For this deal I am using conventional financing. My broker can close this loan in 10business days, the same amount of time many HML take still… There are only a handful of HML closing in 7days or less today because of the soft market, at least here in FL.
quote:
Beem,
My realtor found this deal for me. This was a REO that was in HORRIBLE condition. The doors were destroyed; the windows were all broken out; the furnaces were missing; there was about one foot of disgusting trash everywhere (and I do mean everywhere). The water had been shut off for a long time, and there were several buckets of human feces - YUK! Even so, the bank wanted some ridiculous amount for the property. I offered $11,000. They laughed at me. A couple of months later, I offered $11,000 again. They laughed at me again, but lowered their price a little. This went on for about a year. Then, they finally called me and asked if I would still pay $11,000 for the house. I did.
That’s how I got this house. Patience is often the key in dealing with REOs.
BTW, the commission on $11,000 is just about nothing. I gave her a nice bonus for finding this property for me.
Mike
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Thank you Mike. Very precious information. Thanks again for your help.
The reason that I don’t get this formula is may times the value of the property is in the location. I can pick up a duplex, move it by truck 50 miles and ti would rent for $800 more gross and be worth another 100k. However it still would cost about the same to replace the roof and it the stove broke the stove would cost the same no matter wich location it was in.
So if I have the exact same duplex built in two locations in location one it grosses 1k a month and is worth 100k and in location two it grosses 2k a month and is worth 200k and they both incur the same exact damage it would cost the same to fix them.
It makes sense to shoot for the most cash flow as possible but saying a property does not cash flow because it does not fit this formula does not make sense to me. I am not saying iut is wrong, I am saying I don’t get it. I understand “real world operating expenses” .
I can pick up a duplex, move it by truck 50 miles and ti would rent for $800 more gross and be worth another 100k. However it still would cost about the same to replace the roof and it the stove broke the stove would cost the same no matter wich location it was in.
That isn’t really quite right. If you pick up a duplex and move it 50 miles, it is still worth exactly the same. What changes is the value of the land, not the building sitting on the land. The rents do go up at the more expensive location, but so do the expenses.
In the more expensive location:
- the taxes will be higher
- the management expense will be higher (normally a percentage of gross rents)
- vacancy expense will be higher (because the rent is higher)
- insurance will probably be higher
- etc, etc, etc.
So, what you see is that many of the most costly expenses are directly related to the gross rents (and the value). The 45% to 50% expense number is true throughout the United States. With my lower priced rentals here in Ohio, my taxes and insurance are low, but my tenant related costs are high. In Florida, the insurance is obscene, but the tenant related costs might be low. In my low cost rentals in Ohio, I put in low-cost used appliances. In an expensive rental on Hilton Head, they probably put in new stainless steel appliances.
I hope this makes it a little clearer.
Mike
That isn't really quite right. If you pick up a duplex and move it 50 miles, it is still worth exactly the same. What changes is the value of the land, not the building sitting on the land. The rents do go up at the more expensive location, but so do the expenses.
Actually that is exactly my point. I was speaking in terms of repairs. I did not take into account the other items you listed raising.
Thanks
Without suggesting that I would pay “retail” for any property (that’s not my business), there are plenty of investors who pay top-dollar for properties and do very well with them, considering their risk profile and goals. (And thank goodness they exist, or else who would we sell our properties to?)
I bought a duplex last year for $115K and put $15K into it. In two months, I sold it for $177K, which was fully 100% of its market value. The gross monthly rent was $1,400. Would I ever pay $177K for a property that rents for $1,400 per month? No. But does that mean that whoever did pay that amount is going to be ruined? No, of course not.
In my case, the investor put 20% down. Let’s call it $40K with closing costs, etc. The interest on the note is about $10K per year. Taxes are $2K. Tenants pay the utilities, and there aren’t any other operating expenses, but you’ll need to set aside some cash for replacement reserves. Let’s call that $3K per year. That’s a $15K annual expense against a $16.8K rent.
Now you’re saying, “Big deal, that’s a lousy $150 per month!”
I agree…I would never do that deal, either. But it’s not a loser over the long haul. Setting aside vacancies, that’s still $1,800 per year on a $40,000 investment. That’s 4.5% per year, cash on cash. Add in the appreciation on the building…let’s say it’s only 2% per year, which is low…that’s another $3,500, or almost 9% on the $40,000 investment. Now we’re at 13.5% return on equity, and we haven’t even raised the rents yet, which we will do every year.
Most investors would be thrilled to earn 13% on their money with the general safety of real estate compared to, say, the stock market. If you start early enough, earning 13% year in and year out will make you a very wealthy person. At 13%, money doubles every six years. So that $40,000 investment will grow to well over a million dollars in 30 years. Even factoring in inflation, it will be a great return.
Now, having said all of that, no one on this forum is here to make 13% on their money. We all expect to buy smarter than the “average” investor. But, let’s not be so quick to think that paying “retail” for properties is unequivocally the road to financial ruin.
I can’t say I agree Paul. Some people can make a little bit of money buying at retail prices but only because they are using a lot of their own cash. None will do “very well”.
Your operating expenses are so far from the truth I don’t know where to start. Your claiming taxes and a reserve for replacement are the only operating expenses because the tenants pay the utilities directly. WOW, don’t own many rentals do you? If the person who bought this property based their estimates on those expenses, they will most certainly lose money!
Buying properties at retail prices isn’t always the cause for losing money, it’s grossly underestimating operating expenses. The latter is unequivocally the road to financial ruin.
Paul,
I’m loading the U-haul as we speak. Now I just need to know where those operating expenses are only taxes and a capital reserve! Just give me the word and I’m on the way! I just got done writing out about 100 bills - appparently all for expenses that don’t exist.
Mike
I’ve owned a few rentals, and I’ve never had anywhere near 50% of rents eaten up in operating expenses. For the life of me, I can’t see how that’s possible.
It’s just funny to me (not the best word, but the only one that comes to mind), how 95% of investment real estate is bought and sold through conventional means at “market prices,” and yet all of these investors continue to survive and profit.
I sold the duplex to an investor who owned another one just like it across the street. He paid full price (again, $177K against a gross rent of $1400 from both units), and he’d take as many as he could find. He’s happy, wealthy, and seems to be pretty smart. Could he do better if he found wholesale deals (like the fact that I had $130K in the duplex I sold to him for $177K?)? Of course, but the point of this thread was that not adhering to some set of formulae is not the road to financial ruin.
Everyone needs to look at their own numbers and decide what makes the most sense.
Earlier there was a post about a 100% financed deal that net “only” $50 per month positive cash flow. While I agree that I would not be crazy about that deal because it does not fit my strategy, is there really anything to be ashamed about creative a $600 annual earning with no money invested? Especially if there will be rent increases and appreciation each and every year in the future?
I’m tired of this rental property expense debate. You win! Expenses are probably more like 4-5% of the gross income.
Happy Investing!
If that’s the case I better hit the MLS and start buying…lol. Guess his friend never replaced a roof, had an extended vacancy, had a tenant do $10k worth of damage, replaced an HVAC unit, etc.
Danny and Rich,
You guys are killing me here! I’ve already got the U-haul loaded and waiting for Paul to give the location of those low expense houses. With you guys questioning his low expense numbers, he’ll probably never tell where they’re located. I guess I might as well start unpacking. Is that U-haul going to be an expense?
Mike
Probably not, when you get to fantasy land they will probably credit your account back for the rental.
I am interested in learning. Please share with me where you spend 50% of your gross rent on operating expenses. I would like to know what I am missing.
I assume that you agree that “operating expenses” includes taxes, management, and utilities.
By the by, you’re all showing what a class act you are. I see “being respectful and professional” was not a New Year’s resolution…
Paul,
Operating expenses include taxes, insurance, management, maintenance, vacancies, utilities paid by the owner, legal fees, entity maintenance, advertising, office supplies, fuel for your vehicle (for real estate related activities), evictions, court costs, damage done by tenants, lawsuits, exterminations, capital expenses, accounting fees and/or tax preparation, education expenses, and much, much more!
When you only have a couple of rentals, it is easy to pretend that these expenses don’t exist. When you have a lot of rentals, it is impossible to ignore them.
Most small landlords do buy properties at retail as you said earlier. They also lose money on their properties. Those that stay in business do so by paying the difference out of their pocket. The vast majority of new landlords go out of business in a short period of time.
Mike