BiggerPockets

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

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

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

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?

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

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.

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.

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?