making cash flow even/positive

Monthly rental income >= P.I.T.I.H.

My break-even point is *even* cash flow. The way I see it is that I can own a sharply discounted properties with nearly 100% bank financing. The rental income is even with P.I.T.I.H (principal, interest, tax, insurance and HOA fee). My cost is literally zero in owning this property. Over the long term, the principal will slowly get paid down. Rent will rise (that’s a certainty in high-inflation period). And eventually, price will rise. Even if I make no or very small monthly cash income, my long term benefit will be huge.

I often talk about positive cash flow. Positive is good. But don’t push too hard. In many cases, *even* cash flow is good enough. What I want to emphasize is *never lose money*.

Philosophy of REO bidding

Always remember that your top priority is *no negative cash flow*. Say that 10 times in a day so you won’t forget.

If any market, those properties that meet positive cash flow are always involving multiple contracts. People are smart, they can see the value and start to bid. In my area, I had to out-bid my competitor to get what I want, sometimes, 5K - 10K more. I calculated my topline. For example, if a house’ break even price is 100K, but it’s asking 89K by the bank at this moment. I will make a full bid at 89K. Bank will come back and say they have received 5 contracts, blah, blah…, I will give them a final offer at 100K because this is maximum I can go without losing money in cash flow. There is a high chance that I can win this. Although I may have bid 10K beyond the asking price, I look at the big picture, it says that I can still earn slight positive cashflow, I made a winning deal. If I can’t get that, I will forget it and move on to my next target.

In your case, if 350K can’t give you positive cash flow, this is the wrong house to bid. Your agent may be right that bank will not accept anything less than 350K, let it be. You are an investor, you can’t lose money just because bank can’t accept certain level. Let regular self-living buyer buy this house, except you. This house is not yet low enough for investment purposes.

If you can’t find deals in a particular zipcode, move to a different zipcode with lower asking price and start to bid there. You will find out that lower priced zipcode may rent at approximately the same rental rate as the higher priced zipcode. Lower priced zipcode can give you whole lot better cash flow, that’s the key. Sometimes, certain zipcode areas can never make your positive cash flow, then forget about them, move to those zipcodes that can make you win.

Analysis of REO bidding

Banks are asking extremely low prices to stir up interest. For example, they will ask 100K, then they may receive 5-10 competing contracts. They will sell it to the highest bidder. It often happens that the final sales price may be 125K. It’s still a bargin. Sometimes, if the hosue needs some work, such as HVAC needs repair, windows need replacement, carpet needs replacement and etc. Banks could sell it to you for 50K. Banks are really selling them very low right now because they don’t want to hold these houses for long time. Banks want them off their book.

Rather than playing with RealTrac.com, you want to work with an agent to get them from MLS, then start the bidding game. It’s getting very competitive to get the best and lowest priced houses. You pretty much need to make full offer. For those that can generate positive cash flow for you, even a full offer may be worth it. Basically, REO sub-market is heating up in DC region. It could be the same in Contra Costa or Riverside. I bet 24 months later, there won’t be too many REOs for you to choose from and price won’t be as extremely low as today’s.