BiggerPockets

From Scott:

Hey Jordan -

Perhaps we should take this to a separate thread...we've already hijacked the OP's thread for nearly a page...

But, quick response here...

Yes, long term you will be losing nearly that amount each month/year (a little less since your interest rates are lower than I modeled, but still a good bit).

You don't see the losses yet because expenses aren't going to be distributed evenly over time like income is. For example, every time a tenant leaves, you'll likely lose a month's rent plus spend a couple hundred dollars getting the property ready for the next tenant (cleaning carpets, painting, repairs, etc). Since you probably haven't had any tenants move out yet, this hasn't been an expense you've incurred, but expect to every 1-2 years, on average.

As another example, you will occasionally have tenants that stop paying rent. By the time you go through the eviction process, you may have lost a month's rent, some legal costs and the repair costs for any damage that was done by the pissed off tenant. You probably haven't seen those types of expenses yet, but you will eventually.

Also, you have new properties, so you haven't paid any capital costs yet. But, you will. On average, expect that every 20 years you'll need to replace the roof on each property and replace the HVAC system. Also, every 10 years or so, you'll need to replace the hot water heater and cabinets. Every 2-3 years, you may need to replace the carpet. Over a 20 year span of time, you'll likely spend $10-15K in capex costs. That averages to $40-60/month per house that you're spending without realizing it...but you will eventually!

Right now, the money is coming in but not really going out (as they are new properties with new tenants). Pretty soon, it will start going out, and soon after that, it will be going out faster than it's coming in, and later on, it will be going out MUCH faster than it's coming in.

These are the things that many new landlords who purchase overpriced properties don't consider. They get their first rent check, pay their mortgage and pocket the rest, thinking, "Wow, that was the easiest money I ever made!" They don't think about the fact that pretty soon the expenses will eat up up everything that was put into the pocket...and much, much more...

Perhaps cut and paste your last post (about your three properties and their purchase/rental numbers) into a new thread in the Rentals section of the forum...you'll probably get a lot of good feedback...

Another fallacy you should consider is that new homes have no maintenance. If you rent a house out there will be repairs and maintenance cost regardless of age - toilets get plugged, garbage disposals get clogged or jammed, things break. When tenants move out you will almost always have some painting to do. Carpets often require cleaning or may have stains to remove, blinds don't seem to last long, windows break.

You may have less in capital expenditures in the early years, but I have seen some very shoddy work on some new homes that would require major repairs in short order.

IMHO the property needs to cash flow from the beginning and you want to account for repairs and reserves even on a brand new home.

In my experience it is extremely rare to have a new home cash flow. If you bought it as a distressed property you might be okay, but I would still want to make sure the numbers worked.

Originally posted by Charles Perkins

Another fallacy you should consider is that new homes have no maintenance. If you rent a house out there will be repairs and maintenance cost regardless of age - toilets get plugged, garbage disposals get clogged or jammed, things break. When tenants move out you will almost always have some painting to do. Carpets often require cleaning or may have stains to remove, blinds don't seem to last long, windows break.

You may have less in capital expenditures in the early years, but I have seen some very shoddy work on some new homes that would require major repairs in short order.

IMHO the property needs to cash flow from the beginning and you want to account for repairs and reserves even on a brand new home.

In my experience it is extremely rare to have a new home cash flow. If you bought it as a distressed property you might be okay, but I would still want to make sure the numbers worked.

Do I know it. I've had to repair a furnace already. #$%^*! The property I'm buying right now is a foreclosed property. 3 years earlier it was bought for 100k more, but the cashflow still just a little above break even, not the 19-50% above PITI as recommended.

I may have to rethink my strategy of getting new SFH's as my RE vehicle investment.

Originally posted by Jordan L.

My 176k property is getting me $1100 per month. My 204k property is getting $1350 per month. The new property I'm getting for 196k is anticipated to rent for $1500 per month.

Where are the properties located? There are many areas you'll get higher rents for those price tags, but if they're in your neighborhood of Newbury Park/Thousand Oaks, then I believe you'll make great money in the long run. You just have to be able to carry the negative cash-flow for a few years still and wait for property values and rent rolls to increase while your expenses remain relatively fixed.

Originally posted by Bryan Patton

I'm still trying to figure this 50% thing out.

Basically, you are assuming that 50% of your gross rents will go to expenses, vacancy and capital costs, leaving the other 50% to go towards mortgage payment and cash-flow (profit).

So, if a place rents for $500/month, you can assume that all expenses/vacancies/capex will eat up about $250 of that (give or take), leave you with $250/month to go towards your mortgage and your profit.

If your mortgage is $150/month, your profit will be $100/month. But, if your mortgage is $300/month, you'll be losing $50/month.

The bottom line here regardless of how accurate any of the numbers are... is that these deals are not DEALS!

They will very soon become severe cash drains and your thoughts about being a real estate investor will very quickly be shattered.

Here are the facts...

You cannot count on appreciation to help you gain any value. If you overpay now, you are stuck.

Assuming that you can continue to get those rents things will be fine... but with the uncertainty of the ecomony you need to be conservative with your numbers... because you may not get those numbers in any given rental situation.

On average you will need to keep a tenant in a property for 3 years to ensure profits. Since you are starting out in a negative cash-flow situation it won't matter how long the tenants stay... but for every month you go without rent you are going further and further negative with very little hope of ever recovering your investment.

Sorry for being so frank!

If you can get out of the 3rd deal... do it! Even if it costs a few bucks now. That cost now will be very cheap compared to what is most likely in store for you in the next year or two.

Best of luck!

Pete

Originally posted by Peter Giardini

The bottom line here regardless of how accurate any of the numbers are... is that these deals are not DEALS!

They will very soon become severe cash drains and your thoughts about being a real estate investor will very quickly be shattered.

Here are the facts...

You cannot count on appreciation to help you gain any value. If you overpay now, you are stuck.

Assuming that you can continue to get those rents things will be fine... but with the uncertainty of the ecomony you need to be conservative with your numbers... because you may not get those numbers in any given rental situation.

On average you will need to keep a tenant in a property for 3 years to ensure profits. Since you are starting out in a negative cash-flow situation it won't matter how long the tenants stay... but for every month you go without rent you are going further and further negative with very little hope of ever recovering your investment.

Sorry for being so frank!

If you can get out of the 3rd deal... do it! Even if it costs a few bucks now. That cost now will be very cheap compared to what is most likely in store for you in the next year or two.

Best of luck!

Pete

Thanks for your advice.

I'll definitely keep this all in mind for a fourth property, but I want to proceed with this 3rd property and see if I can get this expected rent.

Originally posted by Peter Giardini

Assuming that you can continue to get those rents things will be fine...

Personally, I think this is even a little optimistic (though perhaps you were trying to be optimistic, Peter :)...

Given that the first property needs to operate at a 19% expense/vacancy/capex ratio just to break even, I'm not sure that have a paying tenant every month forever would still cover the costs.

It sounds like he has a PM, which is going to cost somewhere in the 8-14% range right there. Taxes and insurance in California could easily be another 10-20%. And capital costs could easily be another 5%.

So, even with no vacancies, no concessions, no rent loss and no repair costs, I can't see how this investment could make any long-term profit...

Again, hopefully I'm missing something...

Jordan - Using the first property as an example, can you tell us how much you're paying for taxes, insurance and property management?

J... just trying to be realistic at best.

For the time, money and aggrevation with the properties, Jordan could make much higher returns.

I wish Jordan the very best... but I just don't see these properties being a great way to get into this business.

Pete

Originally posted by Charles Perkins

Originally posted by Jordan

I live in Newbury Park. My investments are in South Puget Sound. I'm priced out of where I live, certainly I can't purchase new construction and rent out without a massive negative cashflow.

Is their a Puget Sound in California also? I live in the south Puget sound area in Washington, close to SeaTac airport. All of my investments are nearby and they all cash flow nicely. You can purchase SFR properties in this area that cash flow, it takes time to find them even now and you have to be patient not falling in love with any property.

Gosh I wish. No I'm an out of state investor. I've been shopping around, but I really do prefer new construction. Which cities do you target if you don't mind my asking?