Losing Faith In The Formulas

[propertymanager]

kl,

Even if you put money into the property, you are still making money as long as you have a positive cash flow.  After all, the money that went into the property is your equity.  Theoretically, if you sold the property, you would get it back in full and you would get to keep the cash flow that you made.

Mike  

[big_sb]

This is a long term strategy. You could tap into the equity to get your next property, but you won't be cash flowing on the property. If your looking for a quick payday, you would have to flip it or lease option out to your tennent with a down payment.

A lot of the shows never factor all of the costs to the tv show bottom line, cause it wouldn't be sexy to show all of the fees, holding costs, etc. Same thing when it comes to investors talking about a property cash flowing...they look at the Rent in minus the mortgage they pay and its cash flowing.

[klproperties]

Theroretically, that is true. Seems there is a risk with this market and need to buy at a better discount than before to be sure. Cannot count on this market and what it will do for sure in all areas. I am just on the cautious side safe than sorry.

[DannyTheGreat]

Except for rapidly depreciating markets, that equity attributable to the money you put down isn't going anywhere. If your buying at a 20% discount and you put another 20% of 80% down, your actually putting down 16% of the market value. You've more than doubled your investment, even before the cash flow starts.

[Land Baron]

Hey!  What's all this talk about putting 20% down?!  I thought the whole idea was "leveraging", "no money down", etc.?

When I've been calculating my potential deals, I've only been counting on putting down $5,000 of my own money.  I realize that the more I pay down, the more cash flow that I'll have, but I thought that everyone was against the idea.
 ???

[DannyTheGreat]

Putting money down is not the enemy. Infact, it's sometimes the smartest thing to do. In your situation, I wouldn't even put down 5k. That's not going to do much to boost your cash flow and may be better spent on the small expenses when acquiring properties (appraisals, inspections, surveys, closings, etc.)

[propertymanager]

Land Baron,

It depends on your financial situation.  If you've got a bunch of cash, then you should invest it to get the best return.  If you only have a few tens of thousands of dollars of cash (or less), then how much can you put down on each deal.  For example, if you had $50,000 in cash, how many deals could you do if you were going to put down $20,000 per deal?

Mike

[dwj469]

Yes putting down that much money to me makes no sense unless you can fix it and refi it to pull it all back out again with a small equity cushion. That much equity means nothing if you are in the building stage and dont plan on using it. Why not tap it to expand your business and let the renters pay it off for you. Thats the magic of real estate."Leverage" just dont over do it so you are upside down.

[NoMoneyDown]

klproperties: "If you put money down then you are not making money till you have made the money down back a few years down the road depending on the numbers."

Land Baron: "Hey!  What's all this talk about putting 20% down?!  I thought the whole idea was "leveraging", "no money down", etc.?"

Think about it for a moment.  You buy a property and flip it and net $20,000.  Where did that money come from?  Your savings?  Income from your JOB?  No, it was profit made from a flip.  You put that money down on your next property.

 

[kiko456]

What a great thread.  Thanks for all of your opinions.  Just bought my second investment property and, admittedly, know very little.  I love learning though...

[dd564]

Okay, it's completely sexy to buy properties no money down, but what's your goal?

To take nothing, flip houses, make $10,000 per house and multiply by 500 times in your life.

Or maybe put down 20% on a property.  Hold it while it cash flows (and cashflows a little better at the same time).  Maybe get lower mortgage rates and shorter terms and increase networth faster.  Do this for 15-20 years, your networth is several million dollars and you are cash flowing $5,000-$10,000 a month.  Until one day, you start paying off those 15 and 30 year mortgages from holding the property that long and putting a little cash back to pay it off faster.  Next thing you know instead of $10,000 per month in cash flow, you're making $15,000 or $20,000 month with millions in networth.

You need to know what number you want to hit by what age.  I want to hit $5,000,000 in networth by age 55.  A high goal, but worth shooting at.  To get there at some point, I'll need to eliminate debt and get a return on my money.  No one can tell you what the best path to retirement is if they don't know what your number is.

[propertymanager]

dd,

To reach a certain net worth, you don't need to pay down your debt or get a return on your money.  Net worth is simply the difference between your assets and your liabilities.  It has nothing to do with your cash flow.  If you have $10,000,000 in assets and $5,000,000 in liabilities, your net worth is $5,000,000.  Any return on your investment is irrelevant to net worth.

I think that your goal is very realistic.  With my plan, I'm getting $1 million in equity every 4 to 5 years.  Getting the net worth is easy.  Getting a high cash flow is a little harder, but more important if you ask me.

Finally, as your net worth grows, you must think about how to protect it from the scumbags and vultures out there who want to steal it.  They're the ones you see on TV commercials wearing suits and standing in a courtroom.

Mike

[Dave T]

Didn't Rockefeller say that? Wouldn't surprise me if a Wallstreet investor stole the quote...

"The time to buy is when the blood is running in the streets" is attributed to Nathan Rothschild.

[Dave T]

dd,

I hope your not turning your nose up at the notion that operating expenses run about 50% of the gross income because few properties in your area could cash flow like that. In which case, most people would be losing money on there rentals.

If it will help, I would like to contribute my actual experience to the discussion.  I have several rental properties spread across three different states -- all professionally managed.  

For the year 2006, my Net Operating Income was 42.5% of my actual rental income, putting my operating expense at 57.5%.   Debt service was 37% of actual rental income.  After operating expenses and debt service I am left with 5% cashflow for the year.

I included in my operating expenses everything directly attributed to my rentals that takes money out of my pocket that is not debt service.  I also do not include any "overhead" expenses for a home office.  Replacement costs, leasing fees, commissions, legal fees, property management fees, repair and maintenance costs, utilities, postage, homeowners association dues, condominium association dues, and pest control are all included in my operating costs.  

Vacancy is not included because I used actual income in my calculations.  If I am doing a proforma for a property to purchase, I use one month vacancy allowance per year.  Contribution to a replacement reserve is not included because I used actual costs in my calculations.  If I am doing a proforma for a property to purchase, I allow a replacement reserve amount equal to the average monthly per unit replacement cost for my entire rental portfolio for the previous year.

I think my numbers are typical, though I did have a higher than normal vacancy rate this year because of several new acquisitions.  Most years my cash flow is between 10% and 15% of actual rents.   I could lower my operating costs by self-managing or by purchasing fewer condos with high association fees.  However, I prefer to concentrate on the big picture.

There are three reasons to invest in rental property.  I credit Ron Starr for this.  He uses the abbreviation CAT for Cash Flow, Appreciation, and Tax Benefits.  All three have to be considered in the rental property purchase decision.  Basing a purchase decision only on cash flow does not make good business sense if the property is declining in value and will be sold at a tax loss.

Rental property ownership is a SLOW road to wealth, but over the past 25 years, my 10% cash flow and property appreciation have made me a millionaire a couple times over.  Tax benefits such as depreciation expense and tax deferred 1031 exchanges are just a bonus.  The payday came for me when I retired at 49 years of age, my unearned income more than covers all my lifestyle costs, and my tenants keep "buying' my properties for me.

[DannyTheGreat]

"The time to buy is when the blood is running in the streets" is attributed to Nathan Rothschild.

The way to make money is to buy when blood is running in the streets" - John D. Rockefeller

It appears Rockefeller was the one who stole the quote (or he was 3 years old when he said it), that doesn't surprise me either.