I have found a property that is being offered under market value (given data on 3 comp sales), owner financed at 8% for 30 years under 50K with a cashflow after debt service and insurance, taxes and PM of $150. I’ve done the research and the properties in the area have appreciated about 5% and is projected to do the same this year and next. The property has been already updated with a new furnace, carpet, kitchen floor, fresh paint and upgraded electrical. I would need 10% down to get into the property which already has a leased tenant for a year. This screams to me of a good deal. The only catch is I’m in Virginia and the property is a few hundred miles from me. I’m a new investor and I’m wondering should I start out closer to home (no deals available) or venture into other areas where it seems deals are plentiful? Please advise!!
This screams to me of a good deal.
lboogie,
This screams “alligator” to me. When you include the rest of the expenses that you have ommitted in your post, this property WILL lose money, especially considering that this would be a long distance rental. Debt service, insurance, taxes, and PM are not even close to being all of the expenses associated with rental properties - NOT EVEN CLOSE!
I would study the business more before you buy ANYTHING and then invest closer to home.
Good Luck,
Mike
How old are the comps? Your cashflow is off you are not accounting for repairs, vacancies and others. Just from what you have stated and the fact that this is so far away I would walk away. Try starting closer to home, I know you say there are no deals but I live in a market where 3/2 homes don’t go for less than 350K and these are old homes. I have been able to start off on a 5 home set but just opening my big mouth. Market yourself also contact the marketing of others to see if they wholesale homes. I guess what I am saying there are always deals but you have to keep your eyes and ears open.
Benjie
See Mike beat me to it.
I’ve been practicing my speed typing!
Mike
Is it best to just stay local or would anyone ever go outside their area for an investment? Wouldn’t property managers help in these regards? All of the pubs I’ve read have not dismissed property managers as people who would dismiss your property. I may sound naive, but I’m getting a lot of conflicting information. I also don’t have a lot of working capital as do others. I have about 25-35K to start off with.
Start local until you get more experience. Don’t start your RE career with a long distance property.
lboogie25,
Many of the guru courses, seminars, infomercials, etc are full of pie-in-the-sky hogwash. They make everything sound easy. One CD a guru sent me was about investing in mobile homes. In the CD, the “guru” said they don’t call mobile homes “trailers” anymore. He said the only trailer that you need if you invest in mobile homes is a trailer to take all your money to the bank! RIDICULOUS!
Another guru says ’ the less I do, the more I make’. RIDICULOUS! Try doing nothing and see how much money rolls in.
A lot of business is common sense. Do you think it’s easy to run a business long distance? What can you think of that can and will go wrong with long distance rentals?
I can tell you for an absolute fact that things are not as easy as they seem in the guru courses or on the infomercials. You can make good money in REI - IF - you do things right.
Good Luck,
Mike
propertymanager:
You bring up excellent points which I have considered and factored into my business plan (I have one completed). I haven’t paid any attention to those infomercials or the gurus. I have applied common sense to my business plan with the knowledge that I have. I have a plan to enter property with a low down payment and have substantial reserves to cover my repairs and vacancies. This would be for local properties as well. I dont think it’s wise for me to expend all capital and have no recourse in a worst case scenario, so I plan to keep extensive reserves while minimizing the risk I take on. Small, slow and steady is the plan while I gain experience.
boogie,
from your last post, I will say that you may do all right. This deal could be alright, and if you are careful, the learning curve may not be too expensive. Read a lot of posts on this board, and especially propertymanagers posts on expenses. But don’t let that stop you once you think something will work by the numbers. Most of the things that experienced investors preach were learned by, guess what, experience. So consider all the advice, and then make a decision, and work to limit your risk.
Good Luck,
DB
I have a plan to enter property with a low down payment and have substantial reserves to cover my repairs and vacancies.
I would translate this statement as saying that you know you will lose money on this property and will cover the losses with your own money. That’s a pretty low goal to start a losing business but to have enough money to cover the losses.
One of the ways I like to judge a potential rental is to ask myself “how many of these deals can I afford”. If your rental will lose money, how many can you afford? If you owned 100 of properties just like this one would you be better off or broke?
I will not buy a rental unless that rental will put money in my pocket each month. The more rentals I have, the more I make. That’s the way a business should work.
Mike
I would translate this statement as saying that you know you will lose money on this property and will cover the losses with your own money. That’s a pretty low goal to start a losing business but to have enough money to cover the losses.
One of the ways I like to judge a potential rental is to ask myself “how many of these deals can I afford”. If your rental will lose money, how many can you afford? If you owned 100 of properties just like this one would you be better off or broke?
I will not buy a rental unless that rental will put money in my pocket each month. The more rentals I have, the more I make. That’s the way a business should work.
Mike
You have misinterpreted my statement. What I’m doing is using reserves in case of the need for repairs, vacancies etc. I’m not using my own money. There is a separation between my earned income and what I will use for the startup and business operation. I understand you are giving advice but I think your tone is a little condescending and offensive. Perhaps since I’m new at this and in this forum, it is normal to address me and my “low” goals like this. I think it to be a sound plan and if I’m wrong so be it, I’m okay with experienced people pointing this out to me, in a constructive, educating way. Why do you assume that each month I will be in the negative? What are some of these hidden costs you referred to earlier? How can I mitigate these costs? Is something published that I can reference to change my strategy, make me see something I’m missing? I thought that’s what this forum was going to do for me. So far I’ve basically been told “Walk away” without any data or experience to back up these statements. I’m looking for help and advice not a rude dismissive “Go home and study”. I’m open to all ideas good and bad, just would like some constructive advice. Perhaps I’m looking in the wrong place. Thanks for your time and all your responses.
Before even thinking about buying a property you must learn to first how to accurately calculate cash flow. Real world operating expenses around the US range from 45%-50%, it is not simply management, maintenance, taxes, insurance, vacancies, and mortgage.
That is not even close to operating expenses! What happens when an angry tenant destroys the property? Do you actually KNOW how many vacancies you will have in a month? What about paying for evictions (cause they happen)? What about the gas you use to drive to the rental? What about roach exterminations? The list could go on for years.
The point is that if you do not accurately calculate cash flow you will be out of business in no time. Therefore, to accurately calculate cash flow, divide the rent by 2 and subtract mortgage from the remainder, and that’s your cash flow.
lboogie25,
I don’t know Mike from Adam (or Eve, for that matter) but I’ve read enough of Mike’s posts to believe he wasn’t intending to be either offensive or condescending…While you write that you’re okay w/ experienced people pointing things out because you’re new to REI, it seems that such is true if they agree with your plans.
While I appreciate your desire for this deal to work, sometimes there are risks and costs that simply can’t be mitigated - unless you’re totally willing to subsidize a losing proposition - which isn’t mitigation - and defeats the purpose of running a business. Perhaps the experienced hands in this forum are doing you a huge favor by not trying to sugarcoat what they clearly see as a mistake waiting to happen. I understand no one likes to have their hopes dashed…but I’ve got a gut feeling Mike’s doing you a favor.
Regardless of your decision, best of luck to you!
David
You have to take Mike with a grain of salt. He’s in a good investment area where he can buy properties that cash flow. They can be very hard to find in other areas of the country. I don’t believe appreciation is something he takes into account because he doesn’t really need to in his market. Other markets are different.
With that said, most of the advice given earlier is pretty much on target. The biggest problem is the distance. If you pay a company to manage the property for you, they will quickly eat up any of your profits. Try finding something closer to home so you can keep an eye on it easier. Try something within a hour drive or a half hour or less would be ideal. Otherwise that’s really the main drawback to your plan.
The key to keep in mind is that Mike presents the worst case scenario and if they all happened at once, you’d be ruined. However if you’re just starting out with a few units, the odds of evicting someone or having the tenant from hell isn’t that high if you do your homework first. It would be prudent to keep it in mind though. Once you have enough units, it’ll start to happen more regularly.
Thank you for the last few responses. All I’m looking for are things to watch out for. I’m not concerned if anyone agrees with my plan or not. I would REALLY like to know what the pitfalls are, what I am not calculating, how to PROPERLY calculate cash flow, etc. I did not get those in the previous replies. It’s one thing to say you’re not taking everything into account, but what am I missing in my calculations was the key point. I do think Mike was trying to help and it’s appreciated. I’m just the kind of person to hear “no” without a little explanation as to why. Thanks for the help and I’ll continue to look for a better deal closer to home.
You have to take Mike with a grain of salt. He's in a good investment area where he can buy properties that cash flow. They can be very hard to find in other areas of the country.
Henry,
It doesn’t matter what kind of area you’re in. It also doesn’t matter whether cash flowing properties are hard to find or not. The truth is that if you buy properties that are losing money, you will either be pumping money into your business or you will be out of business. In addition, with negative cash flow properties, the more properties you own, the more money you lose. It seems to me that this is contrary to the point of running a business (to make money).
I don't believe appreciation is something he takes into account because he doesn't really need to in his market.
I certainly am happy for any appreciation that I get (about 3%-5% per year historically over the long term), but I certainly am not speculating on appreciation. I am in business to make money (each and every month). Losing money each month so that I can bet on future appreciation is speculation. I can’t feed my family with negative cash flow and speculation!
The key to keep in mind is that Mike presents the worst case scenario and if they all happened at once, you'd be ruined. However if you're just starting out with a few units, the odds of evicting someone or having the tenant from hell isn't that high if you do your homework first.
That is absolutely false. I am not presenting the worst case, I am presenting the everyday reality of being a landlord. What most new landlords don’t understand is that it something doesn’t have to happen every day, every month, or even every year to be an expense. Even if you have only a few rentals, the numbers are the same. Your operating expenses are still 45% to 50% over time. Will an angry tenant do $10,000 worth of damage to your one and only rental this year? The chances are high that the answer is no, although I know of people with only one rental that have had this happen. If you have 5 rentals, will a tenant do $10,000 worth of damage to one of them this year? Again, the chances are high that the answer is no. However, there have been at least 2 newbies on this forum who recently have had these huge losses with only one rental. One is the guy who has posted about trying to short sale his badly damaged and vandalized property in the historic district and the other is the guy who lost $10,000 dealing with a bad tenant (although I thought a lot of that was self-inflicted due to lack of knowledge). When you consider that the vast majority of people on this forum have never done a deal, that should say something.
The problem is that if you own rentals long enough or have many rentals, this WILL happen to you and when it does it will literally wipe out years or decades of positive cash flow for that house . Is that a predictable expense - YES. What about all those times that a tenant will do $2,000, $3,000, or $5,000 worth of damage, which occurs MUCH more often. Is it necessary to account for thoses expenses? Of course it is!
Now consider that ‘damage done by tenants’ is only ONE of the expenses that occur with regularity that most newbies ignore. What about eviction expenses? Legal Fees? Court Costs? Lawsuits? etc, etc, etc.
The question is not IF these things will happen, the question is WHEN. If you haven’t accounted for these very real expenses, when it happens to you, you will join the majority of other newbies who fail. It’s just that simple.
Now, consider for a moment that the original poster didn’t even consider the basic expenses such as maintenance, captial expenses, vacancies, office expenses, tax preparation, advertising, etc, etc, etc.
Mike
Mike,
Thanks for your reply. I see what you’re saying in regards to tenant expenses. With what you have said and the things you have pointed out, I have a new question and all I’m looking for is to be pointed in the right direction. What is/are the best ways to make rentals profitable? Can you start with a rehab to increase your cash flow?
I will have to agree with Mike. I have only started and not collected any rent yet and I have already spent 3000 on just fixing up a home. I know I haven’t accounted for everything yet because I haven’t run across them but even if the problems happen down the road they are going to happen and it is better to be prepared for them.
lboogie,
The key is to buy at a huge discount. Buying distressed properties can be one way. Another way is to find desperate sellers. Ironically, one of the best ways is to find desperate landlords. Many new landlords get into the business without understanding cash flow and tenant issues. These distressed landlords will literally do ANYTHING to get rid of their pain (no, I’m not exaggerating). Many new landlords are not mentally prepared to deal with terrible tenants and there are a LOT of terrible tenants out there (even if you do a thorough screening). When you combine that pain with the pain of losing money, you’ve found a desperate seller!
Mike