Hello again, my question concerns the subject of operating expenses and rental properties. I have read that operating expenses for properties that are older will consume approximately 50 percent or more of the total monthly income. My question are the following:
What steps can an investor/landlord take to minimize operating expenses before and during acquisition of the property?
Is the percentage I have provided accurate?
Is it prudent to pay mortgage obligations that exceed 50% of the total monthly income?
Thanks for reading this post. Have an excellent day.
To Property manager, I really appreciate the information you have provided regarding operating costs and rental properties. I will keep in mind the two factors that you have stated in regards to future buy and hold acquistions. Thank you very much.
Having purchased several older properties I can tell you that initialy your operating expenses will be much higher. Of course your cash flow will be higher as well because the cost of purchasing the property is less than for a newer property. The trick is to repair and replace with the highest quality possible so that long term you will have a substantial asset that provides a nice cash flow! Short term (6-12 months) you may have no cash flow at all but if you hang in there it will be well worth it. My goal for the next piece of property is to buy newer construction.
To me this also looks strange. It is probably possible in states such as Indiana where RE is still unexpensive. One friend bought a house for about 45K and rents it out for about $700.
I also heard that if you can gross 1% of the cost, it could be a good investment. But it looks like in my area you’re lucky if you can get close to 1% now. I think 1% and more is possible for those who bought their properties long time ago or where prices have not gone up much.
I see multis every day that rent for 1-1.5% of their listed price (and I don’t live in one of those areas with solid rent rates and super low building prices). I also see many that don’t, they aren’t all bargains. As always you have to fully check the expenses to see if it truly will cashflow.
2% of the cost of the property??? Buy a house for $100,000 and rent it for $2000/month?
Quote from Tim:
Where do you live??? To me this also looks strange. It is probably possible in states such as Indiana where RE is still unexpensive. One friend bought a house for about 45K and rents it out for about $700.
I also heard that if you can gross 1% of the cost, it could be a good investment. But it looks like in my area you're lucky if you can get close to 1% now. I think 1% and more is possible for those who bought their properties long time ago or where prices have not gone up much.
I live in Ohio, but this is possible in most of the country. These are the “red states” and often called “flyover country”. Ohio, Indiana, Kentucky, Georgia, Texas, and 35-40 other states have reasonable prices and reasonable rents. However, the key point is that it doesn’t matter where you live! If you can’t get enough cash flow to make a profit, then don’t do rentals. In my experience, about 2% of the cost of the property each month is enough to cover the common expenses plus all the other costs that the gurus forget to mention.
I wish Colorado was in “flyover country”… The “tri-city” area of Northern Colorado has average sales price of around $230,000 for SFH with MAX rent no more than $1300. I fairly new to the game with about 5 years of property mgmt/landlord experience and about 5 deals done in that time, but 2%… Man that seems impossible here… Sure you can buy foreclosures/hud homes for as low as $60,000 in certain areas, but once you spend $10k + to make the hosue liveable, that certain areas still supports no more than $600-$700/month in rent.
I understand - this how it should be (i’m actually a beginner in this biz). It’s easy to think that way from Ohio:-) My friend in Indiana is also happy about his rent:-)
For example in my area(Delaware): you can buy a medium quality townhouse for $150-200K, they rent for $1000-$1300, so unless you buy some junk for 80K, it’s tough to get 1%+ But in that case you get junky tenants too. Is there is anyway to get that return 1-2% in this market?
anything is possible ,and the #s propertymanager exsist.Just like people living in space ,Yeah there are three os them out of (whats the worlds population again?)Now what is happening in the real world.Well typically as everyone Im sure knows it depends on your area.All formulas will work in all markets.Listen carefully to what I said. All “FORMULAS” will work in all markets.A formula is a recipe for profit.ie: Buy your houses @ 70% retail (ARV) minus repairs is one a lot of the seasond posters use.Some will go as far as even minusing the holding costs from that attempting to give themselves 30%profit.It doesnt matter if you buy a $10k dollar house @70%minus repairs or a $200,000,000 at 70% minus repairs you are going to make a 30% profit both way!!!The formula works but do you have what it takes to do the $10k deal or the $2,000,000 deal that is what you need to determine.Im going to try and get the guru posters to list posts under a listing Im going to title FORMULAS and that will hopefully give newbies the answers they need to start because remember A formula is simply that a formula Just like a recipe if you want to make 10 cookies you use 1/2 cup os sugar .If you want to make 20 cookies …you got it ,you need 1 full cup.Now the question is how much sugar do you have in YOUR pocket?
I understand - this how it should be (i'm actually a beginner in this biz).
Tim - it isn’t “how it should be”, it’s how is MUST be if you’re going to be in the rental BUSINESS. I’m not talking about having a hobby with 1-5 rentals, but rather running a business with enough rental units to provide a living for your family. Simply having a “positive cash flow” using the typical formula is not enough to stay in business. The typical formula touted by most gurus leaves out a LOT of real life expenses such as legal fees (ouch), lawsuits, major repairs and improvements, damage caused by tenants, exterminating, advertising, maintaining entities, bookkeeping, etc. These additional costs rapidly add up even if you are personally doing as much as humanly possible.
This is why so many new landlords don’t make it - because they had insufficient cash flow to make a profit. Throw in a few “tenants from hell” and their will is broken. I see this all the time. At least once a week, I am approached by an “investor” who wants to unload their rentals. In almost every case, they paid nearly double what it is worth as a rental and then simply couldn’t survive.
These deals do exist in the real world. However, even in flyover country, these properties are no more than 1% of the houses for sale. It takes work and effort to find these deals, especially when you’re first starting.
I went to Georgia the other day. I picked up those free “apartment rental guides” along the way and found that every one of these states had excellent potential for rentals (some were MUCH better than Ohio).
Can you find an acceptable rental in Delaware? I don’t know (that doesn’t sound like flyover country). If you want to do rentals and it won’t work where you are - move. If you just want to do REI in your area, then find what strategy works and do that (it may not be rentals). The entire point in either case is to make a profit!
<<A formula is simply that a formula Just like a recipe if you want to make 10 cookies you use 1/2 cup os sugar .If you want to make 20 cookies …you got it ,you need 1 full cup.Now the question is how much sugar do you have in YOUR pocket?>>
If it takes 2 men 2 days to dig 2 holes, how long does it take one man to dig half a hole?
So… I understand (Mike’s rules above) are required if you are going to have rentals as a business. It makes sense – it really does. However, I guess I am unable to “think outside the box” (I hate that phrase by the way) when it comes to purchasing properties.
Mike has been yet to be asked the following:
How many Single Family Homes does he operate as rentals?
What was the average purchase price of those SFHs?
How much did he buy his last hosue for? When did he buy it? What was the Retail Value?
What is his average rent for those SFHs?
How did he purchase these homes (MLS, HUD, REO, pre-foreclosure, etc)?
Anyone else curious?
Oh also Mike said “However, even in flyover country, these properties are no more than 1% of the houses for sale” – does that mean 1% of the houses on the MLS? How do you define “houses for sale”?
Mike, I’m not picking on you, but I am very curious!!!
I also have to call Mike onto the carpet. According to my math, 2% of 100000 is 2000. Right?
OK, so the only way that I can see that ROI happening is:
A. Slumlord. There are houses for sale in Flint, MI that I can buy for $8k and rent them for $450. There is a big market for that, but…well, you know.
B. The properties are given to you by a relative.
C. You have owned them for 10 years apiece and gained appreciation (and rent).
