Mike and Danny,
I have seen you two post this the most that is why I am directing this to you but please anyone with advice please chime in.
You have made posts where you ouline using the 2% rule against Gross Rents to purchase and/or the Gross Rent - 50% expenses - mortgage = Cash Flow as things to look for when buying rental property.
When using these formular do you base the Gross Rent on what the property is currently pulling in or what its potential is if completly rented?
Rick
I use the current rent, because that is what you are actually getting. The gurus are always talking about raising the rent, as if it were so easy. Rents are primarily set by the market. If you raise the rent too much, your tenants will leave. Also, you never hear the gurus talk about the rent going DOWN, but that can happen too. It’s all supply and demand.
Mike
Mike,
Just some confusion and I am not looking to twist anything with this but being somewhat new I am trying to decipher all this.
In another post DubusWorld asked about a 24 unit apartment complex where only 9 of the 24 were rented. All 24 units needed a rehab.
In that example you used all 24 units @ $550 in your analysis of the building and its purchase price. Was this because all units needed to be rehabbed and thats the only way they could have been rented?
LR,
Quite honestly, I think I missed that only 9 of 24 were rented in that other post. I also believe that the $550 number he was using was once the rents were raised. If I remember right, this was a bad deal even after the rents were raised (again, raising rents is easier said than done).
I sorry, I misread your post. I thought you were asking whether I would use the current rent or a raised rent. Obviously, that was the question I answered, although not the one you asked.
Let me try again.
If I were looking at a building that was not fully occupied, I would do my cash flow analysis on the building as if it were fully rented. Obviously, I want to know if the property is a good deal (will cash flow) once I get it filled up.
Your operating expenses will also be based on the gross rents of the building as if it were full. Nearly all of your expenses will continue whether the units are filled or not. Some expenses may be a little lower without tenants (like lawsuits, evictions, etc). Others will be higher with no tenants (like insurance, vandalism, etc). At any rate, your goal is to rent the units out and therefore you need to know if it will cashflow when fully rented.
If I decide to buy the building, I then need to decide where I will get the money to absorb the loss and extra expense while I am getting the property up and running and rehabbed.
Hope this is a little clearer.
Mike
Thank you Mike.
That cleared up a lot.
What are some ways you would finance the expenses while your getting it up to its full potential? Would you borrow against that property? (I would think this would reduce the cash flow even more) WOuld you look at the equity in others that you own? Would you just get a business loan?
Just trying to close the loop so to speak with these questions.
Rick
Rick,
There are almost an infinite number of ways to finance the rehab and losses while the rehab is being done. You could borrow the money from any number of sources - line of credit, signature loan, credit card, a friend or family member, HELOC, etc.
My personal rule is that I MUST have 30% equity in every property (including the rehab costs) and I must have cash flow of at least $100/unit/month. I am paying all of my properties down over 20 years and therefore don’t borrow on them after the first mortgage. One hundred paid off properties will generate one big pile of cash flow in a few years.
Mike