Hi Every one.
I am a newbie in REI. And I just made a mistake on my first deal. Actually, this is still a good deal. I put 8 rented properties under contract which generate $54,000 per year for 150K. The cash on cash ROI is 30%. But I can’t sell it. I don’t know why. Everything is good even though the neighborhood is not good much. But the houses have tenant in there and they are never late in payment. They have been there for over 2 years and want to live there for long time. What did I do wrong in here?
You have to find people who deal in that niche. People who have rentals usually go for a certain part of the market. There are those who deal in horrible war zone areas. There are also people who want to stay in decent blue collar neighborhoods. I deal in certain areas of my town. There are certain areas I wouldn’t buy in if you sold me a house for $3k because I don’t want to be there or deal with the area. That could be part of your problem. Another possibility is that the houses have a lot of deferred maintenance. I bought a bunch of houses in January that had been run down for several years. I’m still trying to get them all fixed up, but the deal was good enough that it’s worth my effort. Purely from an income standpoint, these look good…there could just be other issues.
Hi,
If you buy 8 properties for $150k which produce $54k per year in income, you still have expenses and depending on age the ratio may be 33% expenses to 67% debt service and positive cash flow for a newer good condition group of homes or the properties may be closer to an even split at 49% expenses to 51% debt service and positive cash flow for an older but reasonable condition group of homes with minor maintence needed or you may have a 66% expenses to 34% debt service and positive cash flow which is older, in a bad neighborhood and needs major maintence performed yearly along with defered maintence.
In the last example of 66% expenses and 34% debt service and positive cash flow the actual yield is closer to 10% ROI or it takes 10 years to recover initial investment with interest.
And although this at face value is not worse, location, type, market, etc. dictate desireability for an investor!
GR
Many newbie real estate investor made such kind of mistake in their first deal due to lack of experience. You have deal in smaller property and take advice from expert before dealing in your first deals.
Don’t most underwriters consider 25 percent of rental income to go to maintenance?
Hi,
If you take $54,000 at face value we first do not know whether it was adjusted for a vacancy factor? Then if we assume it's been adjusted for vacancy and take $54,000 at face value for 8 properties it means each properties income is an average $6,750 which means 25% is $1,688.
So the cost of property taxes, insurance, general maintence, appliance repair or replacement, long term major repairs, prudent reserves, advertising, legal, etc. is the percentage of expenses against income, and this ratio is what it is, older property may run high expenses cost’s because of age.
25% may work for some homes, but not all homes and as I have said before even a brand new home with intentions of exiting before problems occur does not make the property operate without expenses, although they can be limited.
Now if you pay $150k for 8 properties, each properties average value is $18,750 per property. I don’t know of very many new homes selling for $18,750 each, but I know there are a lot of older decent properties out there for $18,750 each, but I would never assume my total expenses from gross or net revenue of $6,750 per year to strictly run along the lines of 25% or $1,688 per year.
I would always work out my expense list and apply enough money to cover costs relative to my location and known average cost’s.
GR
There’s deals like that everywhere. For the reasons listed above they are not usually that good a deal. By the time you pay expenses on them and deal with the problems, I’m just as happy with my $100k rentals that bring in $900-$1200 per month.