How do you make money with 90% leveraged real estate?

Okay, I posted a topic awhile back about buying rental property and got a lot of feedback that I should be highly leveraged.

Every time I run the numbers on this, I go broke - how do you make money on this kind of investment:

Buy a property with 80-90% leverage.
Pay a 30 year mortgage at 7%ish interest.
Pay taxes, maintenance, accounting, insurance etc...
Get about 6-8% of the value of the property in rent per year.

Every time I run these numbers, it results in SERIOUSLY negative cash flow. House is foreclosed, I'm screwed.

How does this work?

-->Adam

It is negative cash flow, and it's BANKRUPTCY when prices and values are going down, as they are now in much of the USA.

Remember this too: In MOST places in the USA right now, you can't charge enough rent to cover just the mortgage you'll have to "buy" the place. Rents just don't keep up with mortgage prices. So the answer below is not applicable in the current market.

Landlords don't make money on cashflow. They make money by holding onto the property and selling it after the value goes up.

A landlord may have a small positive cashflow, but that is usually eventually put back into the property in repairs.

Landlords make money by using someone else's money (the tenants) to buy them a property, which they later sell at a profit. Sometimes they have to put a little bit of their money (negative cashflow) into it to supplement it as well. But, in the end, you still have a property that you paid very little for, so is mostly pure profit when you sell it.

Don't forget depreciation. I have positive cash flow on all of my properties, but once you calculate in depreciation, it always shows as a loss on that year's taxes. Of course, I realize when I sell and pay tax on the gains, that having depreciated it really makes no difference.

Find a property that has a cap rate of 10%. A cap rate is net operating income divided by sales price.

Have you bought a distressed property at 70% of value?

Hmmm, I think you may be paying principal into the house which I personally don't do with investment properties, and it sounds like you are forgetting about your tax deductions from your mortgage interest and writing off the depreciation.
Also, if you think that based on location and the shape that it is in that it will double in value in 7 yrs (national average), then you can refi and pull all that equity out TAX FREE.
Recommendations:
Pay only interest in a no pre-pay penalty loan.
Don't get too caught up in making your rental income match your mortage, it probably won't happen, but your rental income and deductions should break you at least even. If you get more-bonus.
Be sure to make the most of your deductions.
Refi when the market is back up and get your tax free income.
Good luck.

I agree with your situation, the numbers do not lie. It is very difficult to make a highly leveraged property cash flow well. The key to making it work is in either buying the property for much less than the true market value; getting terms on your loan for the first few years that help your cash flow situation until the property cash flows better in later years; and/or getting terms from the seller that will help your cash flow.

Given the numbers you have provided, your cash flow problem also lies in the 6-8% of value of property in annual rent. This number should be more like 10-12%.

Happy hunting.