Breaking Cashflow Rules - Worth the Equity?

[Brad Jacobson]

I'm about to acquire three doors (one single fam and one duplex) at a great price from a motivated seller.  Should have at least $100,000 in equity between the three and they're all very much rent-ready.  

The seller needs the sale funds so no seller-financing is available.  With 20% down and a conventional (around 7.25%), the cashflow is going to about break even despite having 20% down and an extra $100,000 in equity.

My long term goal is to have 20 doors in my local city and so I'm anxious to buy and hold - but I've never broken my own cashflow rules before.  I'm in a position where I can handle negative cashflow if I need to, but who wants to do that?

Is the better option to sell the units and cash out on the $100k and then continue to struggle to find cash flowing deals in my local market - OR - do I just sit on the properties until rates come down and build on their potential as long term holds?  

[David Ramirez]

How many years would it take you to have positive cash flow? I wouldn't wait for interest to go down, I would just look for seller-financing deals that cash flow since day one. 

[Bill Brandt]

7.25% seems high, would .5 to .75% make a world of difference? (Are the properties expensive enough for this to make a difference.) you could easily get that big a break in the next year. 

I assume there is no chance you could/would move in to 1/2 the duplex to get a better rate, rent out your current home for a year, and then either move back in or preferably buy a new primary?

If you expect 5-10% rent increases per year that should help, if you don’t I’m not excited about your chosen market. 

I assume these properties are still making tax free money (with loan pay down and depreciation.) I bought a property with $800/mo negative cashflow because it was still making $20k/yr in tax free profit. Now that it’s paid off it brings in almost $30k for one door. 

Obviously you’re going to buy them to make the $100k. Pretty obviously you’re going to keep them for at least a year to cut the taxes in half, probably saving you $10-$15k or $1,000/mo. Plus you’ll have a bette idea of how they actually perform. 

[Eliott Elias]

You should be flexible with your investing criteria, not all deals are created equally. Trading cash flow for equity is a good play. 

[Brad Jacobson]

Quote from @Bill Brandt:

7.25% seems high, would .5 to .75% make a world of difference? (Are the properties expensive enough for this to make a difference.) you could easily get that big a break in the next year. 

I assume there is no chance you could/would move in to 1/2 the duplex to get a better rate, rent out your current home for a year, and then either move back in or preferably buy a new primary?

If you expect 5-10% rent increases per year that should help, if you don’t I’m not excited about your chosen market. 

I assume these properties are still making tax free money (with loan pay down and depreciation.) I bought a property with $800/mo negative cashflow because it was still making $20k/yr in tax free profit. Now that it’s paid off it brings in almost $30k for one door. 

Obviously you’re going to buy them to make the $100k. Pretty obviously you’re going to keep them for at least a year to cut the taxes in half, probably saving you $10-$15k or $1,000/mo. Plus you’ll have a bette idea of how they actually perform. 

I appreciate the thought on cutting taxes by owning for at least one year - I hadn't thought that through all the way.  This will probably be my path forward, hold for at least one year for tax reasons and then see if I have rent increase  and/or refi potential to build on that cashflow.  If it's still a loss-leader, I can sell with a lower tax burden.  

Thank you Bill!