After we have purchased a foreclosure home and we have a tenant in the home that is paying, we need to repeat the process and keep repeating it as the more we own the more the banks will lend us and the more we can take advantage of the next wave of foreclosures. At USHUD we have experience with investors that have not just purchased a foreclosure home but have bought ten or twenty foreclosures at a time. But this can only be done when we have built up our inventory of positive cash homes and have the equity to leverage against the next homes. This when we begin to be able to buy homes with no money out-of-pocket and can really get the ball rolling.
The one thing that we always have to remember, if we are buying one foreclosure home or twenty is that they each have to be cash positive at the end of each month and year. If we forget this simple rule and get confused we can wind up with several homes that are costing us money each month. Even though the equity is building the wait is not worth the negative cash flow. If the position isn’t cash positive we shouldn’t be in it. And if we know that is a potential issue we shouldn’t buy it. It is nearly impossible to leverage negative cash positions and this should be avoided.
One way around negative cash positions is to use the lease option contract to rent the home for a higher monthly payment. We can generally add an additional $100 on to the rental for every $100,000 in value of the home. This can be stretched but stretching too far can cause an increased vacancy rate and thus reverse the attempt of creating a positive cash scenario.