1 to 4 units is single family. More than 4 is multi family
Bluemoon was just testing to see if we were awake.
1 unit per building is single family. Anything more than one unit is multi-family.
For purposes of financing, 1-4 units is residential, 5 or more is commercial.
For purposes of the building code, here in Ohio 1-3 units is residential, 4 or more is commercial.
Mike
Yeah, still too vague and there is no clear outcome. What will increasing your rental income by $6K per year do for you? How will that impact your bottom line? You can buy a $1 million property and then rent it out for $6K per year. You have accomplished what you set out to do, but the overhead cost of owning that $1 million property will soon bankrupt you. This “goal” is more of an objective – something you can do that will contribute to a success oriented goal.
Let’s try restating the result you want to achieve.
Let’s say that your GOAL is to increase your CASH FLOW by a certain amount of money by the end of the year, say $6K. Now what will you need to do to accomplish that. Maybe you need to get $12K more rental income than you are now receiving. Maybe you need to reduce your overhead costs of property ownership. Increasing your income and reducing your expenses are objectives that in some combination may result in $6K additional cash flow by the end of the year. If you can’t get all the additional cash flow you want from the property you currently own, perhaps you will also want to purchase additional property that helps you increase your rental income and cash flow.
If increasing your rental income by $12K becomes one of your objectives then define action steps that will get you there such as
(1) at each lease renewal increase the monthly rent by $50 per month,
(2) refinance current mortgage debt to reduce debt service if the interest rates are favorable,
(3) for properties with adjustable rate mortgages, contribute extra principal each month so the ARM resets to a lower loan balance when it adjusts, resulting in a lower debt service,
(4) increase tenant retention to reduce the vacancy rate.
If acquiring more property to increase your cash flow becomes one of your objectives, then you might add these action steps to your plans
(5) use 1031 exchange where appropriate to upgrade my rental property portfolio, increase my cash flow, and to increase my equity,
(6) acquire three more rental units during the year that generate a total of $300 monthly cash flow.
I hope this helps clarify the difference between your goal, objectives to accomplish that support your goal, and the specific action steps you will take to meet each objective.
Just a little more food for thought to reinforce the value of goal setting. You might think that a very large, publicly traded company like Honda Corp. would have an elaborate goal statement. Quite the opposite is true. Their strategic goal for their American operation is simply
Six Hondas in every garage.
Honda will have met their goal when each garage in America houses two cars, a motorcycle, a lawn mower, and at least two power yard tools such as a weed wacker and leaf blower. You can imagine all sorts of marketing plans and sales promotions, market penetration objectives, and corporate expansion plans that derive from that simple strategic goal statement.
This is awesome, terrific feedback from everyone. Before I get into the goal discussion, I wanted to comment on the accountant situation as commented on by buffinvestor.
I should clarify that I use my accountant for my tax returns and the financial statement only. I do use MS Money to track all my income and expenses and provide my accountant with a year end summary.
Like buffinvestor, I don’t care to stay on top of the tax laws either, that’s why the accountants work for their paycheck. Also as far as the financial statement goes, like Funder says,
You mentioned using an accountant, but a professional representation of your finances can be accomplished with a bookkeeper.
With that in mind, for any first time investor, when asked for their financial history, how many years of financial history or tax returns are they asked for?
Okay now, back to the fun part!!!
DaveT says
Yeah, still too vague and there is no clear outcome. What will increasing your rental income by $6K per year do for you? How will that impact your bottom line? You can buy a $1 million property and then rent it out for $6K per year. You have accomplished what you set out to do, but the overhead cost of owning that $1 million property will soon bankrupt you. This "goal" is more of an objective -- something you can do that will contribute to a success oriented goal.Let’s try restating the result you want to achieve.
Let’s say that your GOAL is to increase your CASH FLOW by a certain amount of money by the end of the year, say $6K. Now what will you need to do to accomplish that. Maybe you need to get $12K more rental income than you are now receiving. Maybe you need to reduce your overhead costs of property ownership. Increasing your income and reducing your expenses are objectives that in some combination may result in $6K additional cash flow by the end of the year. If you can’t get all the additional cash flow you want from the property you currently own, perhaps you will also want to purchase additional property that helps you increase your rental income and cash flow.
Property Manager clarified the multi-unit question which will help me with my goal.
1 unit per building is single family. Anything more than one unit is multi-family.For purposes of financing, 1-4 units is residential, 5 or more is commercial.
To increase my cash flow by 6K per year through 1 multi-unit residental property purchase per year
I don’t know, does that sounds kinda too long or dumbly worded? I think we all can see where I am trying to go here.
I hope this helps clarify the difference between your goal, objectives to accomplish that support your goal, and the specific action steps you will take to meet each objective.
Dave T, it certainly does clarify the difference for me. I hope it helps others as well. That is why I am asking whether the goal I revised went off track or should I keep it simple and short as
To increase my cash flow by 6K per year
Thanks again everyone. We could write a book. :cool
That is why I am asking whether the goal I revised went off track or should I keep it simple and short asTo increase my cash flow by 6K per year
To increase your cash flow by 6K per year is good, but you still need a time frame. When will you accomplish your goal? Here is how I would state this goal:
“By the end of 2008, to increase my cash flow by 6K per year”. You can see how this is a better goal because it now allows you to measure your success or failure. If at the end of 2008, you have purchased rental(s) that will generate an additional 6K per year, then you have met your goal. If you are not generating any additional income, you have failed. If you are making $3k per year, then you are half way to your goal and you can re-evaluate to determine why you didn’t meet your goal.
Good Luck,
Mike
There are some states such as my own state of SC that will not record a deed unless it has been prepared by an attorney.
It does not matter whether the property is your home or an investment. As a general rule, the lender will require mortgage insurance (PMI for conventional loans, MMP for FHA loans) whenever the loan is greater than 80% of the purchase price.
You will be asked to complete a financial statement on a form the bank will give you, most likely a Uniform Residential Loan Application (HUD 1003). In addition, you may be asked to provide documentation to support income such as two years prior tax returns, copies of leases for current rental property, pay stub from most recent paycheck, and whatever else the lender will require to get a complete picture of your financial strength.
To increase my cash flow by 6K per year through 1 multi-unit residental property purchase per yearI don’t know, does that sounds kinda too long or dumbly worded? I think we all can see where I am trying to go here.
If your goal is to increase your cash flow by $6K next year – really your net disposable income – then that is enough. Don’t let your goal statement limit yourself in how you might accomplish it. There are several things you can do to achieve this goal. First the active income opportunities:
[]Salary increase, whether cost of living increase, promotion, or, job change
[]Pay off credit cards to zero balances
[]Pay off car loan faster by contributing extra toward principal each month
[]Set budget and track spending to identify and eliminate wasteful spending habits
[]Birddog and collect at least $500 birddog fee per property given to an investor
[]Wholesale property for $2500 assignment fee, or flip for $4000 to $6000 per property.
[]Sandwich lease option property for $200 monthly cash flow and $10000 minimum payoff when option is exercised.
[]Start a home based internet business to generate income.
[*]Get a second job – become a two income household.
In addition to these active income opportunities to increase your net disposable income, you can consider passive income opportunities such as
[*]Acquire “X” rental properties that generate $100 monthly cash flow each
You determine how many rental income units (“X”) you need to acquire by setting a cash flow requirement per unit. Whether you get this with one 5-plex or with several single family dwelling units is immaterial. Your investment criteria is that each “unit” will generate whatever target cash flow you need to meet your goal.
Lastly, you will also want to include portfolio income opportunities in your action plan. Do you have idle cash sitting in your checking account? If so, what interest rate is it earning? Can you find higher yielding deposit vehicles such as bank CDs to generate a little extra cash during the year.
thelocomono,
You still have not really fully defined your goal for us. Perhaps you need to replace take home pay so you can retire from your W-2 job. Maybe you need extra income to expand your lifestyle. Whatever your goal, may I suggest another and a plan to achieve it?
Let’s say that you set a goal to have your properties generate $25K per year, tax free, for the rest of your life starting eight years from now.
Plan to buy buy one rental property per year for each of the next seven years. Let’s say that you buy prudently in strong rental markets and only pay about $50K for each property. Let’s say you purchase in appreciating markets and see each property double in value in seven to eight years. At the end of seven years, the property you purchased in year one will have doubled in value from $50K to $100K, and you have paid down your mortgage balance as well so your equity exceeds $50K.
In year eight, do a cash our refinance on the property purchased in year one. Your cash out amount is $25K and should keep the LTV on the property at or below 75%. Hopefully during the seven years of rental use, your rents have gradually increased so that you will still have a positive cash flow after the cash out refinance.
In the ninth year, repeat this process with the property purchased in year two. And continue in succeeding years sequentially refinancing one property every seven years to take $25K per year out of your equity, tax free, and with no negative cash flows. You can use 7/23 ARMs to support this plan, though, the rates for 30-year fixed rate loans are a little better than the ARM rates these days.
If an extra $25K tax free cash each year is not enough to support your lifestyle ($2K per month), then adapt the scenario and the number of properties to the tax free cash number you need to hit.
If the appreciation rate is lower in your investment area, just purchase an additional property for a couple more years before starting your sequential refinance.