How much do you keep in savings per housing unit as safety reserve? At what point do people get into trouble? When they buy too many properties than they have money in reserves or when they can’t keep renters? There are so many opportunities and we want to keep going, but have heard people say that they know people that have gone under in Real Estate Investments. Why did they go under? I want to prevent that from happening.
Thanks!
Sizzmo, I’ve seen people lose their shirt on RE. I’ve also seen people make a lot of money. The people who I’ve seen lose money do one or all these things wrong.
1. They pay too much for the property to cash flow.
2. They undersestimate the expenses.
3. They don't properly screen tenants and don't evict ASAP.
4. They get overleveraged in attempt to buy more & more properties too soon.
5. They don't keep at least 1 yr. of mortgage pmt. per property in reserves.
There are more I’m sure, but this is what I’ve seen. If you can avoid these mistakes, you at least have shot at succeeding… maybe… :cool
sizzmo - this is an interesting question. I believe if you keep 6 months reserve should be more than enough. This should give you enough time to evict the tenant, fix the unit and re-rent it. In my case I have only one property and I can make the mortgage payments out of my paycheck if I need to. So I am not too worried with reserves. In my business plan I am planning for a 6 months reserve per unit. I believe this can be reduced as you acquire more properties.
At some point, if you acquire multiple properties at the right price and all of them cash flow, you should be able to support the underperforming unit with cash flow from the others. This should reduce your need for reserves/unit.
Hope this helps. Good luck!
sizzmo,
I sure have an opinion on this one! In my experience this past year I have seen some friends and family members acquire properties that SHOULD have cash-flowed.
I liked the properties myself, I would have bought them if I were in the market.
But then I have seen these buyers DEMO WAY TOO MUCH! ANYONE can demo! It is easy to rip out bathroom walls because you don’t like the tile. Then you uncover a whole other job of replacing pipes, structure and wiring that you didn’t have before. So the rehab costs go way up. Why do people like to demo so much?!
The unit then sits there empty and unrenovated. It continues to eat cash in mortgage, insurance, utilities and taxes. No rent comes in.
So buyers wreak what could have just been scrubbed up and painted and rented out.
The second thing I saw was new owners holding out for months for the PERFECT TENANT at the perfect price. Instead of dropping the rent $100-200 and getting it rented.
The third way to go broke is to just procrastinate. Watch TV instead of putting the ad in the paper. Go away for the weekend when there is a vacant unit rather than focusing on that.
All this year I have been watching those new rental property owners. I have been saying “Gee, are you sure you want to rip out that kitchen right now? Wouldn’t it be better to do it at the next vacancy when you’ve gotten some income from the property?” Advice fell on deaf ears. People have been watching those TV renovation shows, and they know that granite is now as necessary as oxygen.
Something I’ve observed…if you are not maintaining the place where you live right now, maybe you SHOULDN’T BUY anything else. Rental property is a lot of work. And you can lose your shirt. There is a lot of that going on around me.
Furnishedowner
sizzmo,
People get into trouble when they speculate. They watch too many TV shows that show people buying RE with a “projected” profit at the end of the show that’s huge for no more time than they put into it. Our pastor told us yesterday about a couple from church who took the equity from their house to buy rental properties with. They ended up losing the properties to foreclosure (and lost all equity in their home as well) so he wanted to know how we were doing. I told him things were going just fine; no vacancies.
When it comes to rehabbing a rental. I agree that you should only do what’s necessary. But if you can tell that the plumbing and wiring are severely outdated, you should factor that cost in your offer. What happens to some investors is that they only intend on doing a little but talk themselves into doing a lot. I completely guted my upstairs bathroom. I replaced EVERYTHING. I didn’t have to knock down walls but I added plumbing for a bathtub/shower combo. The Tub/shower,sink/vanity, toilet, plumbing, wiring, sheetrock, floor tile & exhaust fan cost me $1500 at the Home Depot. It was mid-range quality and it’s held up great for 5 yrs. I did most the work myself (which I had to learn on the fly), I had to call in a favor for the electrical, but it would’vt cost a few hundred if I hired it out. I think people waste money buying items that are too expensive for the type of property. You can get away with low - mid range items in rentals. Look for cheap, durable items for rentals.