I am currently evaluating the number on a property I spotted, I am “running the numbers” to find out if my investment analysis is solid or not. After all is said and done on a monthly basis is $70 profit…healthy?
(I am setting aside $100 per month to the maintenance & repair fund, is that high?)
Thank You
There is no standard NOI.
Anyone can say something like - $200 is a good monthly profit after debt service for a single family home, but that does not make it so.
It depends on the type of property you’re buying, how good of a deal you get on the property, what you can rent it for and if you paid cash for it or not…and there are even other variables such as occasional large maintenance expenses that are not typically budgeted for (such as foundation problems) which will really mess up your math.
If you bought a $100k house, put 10% down and had a note at 5% interest over 30 years, your NOI would be drastically different than if you got that same house on a 15 year note.
Also, if you came up with cash and were able to therefore negotiate a much better deal with the seller - it happens as I do these deals all the time - and you bought that $100k house for $70k … your NOI would be far, far better than if you financed the house.
Or what if you are an excellent negotiator, better than average, and you haggled the guy down an extra $10k and you got the house for $90k … but you had to finance it like in scenario one. Again, the NOI will be skewed in your favor…but it’s still not as sweet as if you paid cash for the transaction.
Does that make sense?
I am not trying to confuse you, but ultimately what you want to do is focus on getting the maximum return on your investment (ROI) - MORE than getting a certain amount of net operating income (NOI) - on your rental properties.
There are multiple methods of calculating your return on your investment, and I personally prefer the APY / annual percentage yield method.
Hopefully that helps!
I see. So you go for the MAXIMUM ROI instead of the maximum cash flow per month? (My math was based on a single family home @ $44,000). I created a spreadsheet where i can just plug in variables and it will calculate my return. My yield is simply the yearly NOI/Total Investment Cost.
I also noticed that you have enough cash to cover a huge repair bill. For the first time residential investor, he (I) need that positive cash flow to help cover the cost of the property, correct?
Thank you for your advice.
So you go for the MAXIMUM ROI instead of the maximum cash flow per month?
Yep. You want to earn the highest rate of interest per year as possible. By focusing on compounding your principal (your initial investment) and interest over time … the richer you will get. Spend your time focusing on doubling your money. The more doubles you get in your lifetime, the richer you will be. If you double your money 5x before you retire at the age of sixty, you’re doing OK. If you do it 10x, 20x or even 100x or more … now that’s a lot better. Make sense? So the more interest / return / ROI / APY … the better it is for you.
I also noticed that you have enough cash to cover a huge repair bill. For the first time residential investor, he (I) need that positive cash flow to help cover the cost of the property, correct?
All investors should keep some sort of minimal cash reserve, in cash of an emergency. How much? It’s up to you. I personally would say keep 3-5% of the value of your assets in cash, just in case you need it, with a minimum of $5k-7k in reserve when you first start out. So if you have one $40k property, keep $5k in the bank. If you have houses work $400k, keep $15-20k in the bank. You can do what you want, but that’s what would make me feel comfortable.
I have a friend who is a successful investor who owns about 70 residential properties…with out any debt service payments (She sold her other properties to pay off the 70 she kept). Her opinion is that over the long term, buying and holding (renting) is the most profitable method of real estate investing. Assuming her average rent is $500 per property X 70 she is making $35,000 per month…net (roughly).
Assuming an average home value @ $80,000 her equity is roughly $5.5 million.
Would you say the aim of doubling your money is more lucrative?
A benefit I see with her method is her worth rises with inflation. $5.6 million in the bank will decrease in value.
A benefit I see with your method is you can get more cash NOW as too make bigger investments.
Your friend is doubling her money - her total principal in her investment - every few years…so she is doing it too. Every investors goal, if they strive to be a successful investor anyway, is to make the most money as possible. You do that by getting the highest return possible on your investment.
By borrowing money, you can actually get a far higher return on your investment than if you did not borrow money. There is nothing wrong with borrowing money - as long as you are smart about it and don’t put yourself in a position where you have a chance of going bankrupt.
Here are some things you should checkout:
http://en.wikipedia.org/wiki/Compound_interest
http://en.wikipedia.org/wiki/Rule_of_72
http://en.wikipedia.org/wiki/Time_value_of_money
http://en.wikipedia.org/wiki/Annual_percentage_yield
http://en.wikipedia.org/wiki/Return_on_investment
I see, you were not saying that JUST flipping properties is the only way to double your money. Financing with OPM is the way to maximize your ROI, but whom does this OPM come from? Aunts, uncles and family members? Other investors? Is there a “classification” of investor that just lends money? Why would an investor with $100,000 in cash loan to another investor when he can use to invest in his own property.
(Motivatedceo, I really appreciate your replies, if you were in Louisville, KY, I would buy you a pizza 
)
Financing with OPM is the way to maximize your ROI, but whom does this OPM come from?
Aunts, uncles and family members?
Other investors?
Is there a “classification” of investor that just lends money?
Why would an investor with $100,000 in cash loan to another investor when he can use to invest in his own property.
The Hard Money Loans are “…only a few years long” - according to Wiki. How would an investor with a buy & rent strategy utilize a HML, if loans typically are only a few years in length?
Hard money loans are not meant for the long term. They’ll get you into a place, but you’ll have to re-fi out of that later. So maybe you use hard money to buy a place and fix it up, then re-fi out later when the house is worth more since it’s fixed up.
For rental strategies would you refinance out with a traditional bank?
Yeah. You’d be looking at banks or private money (individual lenders). A lot of times, lenders aren’t going to want to take the loans all the way out to 30 yrs (especially for lower cost properties). Just keep that in mind.
Why not just deal straight with the bank? Wont a HML require about the same amount of collateral or down payment?
Some banks won’t lend on a bombed out property. In fact, that’s why financing is very difficult for owner occupants for cheaper properties. Many cheap properties have some pretty big electrical, plumbing, and structural issues. These aren’t a problem for investors who deal with this stuff all the time, but most people aren’t used to fixing up soemthing like that. So let’s say you find a property with potential, but the bathroom is ripped out to the studs and the electrical box looks like a rat’s nest. That’s the type of property someone might use HM on in order to fix it up. When the value is higher after repairs have been completed, a bank is way more likely to lend on it.