How do you gather more properties?
Real Estate Investor · Renton, WA · Member since 2008 · 16 posts · 0 votes
I have a Single-family and a Fourplex that are rented out. Between the two I'm positive, but not by a huge margin. How do most of you gather more properties without having a huge cashflow? Maybe start a business?
I don't have an answer to your question buy your children sure are cute! :)
Having said that, I am currently taking a class on lease options and if you can aquire a property using this strategy it is no cash out of pocket, no mortgage qualifications and if it doesn't cash flow you can walk away. I have not tried this approach personally, however many people have and say it works nicely.
That's all I have to offer. Just a thought!
Heather
Operating rental properties IS a business. Each and every property you buy should significantly add to your net worth AND provide you with increased cash flow. If so, then the more property you own, the better the bank should like you.
Mike
Todd have you put together a balance sheet for yourself?
Do a real one where only assets that create money or real income like from a job is shown in the asset column. Don't put your boat there for example. And in the expense column put everything that belongs there. EVERYTHING. A simple excel spreadsheet will do the trick. You should do one each time you buy new property to see if its the right deal. And do one each year for the hell of it. Make it like brushing your teeth.
Really great understanding of simple personal balance sheets and income statements, can be learned quickly in Robert Kiyosaki's books. So buy the first 2-3 in the series and study them. You will learn quickly how to create and understand your balance sheet and develop it.
And Mike is right your properties ARE real businesses. Again Kiyosaki's books will help you start to think this way.
Let me tell you, once I had a good picture at my real balance sheet, I saw where money/wealth was made and where it was hidden. You may have some equity hidden in those two properties for example. But you can not know until you do a real balance sheet.
Don't believe a banker either. They will typically under value your personal wealth esp right now. But if YOU know it you can shop around even now.
I would also consider all missed income streams in your 2 properties by looking at their budgets. Are you paying for things your tenants should pay for? Are there efficiencies like low flow toilets or florescent bulbs you are missing? Have your tenants been in the house for more than a year? Why not raise the rent 4% or 10%?
I would suggest analyzing the 2 properties by creating their operating budgets, and then seeing where you can increase income and decrease expenses. Also make a "business plan" for the portfolio you now have by projecting your newly gained knowledge out 2-3 years. Where do you want to be?
Good luck to you.
Diane
Todd, what is it that's holding you back from buying more properties? Banks generally count your rental income, discounted by 25%. Good rentals should pay for their own payments. If they don't, you shouldn't buy them.
If its down payments, you might look at creative options like hard money/refi, lease options, subject to or wraps.
If its the number of loans limits, check into portfolio lenders and commercial loans.
Diane - thanks for the info. I'm actually pretty handy with Excell and built a detailed profit/loss spreadsheet to examine prospective properties. I have about 180k in equity on the single-family, but am wondering how much debt I really want/need to take on. I'll definetely check into those books.
Thanks again,
Todd
Jon or any one for that matter, can you please explain what a wrap is. I know all the other techniques but do not know what a wrap is.
Wraping one mortgage with another. In some way the same as a subject to, but rather than the buyer just taking the existing mortgage, a new mortgage is created. It can be at a higher price and a higher rate than the existing mortgage, or maybe have a down payment.
So how much debt is too much? I feel like I should have more of an emergency account built up before I take on another loan. I've heard a good rule of thumb is 3 months worth of payments in savings for each rental property. This would take me a while since I am just barely breaking even. Any thoughts?
It sounds like your problem is cash flow - not the lack of reserves. Businesses MUST have cash flow to survive. If you're buying property that doesn't cash flow properly, your business won't survive in the long run. So, my suggestion is to work hard and find properties at a huge discount from this point forward. They are out there, but you will need to do the work to find them.
Good Luck,
Mike
If you own 100 rentals, you would not need to have the same amount of reserves for each one as if you owned one property. The likelihood of having a major problem with all of them at once is very small. However, if you own 100 SFRs, and furnaces need to be replaced after 20 years, you need to budget for 5 furnaces each year. You need to budget for some number of vacancies and releasing costs (paint, fixup, advertising, etc) because some fairly large number of people WILL move out of those 100 houses each year. You'll have to buy new fridges (if you provide those), and new roofs.
None of that really comes out of your reserves. It comes out of your operating funds, and is part of your normal budget.
I suspect when you say "barely breaking even" you mean the rent barely covers the PITI payment. If thats the case, you're not breaking even, you're losing money. As soon as you have a vacancy, you'll be out of pocket. Furnace? out of pocket? Need to paint after that tenant moves out, but haven't in 10 years? out of pocket.
The rent needs to be significantly above your PITI payment to have a good rental. A rule of thumb is "break even" is when rent is 2X the P&I part of the payment.
Todd,
I second what Hassan and the others have said. Don’t buy a property that doesn’t cash flow from day one. Everyone makes mistakes along the way. Learn from it and move on.
As far as finding properties, here are some thoughts. Visit you local investor’s association and network; tell everyone you are an investor and looking for properties; run an ad in the paper; call every FSBO in the paper (or better yet pay someone else to call them and then you only call the best of those); send out flyers, postcards or letters; use realtors depending on what you are looking for and finally use the internet to find sellers. It takes work to find them. If it didn’t everyone would do it. It isn't rocket science but it is work. Be consistent with whatever you use.
Good luck
Mike
Great advice, I really appreciate it. I spoke with multiple investors familiar with the local market before buying this fourplex. They all agreed it was the best deal around here. Finding something that provides 2X the PITI would have to be out of state. As a "hands on" guy, I'm less eager to look for something so far out of my reach. For those of you who are spread out that far, how do you keep tabs on your properties? How do you know you are getting your money's worth for repairs/upgrades and that they are done right?
Thanks!
Todd
You need 2X the P&I, not 2X the PITI. The T&I are expenses.
The "best deal around here" may still be a terrible deal. Around here, a typical fourplex will sell for $300K and get $500/month/unit and rent. If one sold for $200K, it would be the best deal around, but would still suck cash out of our pocket each month. If you're buying deals like that, you don't want to accumulate too many (really, any) or you'll go under.
The idea here is to make money, not accumulate property.
Jon,
I appreciate your advice - clearly you've been doing this for a while. I guess I'm not too far off. Your example of $300k producing $500/unit would give a GRM of 12.5. The building I purchased has a GRM of 11.2 (purchase of $440k with Monthly gross rent at $3275).
Actually, I've only been doing this seriously for a couple of years. I only have one rental at present, though I've been doing other sorts of deals. I spent a lot of time figuring this business out before jumping in, though. And looked at a boatload of houses, easily over the 100 number Mike sometimes mentions.
My example of the $300K fourplex with gross income of $2000/month was meant to be a bad example. Even at $200K, which would be a relatively "good" deal, pricewise, would still be a bad deal.
Here's how I would evaluate that, knowing nothing else:
Rent: $2000
Expenses: $1000
NOI: $1000
Payment: $1330 ($200K, 7%, 30 years)
Cash flow: $-330/month
Bzzzt!
Now, I generally use 40% for expenses for a couple of reasons. At the moment, I can manage them myself, and I'm willing to do that for free. I have a full time job, so I don't need to PM income. I see some potential for appreciation in my farm area, because prices have just been slammed from foreclosures, there are lots of new jobs, and rental demand is very high for SFRs. I also have the long term, perhaps overly optimistic view, that rents will trend upward, as will expenses, but the payment will remain fixed.
So, if I was looking at a fourplex at $500/unit, I would figure the maximum price as:
Rent: $2000
Expenses: $800
NOI: $1200
Desired cash flow: $0 (figure break even, for the moment)
Maximum payment: $1200
Maximum loan: $180K (7%, 30 years, rounded)
I'd subtract off repairs, holding costs (e.g., for vacancies), and money costs (e.g., for hard money for a hard money/refi deal) and that would be the most I'd pay to just break even.
That's a GRM around 7.5, based on my all-in cost.
More realistically, I'd want some cash flow. So, at $100/unit, my max payment is $800, which makes that starting number $120K. Which is why I'm not buying these overpriced fourplexes, even if they're priced below other similar buildings. I have tried to buy another fourplex where each unit would rent for about $800 and that was listed at $180K. Needed about $20K in work. Unfortunately, despite being on the market for several months, there was another offer submitted just a couple hours before mine. Go figure.
I'd evaluate your deal like this, using a conservative 50% ratio, since I don't know anything to make me bump it down.
Rent $3275
Expenses $1637
NOI $1638
Payment $2927 ($440K, 7%, 30 years)
Cash flow $-1290
Ouch! I'm guessing when you said "positive, but not by a huge margin", you mean that once you tack on taxes and insurance, and considering you probably made a down payment, that your PITI payment is just a bit under the $3275 gross rent. As soon as anything goes off track, even a quick vacancy when a tenant moves out, you're in the hole. With four units, I'd guess you have a moveout every six months to a year, and it takes a couple weeks or longer to re-rent the unit. That probably enough to actually put you in the red. A lengthy eviction will really hurt, as will any major repair.
As it stands, you're going to be coming out of pocket for this building at some point. If you want to build a portfolio of rentals, you need better deals.
Jon is exactly right (as usual). This is a terrible deal if your intent is to make money. The answer to your original question is that you don't acquire more properties if they all have numbers like this one. Moreover, why would you want to acquire more property? If every property you own causes you to lose more money, you would be better off never buying another.
Mike
Thanks for your replies - I really do appreciate it. Your calcs are interesting to consider. I've had rentals for a couple years and have never paid out 50% in maintenace, especially with all the tax breaks (mortgage interest, taxes, maintenance, etc). But I've been proactive at taking care of potential problems.
However, your point is well taken. As we look for more properties, I see that in order to get really good cashflow (not just breaking even) it will take a lot of "low ball" offers. I suppose if I put enough of these offers out, someone will bite. Sound right?
If you own just a couple of properties, like you and me, you can expect your expenses to be either much above or much below the 50% guideline. If my property stays rented all year, and nothing goes wrong, and no major expenses are incurred, then my expenses will be very low.
If, on the other hand, my tentant decidees to quit paying rent, and I have to do an eviction that takes two months, and they wreck the place in the meantime, I'm out two months rent, plus all the damage. So, my expenses would be much higher than 50%.
If your right on the edge, with rent right at PITI, then the least little hickup will have to come out of pocket. Even a quick two week vacancy is half a months rent that you'll have to make up out of pocket.
OTOH, if you own 10, 20, or 50 units, you can bet you'll have an eviction once a year or more often. If you own 50 SFRs, you must count on replacing two or three furnaces every year. A roof or two every year. So, if you're planning to get big, you have to plan for these expenses and not just hope for the best.
The tax breaks are way overrated. The useful part is that your net rental income is largely tax free. If you make significant income ($150K AGI) there's no offsetting regular income with passive losses. Over $100K AGI its limited. Even if you can take this, its limited to $25K. So, even it if works at first, it doesn't work work once you get more properties. Based on what you've said, I calculate your taxable income on that building at -$12,500 a year. So, if you have two of those deals, the third has no tax advantage for you at all. The only way around that limitation is to become a real estate professional. That means you have to spend at least 750 hours a year doing this (not too hard) AND more hours doing this that you do anything else. So, if you have a fully time job, you'll have to spend at least 2081 hours a year doing real estate.
Todd,
I totally agree with Jon. The tax breaks or potential tax breaks are just a bonus or gravy. They should never be included in deciding a deal is ok. If you find yourself using tax breaks to convince yourself you didn’t make a mistake in your purchase, you did make a mistake in your purchase IMHO. Cash flow is what matters. I bet if you figure out your expenses not offset by tax breaks, your expenses are probably much higher than you realize.
If the numbers don’t make sense, they don’t make sense, no matter what the brokers or sellers tell you. Be glad you learned this lesson now before you owned 10 or 20 money pits. What if they change the tax code again like in 1986 eliminating a lot of write-offs/deprecation? Think it can’t happen? That is exactly what all the people thought in 1985 as well.
Try looking at it this way. Try to think of it in terms of good debt and bad debt. Bad debt takes money out of your wallet and good debt puts money into your wallet. Think about this property. Assuming it is costing you money (which most here will agree with rightly or wrongly), then it is bad debt and costing you money. Now assume you want to get more involved with RE investing and add to your portfolio so you can quit working or do whatever your goals are. How many properties like this can you afford to have? That depends on how good your job is and what you make. My point is, now your job pays for your lifestyle and also now has to pay to support this property and any others you buy with the same parameters. Now you are more reliant on your job than ever to pay for both your lifestyle and your property or properties. That is a step backward in my book. By the same token, lets assume your next property you buy right and it has positive cash flow and puts money into your pocket. Now how many of those can you have? The answer is as many as you can find. These are assets that are providing a return and making you better off, moving you toward your goals. Just something to think about from another point of view.
The best part is you took Action and bought a couple properties. That puts you ahead of many people already. No matter what happens you have probably learned a ton. And for that, you should be commended.
Good luck
Mike
Jon and Mike,
Thanks for your counsel. I can see that my target has been a little off. I appreciate your advice. My two properties have been a great learning experience and I really do enjoy the management side of things. I've learned some lessons, and I want to be all the sharper in the future.
So, getting back to a question I had, how do you secure these types of properties? These types of deals would have to be a short sale/foreclosure around here, or acceptance of a low ball offer. Do you have an agent willing to make these offers, or do you submit them yourselves?
Thanks again,
Todd
This is a real challenge, IMHO.
You can try finding REOs. I find lowballs don't work. The bank will only come off their listing price a little. Over time, banks will slowly reduce the price. You have to watch like a hawk for new listings and price reductions, and get your offer in with the price is right.
Other members have reported a lowball offer will occasionally get accepted.
You can try direct marketing. Foreclosures are the popular one. Vacant houses are another.
If the properties are on the MLS, you should get an agent. No reason not to. Just don't sign an exclusive agreement. I'll only involve an agent is a house they bring to me.
Find your REIAs and join. Look for wholesalers in your area.
Let everyone you know know you're buying houses.
I have more then 3 properties and I write off items on each of them every year.
You can always deduct the expenses from your rental income to reduce or eliminate taxes on the rental income. You may even be able to shelter other income if your AGI is under $100k and the passive loss is under $25k. There's nothing magic about three. I was simply estimating the passive loss on this property to be about $12.5k. So a third one would not generate an offset.