I haven’t put any of my own money into deals. I typically buy FAR below market value and then get financing for 70% of market value. I usually get money back at closing (although not always).
Here’s one of my typical purchases: Large SFH purchased for $30,000 (REO). Cosmetic rehab $3,500. Market value after rehab $72,000. Total borrowed $33,500 (100% of this deal) which is only 47% of market value.
Here are the monthly numbers:
Gross Rent = $675/mo.
Taxes, and Insurance = $96/mo.
Maintenance = $50/mo.
Vacancy = $33/mo.
NOI = 496/mo.
Mortgage Pmt = $261
Positive Cash Flow = $235/mo
As you can see, this one is much better than my personal minimum positive cash flow of 1/2 the mortgage payment.
This is exactly how the gurus teach you to evaluate a property. GREAT RETURN - RIGHT? WRONG!!! The guru formula leaves out that in the last two years, I’ve had to exterminate for termites once ($700). I am now evicting this tenant for non-payment. The eviction will cost about $800 (filing fees, setout, legal fees, etc) plus at least one month’s lost rent (probably 2) of $675 and any damage. (I do have an $800 deposit, so this may be tolerable). What damage will the tenants do before moving? I don’t know.
In addition to the eviction and termites, this property is held by an entity and there are annual fees associated with maintaining an entity. I have fuel expenses doing normal maintenance and picking up the rent each month. So, even this rental with excellent cash flow is still not a great deal when you consider all of the expenses in the REAL world.
In the guru fantasy world, I have a positive cash flow of $2,820 per year or $5,640 in the past two years. In the real world, my positive cash flow for the past two years is more like $3,500 (with the expenses that I’ve outlined above. If I’d only had a guru style positive cash flow of $100/month over the past two years, my Real World positive cash flow for the entire two years would have been a whopping $260 (yes, that’s $10.83 per month) .
How many rentals would I need to make a living at $10.83 per month???