Posted by David Butler on April 13, 2006 at 13:56:17:
Hello Mark,
This question is better suited for the Main Forum, which covers real estate investing. But, I will mention that the PI in PITI is the debt servicing - with the TI being tax & insurance reserves. You may be aware of that, but difficult to tell from your wording, so I just wanted to be safe. BTW… you have provided a context for that $300 per month cash flow - i.e. what are the other factors in the deal that lead to these “experts” you are talking about desiring that $300 cash flow, and for what time frame they expect to receive it?
And, there are a couple of similar investment concepts which apply in note buying, so we can offer a some food for thought here.
First thing to understand is that there are two primary groups of investors - those who purchase property at retail (essentially buying to local “cap rates”); and those who look to purchase “wholesale”. This second method includes a variety of investors, including CREI’s (most of whom visit web sites like this one).
Different philosophies and different methodologies are inherent to some degree in each of these groups. The one common denominator is that under ideal conditions, the investors will enjoy cash flow, growing equity through debt reduction, tax benefits, and appreciation.
Another influence is property types. Income property covers a fairly broad gamut. On one hand, you have basic SFR investment properties, which include 1-4 living units.
These tend to have a wide-range of investor buying parameters, with no set “one-size-fits-all” formula. Location is a huge factor in what is acceptable to a given investors. Available financing is another.
In any event, a great many investors purchase these types of properties with the intent of living with a breakeven cash flow, with an eye toward gaining growth through debt reduction; whatever available tax breaks are availabe to them, if any (TRA '86 plus); and appreciation. This is particularly so for nothing down or low down investors who purchase property at retail, and consider the lack of cash flow to be a form of their “investment” in-lieu of a large down payment. You can think of this as a “leveraged-buyout” 
Then you have a broader range of “commercial” income properties - which also includes residential multi-family living quarters of five or more units, in addition to many other types of retail, commercial, industrial, and special use properties.
In these types of investments, a lender is going to look at the historical Net Operating Income (NOI) on a given property as a beginning frame of reference. The NOI data automatically includes operating expense, including taxes and insurance, but before debt service.
And a very common rule of thumb from that point is to then apply that NOI to a 1.2 income-to-debt ratio. In other words, at a minimum threshhold, most open-market commercial lenders are going to look at a property that has a $12,000 annual debt service (principal & interest) and expect to see at least $14,400 in Net Operating Income ($12,000 debt service x 1.2), in order for them to agree to fund the loan.
Using that as our own minimum basis for deciding whether or not we want to purchase that property, we can see that in this example, the property “cranks” $2,400 per year, or $200 per month cash flow.
Is that a great deal? A good deal? An average deal? A bad deal?
Rather than going through cap rate analysis, or investment scenarios for individual investor circumstances, I think I am safe in saying that if this deal can be purchased with no-money down, and we believe the historical operating history of the property is reliable - almost any investor would take it! The possible exception might be investors in the Donald Trump class who focus on much bigger “fish frys”.
Hope that helps you getting out of the chute, and Many Happy Returns!
David P. Butler