Posted by A.C. on August 21, 2001 at 15:12:45:
…And all this is legal on my part (I mean the tactics you suggested be employed if they decide to call in on the DOS) just as a result of the original deed of trust that was done? Wow!! What an education I’ve gotten from this. Thanks!!!
No Positive Cash Flow in California - Posted by Steve
Posted by Steve on August 20, 2001 at 18:16:53:
After going through Carleton Sheets course I’ve been trying to find investment properties in Northern California that will generate a positive cash flow. The problem is that California doesn’t seem to support an initial monthly rent of 1% to 1.3% of purchase value as recommended in his course. Based on my research 3/4% is about the maximum one can expect. He also recommends a Net Operating income (before debt service) of 10% which is impossible with the 3/4% scenario.
For example a $200,000 property will generate about $1500 per month in income not the $2000(1%) to $2600(1.3%) as recommended in his course. A 10% NOI would be $20,000 per year, $1500/month only generates $18,000 per year in income @ 100% occupancy. As you can see this puts the 10% underwater by $2000 per year. The best you can hope for is about 6% to 7% NOI. This obviously has a direct effect on cash flow.
Continuing with this example, If you are 100% leveraged with a 30 year loan at 8% the payments would be about $1100/mth which leaves $400/mth($1500-$1100)for expenses. The $400 for taxes, insurance, utilities (no power), and maintance maybe about right, but if you include any management, advertising, legal, and misc expenses your underwater by about $150 to $200 or more per mth. This is conservative because you probably won’t be getting a single 100% leverage loan for 30 years. You may have 2 loans, one shorter than the other, maybe one with a higher interest rate. Paying only $1100 / mth to service the debt in this example is wishful thinking.
Over time the appreciation in the property should overcome this cash flow problem. But like most, I’m not willing to subsidize the negative cash flow.
This is a long setup to my question. Has anyone else encountered this low rent income as a percent of purchase price problem in California or other parts of the country? If so, what creative things have you done to remedy this?
Re: No Positive Cash Flow in California - Posted by Ronald * Starr
Posted by Ronald * Starr on August 21, 2001 at 24:06:59:
Steve------
I agree with Lor’s post. I live in Oakland and have investment properties in No Cal.
I would further generalize Lor’s advice to suggest: “Invest away from Coastal California.” There are properties in most of the inland areas that will work. The rules that you cite in Carleton Sheets course sound pretty much right on to me. I sure recommend at least 1% of the property value month in rent and feel 1.3% is a lot better.
The other thing is to recognize that you cannot buy the average property at market value, with market-rate interest and market rents and expect to make money. Atlease one of those figures has to be lower than average or market. Even in California’s better parts.
I bought a house in Sacramento one year ago for $55.5K. It was listed with a broker. I didn’t know the exact value but figure it was higher than what I paid. It had the front windows boarded up, it needed painting, cleaning, a little fixing here, there, and everywhere and a new fence. After working several months on weekends, I rented it out at $775 a month. Does that work? Sure does. Are there more like that out there? Probably.
Start visiting Realtor.Com to see what is in the multiple listing services in the non-coastal cities of California. Pick a few places to study in more detail. Then start looking for the good deals there. Probably not on the multiple listing service, but you never know for sure. Start rooting around for the ones that will work for you.
Will this take some work? Hmmm, well yes. Or maybe, if you enjoy traveling to small towns it will be “play” rather than work. Don’t expect to get wealthy doing nothing. Nothing generates nothing. Or so I say.
Good InvestingRon Starr******
Re: No Positive Cash Flow in California - Posted by JohnBoy
Posted by JohnBoy on August 20, 2001 at 20:44:40:
Yep, that is the problem with holding these properties as rentals. The answer is just don’t hold them for rentals.
Read my article in the money making ideas section of this site, “You Can’t Do This Where I Live”. I wrote this in response to another poster living in CA having the same problem.
Here’s the link:
Re: No Positive Cash Flow in California - Posted by Steve
Posted by Steve on August 20, 2001 at 19:26:43:
I made a small mistake in my previous posting. The payment on a $200,000 loan for 30 years at 8% would be $1468 not $1100 per my previous posting. However this only enhances my point. The negative monthly cash flow with management fees is now more like $500 per month.
Re: No Positive Cash Flow in California - Posted by Steve
Posted by Steve on August 21, 2001 at 09:48:01:
I read your article “You Can’t Do This Where I Live” and have a couple of questions about the “Mr. Downandout” example. If I understand it correctly it seems as though the original mortgage would have to be assumable or that the new mortgage is a blanket mortgage otherwise you would have to go out and get a loan on the balance of Mr Downandout’s mortgage. Who owns the first deed of trust? Is the original mortgage “due on sale”? Can you clarify?
Thanks.
Re: No Positive Cash Flow in California - Posted by A.C.
Posted by A.C. on August 21, 2001 at 09:09:09:
Johnboy–
Speaking of that very article (by the way, it is awesome!!) what do you mean when you refer to the phrase “subject to”? Is there any way of contacting you directly? Also, do you know what people mean when they use “nt” in their responses?
Re: No Positive Cash Flow in California - Posted by Lor
Posted by Lor on August 20, 2001 at 20:40:49:
Steve, I have invested in Northern California since 1989. While I was investing in the SF Bay Area for appreciation only, I have also invested in the many small towns throughout CA for a positive cash flow. There are hundreds of small towns with houses in the 65-85K range. What I look for are single family homes that have an inlaw apt. For instance, I purchased a home for 68K. My monthly payment is $510. I rent the front unit for $650 and the inlaw apt. for $250 which covers my insurance, property manage fees, taxes, repairs and gives me a small cash flow. You have to get in your car and start looking. Try Plumas, Calaveras, Amador and Lassen counties for starts.
Re: No Positive Cash Flow in California - Posted by JohnBoy
Posted by JohnBoy on August 21, 2001 at 11:00:30:
Who cares whether the first mortgage is assumable or not? No, we don’t get new mortgages on the property. We just take over the existing mortgage by assuming it subject to.
Read the thread at this link for info on subject to:
http://www.creonline.com/wwwboard2/messages/21829.html
Then go to the main news group and type “subject to” into the search archives function and you will get thousands of post pertaining to taking over those non-assumable loans.
Re: No Positive Cash Flow in California - Posted by JohnBoy
Posted by JohnBoy on August 21, 2001 at 09:17:35:
nt. means no text. They only posted in the heading with no further response typed in the post.
You can scroll down the board and read the thread titled “buying real estate no money, bad credit true/false” posted by Stanley. I covered some of this pertaining to subject to in that thread.
Basically it’s assuming those non-assumable loans by purchasing property taking the exisiting loan over subject to.
Here’s the link to the other thread:
Re: No Positive Cash Flow in California - Posted by Teri H.
Posted by Teri H. on August 23, 2001 at 18:55:38:
This is the info. I was looking for. I have been trying to invest in my area-monterey/santa cruz area. I am running into the same problems with cash flow. I would like to venture into other towns where investing is much more do-able but I was always told that beginners should invest in their area and not to venture to other areas that are not within a 30 mile radius? If I do venture out, shouldn’t I know the market there and if so how do I do that? Teri
Re: No Positive Cash Flow in California - Posted by A.C.
Posted by A.C. on August 21, 2001 at 10:50:11:
Thanks for your prompt response. This has been extremely informational.
Speaking of laws in a given state, how do you access necessary real estate law, if you are not a broker, without making it a complicated task; yet, not oversimplifying, such that you have not covered your behind? Is there a reference site to refer to to address issues that may arise?
I am assuming that when you say there is no law against assuming a non-assumable loan that you know this to be true in the state of California, but how did you know this?
Re: No Positive Cash Flow in California - Posted by Lor
Posted by Lor on August 23, 2001 at 21:32:43:
Yes, it would be ideal to invest within a 30 mile radius but you said that isn’t working. I’m near Half Moon Bay so I know the south coast a bit - I’m surprised you can’t find deals near where Fort Ord closed (Seaside?). I find towns to invest in by talking to people, relatives, co-workers etc. around California. I guess I know a lot of people who live in hick towns. For instance, both my horseshoers moved to Amador county so I became curious and spent a day driving through the county, talking to everyone I met, stopping at real estate offices and picking up local newspapers. The market is soft right now in Susanville, CA so you can get some great deals. (look on your map half way between Reno and Lake Almanor) Call John Shaw at Susanville Real Estate 530-257-2010. He can sell you a property and manage it too. Depends what type of investing you want to do. Most people on this forum use guru methods such as flipping, LO’s etc. and if that’s what you are interested in then follow their advice. But you should know that 99% of investors invest in more traditional ways. You have to do what you are comfortable with. Your Susanville house won’t appreciate in value but you will have a positive cash flow and a good tax write off. When I hear of a city I might be interested in the first thing I do is subscribe to the local newspaper then I contact real estate agents to get a feel of the market. I ask about the last few years, present market, and where they think it’s going. Right now I’m geting papers from Boise, ID, Lake Havasu City, AZ and South Tahoe. I even bought houses sight unseen. You have to be brave.
Re: No Positive Cash Flow in California - Posted by JohnBoy
Posted by JohnBoy on August 21, 2001 at 11:06:22:
Assuming loans is not a criminal matter. It would only be a civil matter where the mortgage agreement has been breached. The lenders recourse for breaching the mortgage would be to call the loan due and if you refused to comply then their only recourse from there is to foreclose on the property.
Try this link for CA. statues:
http://www.lawsource.com/also/summary.cgi?elem1=05ca&Key=Browse
Re: No Positive Cash Flow in California - Posted by D
Posted by D on August 21, 2001 at 11:32:27:
Sure, California is more tricky than some other states, but it can be done. By suggesting a lease option. I live in the Southern California market, which right now is hotter than Northern Ca…truth!
We purchased a 2500sq foot home in a ‘pretty’ section of town. We talked the seller into a 2 year lease option to purchased, but we SUB-LEASED the property to someone else. Here’s how it went:
The option to consider (down payment in simplest terms) was agreed for $4,000. The selling price to be $300,000 in 2 years. The monthly payment to be 2,000 a month (just a little less than 7% rate) And a credit of $500 a month. (For me) $500 X 24 months is $12,000 minus the 300K is $288,000 loan to my tenant/buyer.
Now, I put a small ad in the paper, got 25 calls and picked the most qualified. He put down $5,000 in option to consider. (I pocketed a quick $1K) I paid the seller the originally agreed $4K. I charged the new tenant/buyer $2500 a month with a $800 credit. I hope you are following… so, after I pay the seller $2K a month, and get a credit of $500, the seller receives $1500 a month for the home. When I collect $2500 a month from my buyer, and subtract the $800 bucks, I have $200 a month POSITIVE CASH FLOW.
And here is the best part…My selling price is $300K with my seller right? I have a selling price of $315,000 with my tenant/buyer. My tentant/buyer receives 19,200 in down-payment monies. His loan would be $295K. Here’s the profit:
$1K up front ($5K minus $4K equals $1K)
$200 a month POSITIVE equals $2,400 a year
And the kicker… $7,000 after 2 years when my tenant/buyer exercises (buys) the property with loan of $295K minus $288K equals 7K. His loan balance after down-payment and my loan payment after loan.
It can be done. As far as rentals. You are right, unless you leverage tons of money from another property into it, then you will have positive cash flow. for the most part…You are ‘basically’ right.
Hope this helps.
Re: No Positive Cash Flow in California - Posted by A.C.
Posted by A.C. on August 21, 2001 at 11:17:26:
For educational purposes, let me impose the “If…,then” clause - If you replied, then what would happen?
Also I tried the link you recommended above, and it says something is broken and is reflecting nothing.
A Little More Details Please… - Posted by T
Posted by T on August 22, 2001 at 21:00:17:
D. you did such a great job of explaining and laying out the picture for me, but you lost me after the “And here is the best part…” could you please help me
better understand this information by spelling it out just a lit bit more for me.
Re: No Positive Cash Flow in California - Posted by T
Posted by T on August 22, 2001 at 19:09:40:
D. you did such a great job of explaining and laying out the picture for me, but you lost me after the “And here is the best part…” could you please help me better understand this information by spelling it out just a lit bit more for me.
Thank You
Re: No Positive Cash Flow in California - Posted by JohnBoy
Posted by JohnBoy on August 21, 2001 at 11:26:43:
If you replied to the lender if they were calling the loan due?
Try this link and then click on California Summary Law Browse:
Re: No Positive Cash Flow in California - Posted by d
Posted by d on August 22, 2001 at 23:45:10:
The best part is… when the tenant/buyer exercises his option to purchase, you get a fat check for the difference between the loan (selling price) you negotiated with the seller minus what you just negotiated with YOUR tenant/buyer. The above example was $7,500 profit after 2 years. Not to mention the cash flow monthly and the up front money. Lease Option (Rent to Own) is a great way for someone to get involved, just search the interent and Sheets material to give you the best advise, methods, and program to help you out. There is a ton of info. Good luck