Posted by b kozak on August 03, 2008 at 11:34:13:
Michaela,
Thanks…I have considered all expenses in the cashflow. $40K homes in Pittsburgh is common without the warzone factor attached to it.
Cash out vs. Cash flow - Posted by b.kozak
Posted by b.kozak on August 03, 2008 at 08:05:28:
Dear Friends,
I am looking at a good cash-flow rental deal (about $5000 per year net), the upside equity appreciation is probably not there for a few more years. I want the property, but after rehab and refinancing, I may break-even on my out-of-pocket expenses…should I still go for the deal in general, or should rehabs to rent always be done with some cash-out (ie. after refinancing), even if it’s only $5K?
Bak
Re: Cash out vs. Cash flow - Posted by michaela-CA
Posted by michaela-CA on August 03, 2008 at 09:04:21:
Bak,
you have to consider the whole investment (purchase and rehab and holding etc) and base your positive cashflow on that.
What if you bought a property for 100,000 cash and were able to rent it for $ 1000 per month. At that time you don’t really have ‘positive cashflow’ of $ 1000, even if it may look like that on the surface. You have to consider the value of your cash that you put in and include that into the calculation of return.
So, let’s say you bought a house for $ 50,000 with owner financing of $ 50,000 - pmts of piti $ 500.00 .
You could rent it out for $ 1,000/mo and on the surface it may look like you have $ 500 pos. cashflow. But what if you had to put $ 30,000 cash into it to get it to that point? Even though you still have a difference of $ 500 between income and mtg, you really don’t have $ 500 profit per month.
So, to make a long answer even longer ;-). No, it doesn’t really matter whether you get cash out, but you do have to look at the total invested into the deal and see if what you get out is a good return.
As to appreciation, most areas won’t see much appreciation in the near future. So, that should really not be a consideration in your deal, otherwise it would be speculating. just look at the whole deal and see if it’s worth it NOW. Any future appreciation will only be ‘icing on the cake’, but should not be your decision maker.
michaela
Re: Cash out vs. Cash flow - Posted by bak
Posted by bak on August 03, 2008 at 10:39:32:
Thanks…that helps me see a clearer picture.
Here’s the deal I am looking at:
$40,000 ARV
Current List price: $35,000
Rehab, closing and holding costs: $11,000
MAO: $18,500
Net Cash-flow: $425/month
Bruce
Re: Cash out vs. Cash flow - Posted by michaela-CA
Posted by michaela-CA on August 03, 2008 at 10:52:51:
Bruce,
others here may disagree with me, but it doesn’t look like a good deal to me. But then I’m not interested in being a landlord, so priorities may be different.
Have you done a lot of rehab? In my experience (and most rehabbers I’ve ever talked to in my years in the business) it’s very easy to go over budget. So, 11k will turn into 15k in a heart beat and then you’re at 80% or so. In today’s times you can buy houses at 80% all day long without having to do rehab or have lots of holding time while you do the work.
Does your cashflow take into consideration a return on your invested cash (rehab), insurance, taxes etc? If you wanted to refi to get cash out, would you be able to? 40k ARV is very low - in a lot of cities that would mean that it’s in a warzone, which would mean lots of turnover and not good tenants.
But again, it all depends on your area and what you’re looking for.
michaela