A. It seems that practically all the model "subject-to" deal prospects I come across, once the numbers are worked out, will result in little or even negative cash flow. Although there may be plenty of equity at the back end to cash out on, that doesn't help us quit our J.O.B's any sooner.
Is it best to tuck away down payment money from the buyer (or even a seller) to cover a negative cash flow for a year or two? Is it best to pass on these kind of deals? Or what about a "renewable option fee" every 12 months to help cover the negative cash flow? I was thinking of the "renewable
option fee" route, but if that goes toward the down payment, the equity in our deal will be eaten up just to cover the negative cash flow.
A. It is very rare that we will purchase a home with a negative cash flow. In any business, especially real estate, cash flow rules.
We use the Property Aquisition Worksheet to evaluate all of our subject to deals. Many times that sheet will make the analysis very obvious.
The renewable option fee sounds great in theory but the practical application would be very difficult. I am effective at getting maximum amounts of money out of our tenant/buyers but I cannot imagine having any of our tenants paying an additional fee every year. I fear they would just move out and then I would be faced with a vacancy.
As a general rule, just make sure you are going to get a positive cash flow.