Is this really that bad of an idea?

Hi…I am in a disagreement with my mentor. I got opinions from a broker I know, but now I wanted to get some opinions from you guys, if you would:

Recently remodeled brick ranch. 3 BR/2 Full baths. Everything updated in compliance with city & sec 8 codes. New kitchen with new appliances. Full basemnt. New digital control central air & forced heat/duct system. Electrical completely re-wired and re-piped; new outlets, switches and all new interior/exterior light fixtures. Reconstructed 2-car garage w/remote. All new flooring. Enclosed porches front and back with new flooring. Finished front & back porches. Both baths updated. Most windows replaced, existing windows scraped and painted. Newly sodded backyard. Roof is 5 yrs old. Newer 6’ treated fence. Most of the new parts are still warranteed. House appraised for 130k. Purchase price $114k with no money down/seller assist. Vacant.

It is in a beautiful neighborhood in a great suburb, near businesses and restaurants, 5 minutes from a major shopping mall, 5 minutes from some of the cheapest gas in America, near public transportation, 10 minutes from where I live, down the street from my dentist as a (random) matter of fact.

I think this would be a good first rental property for me. I earn enough in my full-time job and part-time business to cover the holding costs which would be just under about $1200 including debt service until I can get a renter in there. That includes average monthly utilities, which would of course be a bit lower while the place was vacant. Other 3/2 houses in the neighboring blocks rent for $1300-$1400, so once rented I’m only looking at $100-$200 a month cash flow. Some of the 3/2 houses have the tenants paying their own utils in which case I’d be looking at about $400 a month cash flow.

I normally look to my mentor for this kind of advice because he knows tons, but this is where he and I part ways. He doesn’t like this situation because he says (as he always says), “this kind of cash flow won’t even pay my bar tab.” I don’t know about yall, but in my town I can get many shots of Malibu for $200. And I can live like a friggin queen on $.50 wing night! :o

I am not trying to make real money off the cash flow of one house. I don’t want to lose money either, but my purpose is to start trying to build up my portfolio instead of only birddogging or wholesaling. Yes I know that there isn’t much equity in the house either, but at least it is not upside down and I have a little wiggle room. Also, I wanted to get some experience landlording one tenant before I picked up a few more houses and eventually get some multi-units. I have a whole business plan but this post is so long as it is, I won’t put it here but I do have one complete with a couple of alternate strategies for this one house and the business overall.

So what are your thoughts on this? Please don’t let this turn into a debate over whether or not to rent to section 8. I know this board is split on this. In fact, for the sake of this discussion, let’s assume I find the most reliable tenants in the universe.

Thanks in advance. Good night…d

Your mentor is absolutely right that this is a lousy rental. However, I’m not sure that you mentor knows anything about rentals. This is absolutely NOT a cash flow positive property - NOT EVEN CLOSE!

Throughout the entire United States, operating expenses (including captial expenses) run 45% to 50% of gross rents. In your case, that means that your operating expenses would be about $650 per month, leaving you $650 with which to pay the mortgage (P & I). Assuming that your mortgage payment is $835 (30 yr, 8%, $114,000). The result is that you would be losing $185 each and every month.

Beside the fact that this is a money loser, it would be absolutely insane to rent a beautiful house (completely rehabbed, with everything new) like this to low income tenants. Section 8 tenants are by definition low income and Section 8 by law can pay no more than the 40th percentile of local rents. In other words, you are renting a middle class house to low income tenants.

If you’re thinking about getting into rentals, I strongly suggest that you talk with some successful landlords and learn about the real costs of renting property. Real expenses include legal fees, evictions, damage caused by angry tenants, exterminations, capital expenses, vandalism, court costs, lawsuits, office expenses, fuel for you vehicle, entity maintenance, and many many more!

The fastest way to go out of business is to ignore the real world expenses!

Good Luck,


When buying a rental property, you have to add in taxes, insurance, routine maintance, plus you need some reserve fund for damages that may occur. Roof damages, insurance deductible, new appliances (do you know how much it cost for someone to just come out and give an estimate on a fridge or stove- about 80bucks in Fl). This property really does not have cashflow in it. It also does not have equity in it. Also does the neighborhood have appreciation in it.

Now I know Mike is a big promoter of half your rent goes to expenses on this board. I really never went that way. Everyone has there own formulas. All the gurus teach something different as well. many still push the $100 per door cashflow but that was back in the days when a modest house only cost 100K and still 1 vacancy could kill all your cashflow.

I know you want to build your portofilo but do it wisely. You will make plenty of mistakes on the way to the top…We all do. I am sure Mike made some cashflow mistakes so he sticks with his formula to protect himself from losing money on each deal.

Your mentor made some mistakes and is just trying to prevent you from making the same ones. But remember this…a mistake should be used for educational purposes. If you do not learn from your mistakes, then you will never learn.


Thanks guys. I wish I could blame this on the lack of success or understanding on the part of my mentor too, Mike. But when we had our conversation I told him I had a potential deal, he asked what the cash flow was. He always asks that first and if he likes the number he asks how I came about it and we look at the numbers together, otherwise I get dismissed the bar tab comment–$100 got me the bar tab comment and he didn’t even want to hear the numbers.

All of his income has been REI activities without so much as a part time job since the 80s with a large bulk from rentals and he couldn’t be paying alimony to two ex wives, put 6 of nine kids through of college (so there are TWO things he is really good at making–kids and money), if he didn’t know how to make properties cash flow for himself.

Now, back to me. Even though I wasn’t depending on this one house to sustain or destroy an entire business, you are both correct that I was not conservative enough when figuring expenses. I must say though, I know plenty of successful landlords, but none of them have a law that 45% of the income will be expenses. Not saying you are wrong Mike, but there are other ways to do it successfully. Besides I have a full time income and a part time business outside of REI so while I would rather not use my other income to float me in an emergency, I could. All that said, I do understand fully what you both are saying. I need to put down some ultra-conservative figures, operate as if I have no outside buffers, and enjoy the pleasant surprise if the actuals look better.

My mentor (not very thrilled that he was “so misrepresented among a bunch of faceless bloggers”) told me that he knows a couple of investors in that and the surrounding areas who are doing well with lease options so when I go back to work with him next week I have to bring him a proposed plan on how I would go about that, “butt-naked budget” and all. You can still do those here without alot of drama (our legislators are busy with the foreclosure stuff to be worried about L/O right now). So I have Labor Day homework to do :stuck_out_tongue:

Back to the drawing board (and birddogging and wholesaling and homework and…). Thanks again guys you probably saved me a great amount of heartache…d

even if your really good and doing most repairs yourself, your expenses will be at 30% of gross rent; you might be baraely cash postivve on a pro-forma basis, but being a single family property, vacancy will kill you. In the end you will only breakeven (at very best) and your top-condition house will be rough around the edge (at best) or trashed at worst.

The best rentals (IMHO) is house/duplexes/building that are rough around the edges to start or perhaps even ragged out. The latter case being where you can buy cheap and slowly fix-up over time and raise the rents at the same time. I have found this to be a very successful strategy. Increase revenue, keep cost basis relative fixed (i.e. no neg AM loans, etc), keep cost level loaded (spread fix up cost out, do it in between tenants when the place is vacant anyways). In the end, this equal increased profits.

AAK is exactly right. If you manage the property yourself and do the maintenance yourself, the operating expenses will be about 30% of gross rents. That’s because you’re saving the 10% of gross rent that the management company charges and the 5% of gross rents that would be paid maintenance. Of course, you’re really just paying yourself for doing these jobs which is how most small successful investors make a profit (or at least enhance it).