@BM,
The rent/price ratio is based on the sale price and the monthly (market value) rent.
If you know that an investment will rent for $3,000/mo (assuming market value rent), and you want to buy it at a 2% rent/price ratio, that means the sale price will be $150,000, or less.
Formula 1) 3000/mo rent divided by .02 equals 150,000/sale price.
Formula 2) $150,000/sale price multiplied by 2% equals $3000/mo rent.
And just for giggles, if the rent is $3000/mo, the expenses will be $1500/mo, or 50% of the gross scheduled monthly market rent. This includes EVERYTHING, except principal and interest payments.
Plan on it. Budget around it. Invest with that in mind. This way you’re less likely to donate more of your own time and money to the project.
That said, if you’re really dumpster diving on cash flowing deals, the expenses can be anywhere above 50%.
This doesn’t mean that every single year your expense rise to 50%. This means that you’re putting away the balance in order to have money to pay for roof replacements, exterior paint, stolen a/c’s and the rest of long-term, emergent-type repairs and upgrades.
I mean an asphalt driveway lasts 15 years and costs $5,000 to replace. The driveway’s already ten years old. Where’s the money been put, to pay for its replacement?
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To clarify: “Cash-flow” isn’t the same as “Income.”
There’s “net” income, “gross scheduled” income, “pre-tax” income, “after-tax” income, and “spendable” income, and more.
I forget how specific I need to be. Let’s talk about your “net taxable income goal,” not “cash flow,” or even “income goal.” These are too imprecise.
For example, my gross income would be a wet dream for me. I have to settle for my net taxable income, and even then, I’m constantly dreaming about how I can make ‘that’ amount as small as possible, if you understand being governed by those who have no respect for you, or your earnings, namely socialists.
To clarify, let me ask, “What is your net spendable, after savings, after tithes, after taxes, after paying for grandma’s place at Greener Acres Rest Home, where “They Care, So You Don’t Have To,” income goal?”
We’ve veered from talking long-term visions, to what we want for today. Let’s talk about how today, will effect the long term.
Today:
Buy a house.
The GSI (gross scheduled income) is $3,000/mo, or $36,000/yr.
The EXP (expenses) are $1500/mo, or $18,000/yr.
The NOI (net operating income) is $1500/mo, or $18,000/yr.
The Debt Service is ___________/mo, or ___________/yr. ???
The Pre-tax Cash Flow (NOI less Debt Service) is ___________/mo, or __________/yr. ???
The Rent/Price Ratio is ___________% ??
What will be your pre-tax income monthly and yearly?
That’s this house.
Now take that pre-tax result, and divide it into $3,000 (your goal), and that’s how many houses like this one, you need to invest in, in order to achieve whatever your pre-tax goal.
For example, if your pre-tax cash flow goal was $3,000/mo, and you achieved a $400/mo pre-tax cash-flow on this house, you would need about eight more houses like it to achieve your goals. $3,000 / $400 = 7.5
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Forget Armageddon happening in Lakewood/Golden. Denver’s an economically diverse city.
That said, if “For Sale” signs start popping up, it usually indicates a time to buy. If you see “For Sale” signs disappear, that means it’s a time to sell. It’s the classic (simplistic) contrarian investor’s scheme.
If you see a lot of “For Rent” signs go up, that can mean several things, depending on what else is happening. It could mean landlords can’t find tenants. Or it could mean investors are seizing opportunities as a result of all the For Sale signs and sellers.
It could mean the market is in a death spiral, and all the over-leveraged owners who try to hold on, will end up with foreclosure-shaped skid marks in their shorts.
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Well, back to the “cash flow” goals question…
I already spewed off on the definitions of such, but again…
I’m gonna bust your chops, because you’re young, and it’s my guess that nobody’s ever ‘loved’ you enough to tell you this… or perhaps ever really had goals themselves.
The goal never changes. Only the way to get there does. You can’t make your income goal contingent on buying ‘that’ one house, or not. That’s very short-sighted and small-minded. That’s the extent of your beating.
Meantime, if your cash-flow goal is $3,000/mo (in spendable cash) in real estate, it makes little difference how you get there.
If the house thing doesn’t pan out, a duplex thing will. If that doesn’t, something else will. You keep changing tires on the wheels of success, until you get there.
So, assume the house deal falls apart.
Do you postpone your goals and dreams, until …what happens?
It’s not, I want to make $3,000/mo ‘if’ I can possibly, ever, ever, close on this hell hole, I’ve had my eye on.
It’s more like a commitment where you say “By hell or high water, I will make $3,000/mo in cash flow, investing in cash-flowing real estate by February 14, 2017 …or I will stand up during a testimonial time at my church prayer meeting (all Mayberry RFD-style), and tell “Andy, Barney, and Aunt Bea” that I am a massive, dysfunctional loser, and have failed God, my Family, and my Church, and I will now strip to my drawers, and allow myself to be flagellated by the pastor with a snake-handler’s whip, for failing to meet this achievable goal.”
Of course, I’m kidding …sort of, but committing to the results means not getting hung up on the brand of tires you’re looking at. Many different ‘tires’ will work.
So, you’re either, somehow, going to achieve this goal and deadline, or you’re gonna die trying.
That means you may have to abandon the idea of buying a house in Lakewood, and start shopping the East side (this just scares me as I type this) of Denver, to reach your goals.
Again, we can reach our goal and deadlines MANY different ways, but the goal always stays the same, even if the deadline, and the way to get there has to be adjusted.
Just to add more to this bible I’m writing… Our minds cannot tell the difference between fact or fiction. Everything we tell ourselves, ask of ourselves, or believe, our minds take for granted as “FACT.”
That’s one very important reason that we are very careful about what we say to ourselves, allow our minds to dwell on, and/or otherwise allow our subconscious minds to receive. Everything. It’s a lot of like self hypnosis.
That’s a major reason not to let your yet-unborn children get plopped in front of the TV and allow all sorts of crap get fed to your children’s minds. Soon, you’ll have crap-filled kids, that say and do the crappiest things, but I digress.
Back to goals. Somewhere in this forum, I’ve shared my ‘first apartment purchase’ story that illustrates just exactly what committing to a goal, deadline, and having no contingencies available, works in real life. It’s quite a story, and it’s one of many I have.
Bottom line the goal is not reduced to buying ‘that’ house. The goal is to pocket $3,000/mo investing in real estate on a monthly basis (for the sake of discussion). This may require buying several houses, not just one.
So, finally I ask, “What is the net, annual, pre-tax income goal, and what is the deadline?” And what are the self-imposed negative consequences for not reaching the goal, besides showing up to church ready for a nice session of abuse?
If you’re not able to think that far ahead, I understand. Some of us need a success or two, to get our minds around what is possible, or ‘not’ possible.
And that’s why I’ll add that ‘whatever’ goal we set for ourselves, and are willing to commit to (regardless of the ability to understand how it’s possible), our minds will literally start working in the background, and subconsciously feed us ideas and options that never seemed obvious before.
Before long, we’ll begin seeing results, and eventually achieve those goals, right on schedule.
Please pardon the pop psychological rah-rah session, but it got my juices going.
Meantime, don’t believe any of this? Prove me wrong. :biggrin
).