negative cashflow of $500

[nextsean]

Based on the calculation, my cashflow will be negative $500 every month for the property I'm looking at.  I have 40k in reserve and that means I could withstand 80 months until I run out of money.  
people say:
1) if you can't make cashflow positive, don't do it
2) Do not bank on house appreciation and go negative every month

Based on the recommendation, I shouldn't even dare to do this.  On the other hands though, if I'm able to weather the negative cashflow for 5+ years, I should be able to come out on top, wouldn't I be?

I just don't see any other options.  my investment property criteria is to be in Seattle.  Any thoughts?

[kdhastedt]

This is NOT an investment property, it is a speculation property!  

$500 a month is a huge negative...where will it come from?  Have you taken ALL expenses into account (including PITI, maintenance, management, vacancy, etc.)...what happens if the economy/Seattle housing market 'take a dump'?  You will still have a mothly mortgage payment, etc...you'lll still be negative, and there was little or no appreciation.  What happens if you can't rent it for 6 months?  That's going to suck in a big way.

Maybe at the end of 5 years you'll be positive, maybe not...that's the speculative part.

Personally, I "buy and hold" and the properties HAVE to cashflow.

I'm not going to tell you "how to suck eggs" but make sure you have a full awareness of what you are doing and the pitfalls that could lie ahead.

You're wearing blinders...think outside the box...for example:

Go to Tacoma (35+- miles) and find a property near one of the miltary bases, Fort Lewis or McChord AFB and tap that military market.  These may be the best renters in the world (I LOVE my military tenants!)...an E-6 in the Tacoma area draws (in addition to his pay), a housing allowance of over $1270!  I know there are properties that would cashflow at $800 - 1,000 per month!

This is just an example...there are a dozen ways to skin this cat...

Can you provide the numbers that you're working with?

Keith

[nextsean]

Keith,

I really appreciate your thoughts.  

My brother actually partnered up with his friend and started about 2 years ago with 26k total cash.  They started by buying 3 houses in Tacoma.  They pulled the money out and bought 3 houses in Arizona, which has been doing really good.  They are renting 7 houses right now.  They are doing really good.

It sounds like you know Washington.  I live in Kenmore.  I wanted to get my first rental relatively close to where I live.  I could get something in Tacoma when it comes to push and shove, but I'd rather not.  I am trying to think whether there is any way to get this to work in Seattle area.

available cash: 40k
home equity line: 100k (I have not done this yet)
rental property price: less than 350k
credit score: 790

Let me know what you think.  

[kdhastedt]

I know a little about Washington...not a lot.  My step-daughter lives in Seattle and works for Microsoft (a whole other issue of having so much of the population being fed by one hand!) and I understand the military market (20 years in the Army and actively own rentals in an Air Force market).  From the little I've seen, you will have a very tough time cashflowing in Seattle right now.

When I said the "numbers that you are working with", I really meant:

Sales Price:
Taxes:
Insurance:
Expected Maintenance:
Management:
Vacancy:

Expected rental income:

BTW - you've got great credit and some capital...that's good!

Keith

[nextsean]

In Seattle, I'm looking at:
Sales Price: 350K
Taxes:3500k
Insurance:500
Expected Maintenance: I really don't know??
Management: $0 - I'm planning to do it myself
Vacancy: minimal - I'm thinking that vacancy will be minimal in Seattle (Maybe I'm kidding myself)

Expected rental income: $1200 - $1400

I just did a quick windermere search in Fort Lewis area and see $1200 - $1300 rentals.  not bad.

[aak5454]

paying $350k to get $1400/mn in gross rent.  Forget it; that's a crap deal.

[nextsean]

I figured that much.  Got any suggestion other than it being a crap?

[aak5454]

you are probably looking in too nice a neighborhood.  For $350K, you need to be pulling at least $2700 (or more) in rent.  As a very rough rule of thumb, if the Gross Rent Multiplier (i.e. purchaseprice /gross rent per mn) is greater than 150 then it is almost impossible to be breakeven.  If its 100, then you shoudl be generating cash even with conservated financing.  However finding 100:1 is very tough in many markets.

Also, I assume you are looking at Single Family homes.  Check out some areas that have duplexes.  These can show much better numbers (my best income property is a duplex).

Also, look a little further from home (up to 50miles) and consider using prop. mgmt.  That way you can go over to the property to do big repairs yourself (if you liek to), but you don't have the daily hassle of dealing with little issues, etc.  I have some rental about 80 miles from my primary residence and use prop. mgmt.  I have a weekend house nearby so I go there a couple of weekends a month and do some of the repairs myslef (I'm a weekend Joe Toolbelt kind of dude), keep an eye on what is going on, but if I feel sittin' on the porch drinkin' brew all weekend or just plain busy, I can have prop. mgmt line some people up to take care it (plus I got a reg. 8-5 job and a family so I don't have time to hassle with tenants on a daily basis).

That's some thoughts

[rhm76384]

Hey,
     Since you live in Kenmore that property is going to wash you up and hang you out to dry.
Peace,
Richard

[kdhastedt]

Wow Richard, that was a really BAD pun! :

Were you in a "Pun-itentiary"?

Keith

[rhm76384]

Hey,


                                           

                                :'(

Peace,
Richard

[4EEM]

Find another property.  

[Corilda]

nextsean, you're scaring me, my man!  WHY would you set yourself up with an "alligator" for any amount of monthly negative cash flow, never mind $500??  Just because you have $40K in "reserve" doesn't mean you should be draining it into this house, or any other property... there are so many other ways to leverage that money into properties with positve cash flow... or, better still, you need to learn how to leverage your brains, not your credit or your savings.... run, don't walk, to any training you can get from Ron LeGrand (www.ronlegrand.com) or Lou Brown (www.louisbrown.com)... They will teach you how to analyze a deal to know your costs, your risks, and your exit strategy BEFORE you buy it... with little or none of your own money, and at very little risk... You're heading for major problems with the kind of deal you're describing!