the rent ($625) which is why you have negative cashflow of about -$100. 

Does this make sense / answer your question? 

@Mathew Madruga the main thing I see is that your loan is too large when compared to rent collected.

For comparison, I have a property that rents for $1200, any my loan is $105k. This property cash flows about $250/mo. after expenses.

Well yeah....your financing 120% of your purchase/acquisition/rehab price and your monthly rent is only about 2/3 of 1% of your mtg amount....of course there will be negative cash flow.

In most reasonable investments, with 25% down, 1% of purchase price rents works out to 1.3% monthly rent of mtg amount......$1200/mo rents on a $220k property will never cash flow.

Got it.  The refinance is obviously higher than necessary just to repay the initial investment. I appreciate all of you that took the time to look it over.  

@Mathew Madruga So when entering numbers into the refinance portion of the investment calculator, do you NOT enter the total price the property is now worth after rehab is complete? Instead do you only enter the difference between original purchase price plus rehab costs and what the property is now worth?

@Anthony Wick All of my investment properties under 5 units have 30 yr fixed rate mortgages. I' close in my personal name then immediately quitclaim them into an LLC after closing (I've informed my lender I'm doing this and they don't care). 5 units and above is considered commercial and all I've been able to get is 10 year ARMs for those unfortunately but that's all I've found available for commercial properties.

@Mathew Madruga

It looks to me like the issue is that you have a $181k note on a property that only brings in $1,250 rent. Are you charging market rent, because this isn’t even close to the 1% rule.

On the plus side, you did get a nice cash infusion.

Ok guys, so if I’m trying to get to the heart of this. I’m using borrowed money for my initial purchase plus the rehab. When I refinance, the idea is to pay off the hard money loan with the money I pulled out from the refinance, correct? So basically, the rehab is costing too darn much. Even if pay $70k and the rehab costs another $40k, to pull out enough from the refi to pay the lender back, it would literally only leave me +$7.95/month cash flow. Then I’ll have to borrow again for the next deal, correct? So how do you break the cycle? Is there a better way to initially purchase a fixer where I won’t need to pay the entire loan back as soon as I refi? 

Originally posted by @Mathew Madruga:

Ok guys, so if I’m trying to get to the heart of this. I’m using borrowed money for my initial purchase plus the rehab. When I refinance, the idea is to pay off the hard money loan with the money I pulled out from the refinance, correct? So basically, the rehab is costing too darn much. Even if pay $70k and the rehab costs another $40k, to pull out enough from the refi to pay the lender back, it would literally only leave me +$7.95/month cash flow. Then I’ll have to borrow again for the next deal, correct? So how do you break the cycle? Is there a better way to initially purchase a fixer where I won’t need to pay the entire loan back as soon as I refi? 

Stop looking at cash flow when you have an opportunity to flip it for a 66k profit. 

My gut tells me to double check your numbers first.. Speak to a few local realtors and run this deal by them.

 

Originally posted by @Brian Ellis :
Originally posted by @Mathew Madruga:

Ok guys, so if I’m trying to get to the heart of this. I’m using borrowed money for my initial purchase plus the rehab. When I refinance, the idea is to pay off the hard money loan with the money I pulled out from the refinance, correct? So basically, the rehab is costing too darn much. Even if pay $70k and the rehab costs another $40k, to pull out enough from the refi to pay the lender back, it would literally only leave me +$7.95/month cash flow. Then I’ll have to borrow again for the next deal, correct? So how do you break the cycle? Is there a better way to initially purchase a fixer where I won’t need to pay the entire loan back as soon as I refi? 

Stop looking at cash flow when you have an opportunity to flip it for a 66k profit. 

My gut tells me to double check your numbers first.. Speak to a few local realtors and run this deal by them.

Exactly. Not every property is suitable as a cash flowing rental. If your numbers are correct - you bought at 100 and have 154 in it when done with an ARV of 220 you should be flipping that property. Even if it *was* suitable as a rental, profits like that are better harvested right now. It takes a long time to get that much back in rent. I think Brian is exactly right - your numbers sound suspicious. Few markets have houses that sell at those prices but rent so low compared to sales figures.

 

I’m on the same page with everyone else.  This is a better flip than a rental.  Even though the property may be in a good area, the rent is really low.  Double check your rent numbers.  If that 1200/month is the max rent you can get after the rehab, then it’s totally a flip.