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Buyer Question: The cash-flow on this semi / townhouse / single-family is very low. It’s basically a ‘break-even’. Shouldn’t I be looking for higher cash flow?
Give them the common scenario:
Semi-detached home — easy to rent, easy to sell down the line.
Price: $264,000
Down payment: 52800 (plus closing costs, etc.)
Mortgage amount: 211,200
(Let's assume 25 year amortization | 3% interest | 5 year term
Monthly Mortgage payment (principal + interest) = 1000/mo
Taxes = 250/mo (estimate)
Insurance= 50/mo (estimate)
If this unit can rent for 1350 - 1400/mo (which is a reasonable rate today) it covers itself pretty well. But as you mentioned - no, it isn't gushing with extra cash at the end of the month.
What we need to remember with these investments in semi's and town homes is that the extra cash flow at the end is just gravy. You can't do too much with an extra 50-100/mo anyway. What is important to remember is if the property is carrying itself like this (or even if the owner needs to throw in a bit extra from time to time), debt is constantly being paid down by the tenant, while the property increases in value for the owner. (The real gain is debt pay down + appreciation)
For example, in that first monthly mortgage payment alone, 475 dollars is going towards principal (owner equity). That amount going to principal continually increases over time.
Even more interesting is that the property owner isn't actually paying the interest portion themselves either -- the tenant is -- AND YET, the mortgage interest is still tax deductible for the owner at the end of the year.
The accountant you meet with can tell you more about the tax advantages, write-offs, etc.
Larger cash flow only comes after the mortgage has been paid down or if you get into some multi-residential deals...which aren't always great to be starting off with, because they can be harder to find, usually require more money, and more management efforts.