i remember doing this last year and i found nothing. this year i’m finding more. your thoughts?
This depends completely upon your area. If you live in Manhattan, Malibu or Kona, then no. If you live in tornado alley or the rust belt, then it’s possible. Many experts advise staying close to the city where you live when you start out. Sometimes, I believe that getting experience in real estate trumps (he he) return on investment; so putting a larger down payment or going all cash can make sense as an initial venture into real estate. If cash flow is your priority, stay focused on the passive income potential.
Keep your expenses less than your income and don’t let your portfolio eat your money. Once again, your strategy may have to change, depending upon your area.
You can find deals anywhere. Don’t just use one resource. Tell everyone you know you’re an investor ( or beginning investor). Do research on where you can find sellers on this site. But here’s the important part. When you find a property that’s for sale, be sure it fits into your criteria. If you don’t have a criteria, you have to nail that down before looking. With an income property, here’s a simple way to develop a “filter” for a positive cash flow.
- Subtract 50% of the ACTUAL gross rents for expenses.
- Subtract a minimum of $100/unit/mo. for your profit ( cashflow).
- The remainder will tell you what you can pay for a Principle & interest mortgage pmt. The taxes and insurance are included in the expenses from step 1. Determine the maximum amt. you’ll pay by using the money left for your mortgage pmt. Remember, putting more down to get that pmt. is not a good idea. I’d go with a max. of 20% down. I hope this helps. Good luck.
thanks phlemboy,
the prop i’m looking at is 155K for a duplex.
total rents is at 1500
so %50 of total rent is $750
$100x2units = $200
$750-200 = $550 is max i should pay
mortgage payment on 155K would be ~$929.30 (30yr@6%)
so i’m off by $379. whoah. and i thought this was a good deal. This was a completely rehabbed rowhome by the way.
155k for a property that rents for 1500 a month is not an “investment”.
bdub,
what kind of areas are you investing in?
but yes, you can find cash flow deals on mls, depending on your mls. in houston, tx, yes. in san francisco, ca - no.
i’m in houston, tx… you can find SFH that are $60k, need $10k in fixup and will rent for $1k with an arv of $110k…
my first deal was a ‘bad’ deal - bought for 88k, 15k fixup, currently rents for $1050 - i’m losing money on it.
““i’m in houston, tx… you can find SFH that are $60k, need $10k in fixup and will rent for $1k with an arv of $110k…””
bdub,
When you have 70k acquisition cost, do you think you can cash flow with 1k rent.
If so can you please show me the numbers that works in Houston.
Bayberay,
Here is how your hypothetical deal would look:
Gross rents: $1,000
Operating Expenses: $500
NOI: $500
Mortgage Payment ($70K, 30 yr, 7%): $465
Cash flow: $35 per month (which is too low for me)
The price is too high.
Good Luck,
Mike
You are using the wrong model. $500 operating expenses is too high. The key is when you buy a single family house in Houston get a mortgage for the house and to fix it up. When you fix it up don’t just paint and carpet. Use that $10k and make EVERYTHING brand new. New things don’t break. If it does break it is under warranty or the tenant broke it and the tenant pays to fix it. That way the only expenses you will have it PITI and vacancy for the first 3 to 5 years.
You are taking about $300 to $500 cash flow not $35.
That $500 Operating Expense is a multifamily type of number. If you join the National Apartment Association http://www.naahq.org/ for $125/year you can get reports about the average cost to operate a multi unit. Houses don’t cost nearly that much to operate.
[[[[… New things don’t break…]]]]
No, but tenants tear them up and good luck on getting any tenant to pay for any damage that is above their deposit amount. You can get a judgement, but that doesn’t mean you get your money.
My last expensive lesson about “new things don’t break”?
My tenant had a darling little boy who grew to become a horrid teenager with criminal friends and they ripped the shigles off of the roof, chopped holes in the roof deck, and sprayed graffiti on everything that was left: on the roof, inside, outside, in the barn, in the house.
Get the tenant to pay for it? Yeah, right. She quit her job and moved back into her parent’s house. She managed to get herself onto disability, and I can’t garnish that.
Even my old things in the houses don’t usually break without a little help from the tenants.
If you are new at this, be aware that if tenants have done a lot of damage they will try to stall you off and live out their deposit, since they know they aren’t getting anything back.
<<New things don’t break.>>
No? Then why do new cars come with a warranty?
Keith
Wrong model again. You have to realize that there are 3 kinds of people. Green people, yellow people and red people. Green people always pay all their bills, stay on the same job for years and years and never break anything. Yellow people may be 30 days late every now and then and may have changed jobs every now and then. Red people have broken leases tear things up and have 90 day lates and bankruptcies etc. People DON’T change from green to red or red to green. People don’t just start to break things when they move into your house…they were breaking things where they came from. You need to screen these people. If they tore up the place they were they are they are going to tear your place up too. I always have them fill out a rental application. This application allows me to run a back ground and credit check. If they come out perfect they are not going to tear up your place. If the report comes red, I don’t let them in. If I take them, I come over to their house (where they live now) to sign the lease and pick up the deposit and first month’s rent. If the house is a wreck, that is how my house is going to be if I let them in.
Again, new things don’t break and people don’t change. The people that tear up things will tear things up again and again. There are only two mistakes a landlord can make 1 is to be lazy or 2 is to be greedy. If you are too lazy to check people out they will tear up your house. If you are too greedy to let a bad tenant with $3000 in his hand pass by that tenant will tear your house up.
These people look for mom and pop landlords like you and me because they rely on us being too lazy or too greedy to find out how bad they are. I am surprised all the time how a prospect will give me $30 to check him out and he is a mess.
Bluemoon06,
I agree with the others. New things do break (with a little help from the tenants) and people certainly do change. A tenant with a perfect rental history can move in a new shack up boyfriend who is a wildman. A tenant with a perfect rental history can make a bad decision and get hooked on crack. A person with a perfect rental history can take in a family member (whether allowed by the lease or not) and that family member or friend can do ANYTHING. A tenant with a perfect rental history can I know that you know this stuff because you just described your eviction experience in another thread.
That way the only expenses you will have it PITI and vacancy for the first 3 to 5 years.
I don’t know what planet you live on, but there a lot of other expenses besides taxes, insurance, vacancy, and maintenance. How about advertising, entity maintenance, utilities (at least during vacancies), management, legal fees, evictions, damage done by the tenants (in excess of the security deposit), capital expenses, lawsuits, etc, etc, etc.
In addition, if you’re going to spend an additional $10K to make everything new, you’ve got that additional expense right up front.
Mike
Yes but it is not $500/month.
That is acquisition cost not expense. You get that financed when you buy the property so it is basically the cost of the house.
Yes but it is not $500/month.
Sure it is.
Let’s look at some typical expenses:
Taxes: $1,200 per year or $100 per month for a $110K house
Landlord Insurance: $50 per month
Management 10% of gross: $100 per month
Vacancy 5% of gross: $50 per month
We’re at $300 per month without ANY of the other expenses (including maintenance)!
That doesn’t include all of the other expenses I listed, which could easily add up to $200 per month. In addition, while I agree with you that the $10K you’re spending to make everything new is not an operating expense, it adds $67 to the mortgage payment if you have a 30 year loan at 7%, so it’s reducing the cash flow by that much regardless of what you call it. Unfortunately, most of the improvements won’t last 30 years in a rental, so that is not the total cost of the capital expenses over a 30 year period.
I also strongly disagree that apartment buildings have higher operating expenses than SFHs. Apartment buidings have economies of scale that SFHs do not enjoy.
Mike
I think Blue Moon is saying that the 50 percent rule does not apply as much to single family homes as it does multi/commercial. Especially since in most cases utilities are paid by the renter not the landlord.
Utilities aren’t paid by the landlord in multis either, if the landlord is smart. When they are, the rent should be higher to compensate for the paid utilities.
I think Blue Moon is saying that the 50 percent rule does not apply as much to single family homes as it does multi/commercial.
I know what he was saying, but it’s simply not accurate. I showed in the previous example that even without maintenance or any of the other myriad of expenses, he would be at 30%. Throw in the rest of the expenses and you’re easily in the 45% to 50% range.
Mike
I agree all those things do happen but not on every house. You don’t evict every tenant and every tenant doesn’t tear up your toilets etc.
That is paid in the PITI, you are double dipping on the expense
That is not per house, it is diluted as you acquire more houses. I pay about $1000/year on a $1million liability policy
My model is to manage your own houses. That 10% fee is not there. Most months and I mean most months (like 10-11 months per year) all you do is cash the check and put it in the bank so that is no need for a manager
I don’t have even half my people moving out at in less than 2 to 3 years. They just stay (because I make my places perfect before they move in) If you have best product best price you don’t have vacancy problems.
Now I agree you don’t have zero expenses other than the PITI, but it is not $500 on a $1000 rent house.
Taxes: $1,200 per year or $100 per month for a $110K houseThat is paid in the PITI, you are double dipping on the expense
Principal and Interest are part of the debt (mortgage payment), they have nothing to do with the operating expenses. If your taxes are $100 per month, then you’re still spending $100 per month whether it’s paid with the PITI or not. There is no double-dipping here.
That is not per house, it is diluted as you acquire more houses.
That is not my experience. I average between $45 and $50 per house, but of course that depends on the value of the house and the quality and extent of the insurance.
My model is to manage your own houses. That 10% fee is not there.
That 10% fee is there, you are just managing the property for free. I don’t work for free!
I don't have even half my people moving out at in less than 2 to 3 years.
If a person moves out every 2 years, that’s a vacancy rate of 4.2%. Plus, you are evicting some tenants which certainly results in a vacancy (you said that in a previous post).
Mike