BiggerPockets

Originally posted by "Ashamann01"

So I have found a property, in a decent middle class neighborhood, the details are as follows:

[list]Property Price: $140,000 (asking price, can negotiate down but for analysis purposes keeping it here)

# of Units: 4

Total Yearly Rent: $25,800

Expenses (assuming 50% rule): $12,900

Down Payment: $14,000

PI: $7,664

Property Management: $1,290 (its about 6 hours away so no way for me to effectively manage it myself)

Cash Flow: positive $2,656 (yearly)[/list:u]

Seems to be a good deal to me... whats your guy's opinion, am I forgetting anything?

have you verified these numbers? if you can, get the rent rolls and ALL LEASES for the past 2-3 years. i'd take the sellers numbers with a grain of salt....... also are the units separately metered? who pays utilities, tenants or the landlord? waht are other similar properties renting for? what's your estimated mortgage payment?

Originally posted by "Ashamann01"

Property Price: $140,000 (asking price, can negotiate down but for analysis purposes keeping it here)

# of Units: 4

Total Yearly Rent: $25,800

Expenses (assuming 50% rule): $12,900

Down Payment: $14,000

PI: $7,664

Property Management: $1,290 (its about 6 hours away so no way for me to effectively manage it myself)

Cash Flow: positive $2,656 (yearly)

You are forgetting taxes, hazard insurance and property insurance but that might be why you came up with that $2,656 yearly quote. Are your payments based on the downpayment or without the downpayment? And what interest rate did you get quoted and if it is a real nice pricing did you get it locked in for 60 days (if so make sure it is in writing)?

Mike was that including the $14,000 for downpayment?

And you do know that he can get and interest only payment and have the money that would have gone to the principle put into an Rooth IRA account that is yielding 8%. I say if he does that and everything works out nice and dandy he will be able to pay off the mortgage in 10 to 15 years and have $1,100.00 positive cash flow a month.

Calixto, when analyzing a deal, a downpayment is not free. Even though it my money, and I don't have to pay anyone interest, its still cash that could be invested and earn a return.

Mike's anlysis assumes 100% financing for analysis purposes, even if there is an actual down payment. This is equivalent to computing the " cap rate" , which also ignores financing. Another way to consider this approach is that the down payment is earning the same rate as the mortgage, 7% in this case.

Another way to do the analysis is the cash on cash basis. If I add in closing costs (2% of the sales price) and subtract the down payment, I get a monthly payment of $857. With the $1075 monthly NOI, I get a monthly cash flow of $218 or $2617 annually. Compared to the $14,000, I get a cash on cash return of !8.7%. INMO, that's not too bad.

If you have an interest only payment, the principal will never be paid off. I guess you're assuming you invest the principal part of the payment at 9% and when it matches the (never decreasing) balance, you pay it off. I compute the IO payment to be $989 vs. $1128 for the 7%/30 year pmt. So, if I invest $139/month at 9%, I compute it takes almost 26 years to accumulate $169,600 to pay off the note. The shorter payoff period (26 years vs. 30) is attributable to the 9% return vs. th 7% rate.

If you want to put this money into a Roth IRA, you have to pay tax on it first. So, the $139/monthly payment is reduced by your current tax rate.

Originally posted by "Ashamann01"

Property Price: $140,000 (asking price, can negotiate down but for analysis purposes keeping it here)

# of Units: 4

Total Yearly Rent: $25,800

Expenses (assuming 50% rule): $12,900

Down Payment: $14,000

PI: $7,664

Property Management: $1,290 (its about 6 hours away so no way for me to effectively manage it myself)

Cash Flow: positive $2,656 (yearly)

Do you know how many bedrooms each unit has for this fourplex my friend. If so it might be more profitable for you to obtain a HUD program and section 8 the property.

Here in CA you will get: (note rents are a little higher and all most the same in Colorado too)
$1,000 for a 1Bd
$1,300 for a 2Bd
$1,700 for a 3Bd
$2,000 fro a 4Bd

add 15% for a 5Bd (from the rent of a 4Bd)
add 15% for a 6Bd (frrom the rent of a 5Bd)

Loki,

" Do you know how many bedrooms each unit has for this fourplex my friend. If so it might be more profitable for you to obtain a HUD program and section 8 the property.

Here in CA you will get: (note rents are a little higher and all most the same in Colorado too)
$1,000 for a 1Bd
$1,300 for a 2Bd
$1,700 for a 3Bd
$2,000 fro a 4Bd

add 15% for a 5Bd (from the rent of a 4Bd)
add 15% for a 6Bd (frrom the rent of a 5Bd)"
------------------------------------------------------------------------
Here in NE, Ohio

$375 for a 1Bd
$425 for a 2Bd
$600 for a 3Bd
$675 for a 4Bd

Maybe

And none of this is set in stone. According to HUDS website those figures should be much higher for my state and area, but many factors come into play. It is not all based on the number of bedrooms. So you cannot make a blanket statement that HUD/Section 8 will automatically pay a LL those rents or someone will be awful disappointed when they find out how much they are really going to get from Section 8.

Well to be 100% honest, I have no idea what section 8 means. I have seen the term thrown around on this board, but I have not researched it at all.

In general for the investment area the rents would be around the following:

1x1 - $325 per month
2x2 - $450 per month
3x3 - $600 per month
1/2 Duplex (2x2 with basement) - $750 per month

Anything more than that and you are into single family houses at which point nobody really rents because its economically cheaper to buy.

This is assuming a " decent" apartment, in generally good condition... i.e. the middle of the road apartments.

Originally posted by "Wheatie"

Calixto,
TC's point is the Section 8 rents in California are irrelevant for NJ. As Ashamann confirms, the rent's are going to be much lower.

Once again Jon I know that this is irrelevant for the area that he is in but I wanted to give him a starting point. And if you read my posting you would have noticed that I asked how many bedrooms each unit had so as I could guide him in the right direction.

Originally posted by "Wheatie"

Section 8 is a government sponsored low income housing subsidy. They will pay certain rates for rentals. The tenant pays only part of the rent, based on their family and income. The section 8 program picks up the rest. The upside is that you will get at least some of the rent each month from the government, hassle free. The downsides are you have to meet their standards and pass their inspections. Some folks have good luck with the tenants, others not so much.

Section 8 is a government program that helps out low to moderate income renters. They will not allow the participant to pay more than 30% of their gross scheduled income each month in rent. They will also cover upto 70% of the actual rent according to FMR's in the area of said building.

You are allowed to interview each participant and decide if they are going to be a tennant of yours. Once this is determined (mind you your building needs to be upto HUD standards) the new tennant and you will sign a lease agreement for one year. Once that time is up you will void or reinstate the agreement accordingly. Right now there are too many participants of section 8 and not enough housing for these individuals. You can check with your local HUD office to see for terms and guidelines, and please note that there are many benefical programs and grants offered by HUD.

Thank you!

Mike, I will have to disagree with you any several points.
Apartment complexes often have larger expense ratios as compared with a duplex or 4-plex. The reason investors buy them is because they can buy on the cap rate factor (commercial) and not the comp value (residential) which is often priced higher. Sure you have administartion, accounting, etc. but those expenses are spread out over all the residential investments which makes them less per, assuming you buy more than one or two investments. Apartments are usually operated as a seperate entity and all the admin./accounting/etc. expenses are for that single complex.

Of course I do not know all the operating expenses as the original question did not list them. It is not my property, nor did I have the benefit of looking at the P&L. Of course sellers always lie or mis represent OE and income so there is a need to estimate some items. The items I mentioned to get exact figures on are set things like insurance, taxes, etc.
There are of course averages nationwide, and sometimes, these figures are needed to get a valuation.

Any building with 4 or less units is residential, not commercial. When is the last time you got a commercial loan on a duplex?

As a full time landlord, you pay no taxes so depreciation is not an issue!?
What kind of BS is that. Perhaps the IRS would like to be introduced to you to examine your tax evasion scheme. If you make income, then you need deductions to offset that income inorder to reduce the taxes. For a full time " investor" , I would hope you make enough money to be in the position to have to pay some tax.

Principle paydown is also relevant because you receive it when the property is sold or refinanced. It is not simple lost just because you cant " eat with it" today. It remains a return on the original investment.

You have promoted yourself as a full time investor and landlord here numerous times. From reading some of your blogs, you appear to be a painter, handyman, property manager, and book keeper just to name a few. As an investor, I find my time is more valuable networking, analizing deals, negotiating them, and managing my business. You also seem to have a niche in the older sfr properties valued under 100k and enjoy managing them yourself and dealing with all the headaches as well as having a high vacancy rate (according to your blog posts). If that is what you like, more power to you. It is just not for me and may not be for others. Investing in older sfr properties with lower income tenants, I can see why you would easily have the 50% OE. I prefer new multi-family units with lower maintenance and leave the headaches up to my property managers to deal with.

In closing, let me say that I did not intend to bash your business here, only to respond to your attacks on my statements previously. Perhaps we can agree to disagree on computing NOI and the differnce between res vs. commercial calculations. I do wish you success in your business as I would any investor. (by the way, the IRS comment was in jest)

Happy investing to all.

You can break down all my statements, ridicule them, state they are silly, call them inacurrate, state I am a guru, and type condesending statements unntil your heart's content. I am not a guru nor would I ever want to be one. Furthermore, I do not have to prove myself to you and your landlord business. I have plenty of residential sfr and mult-family rentals all earning me cash flow, and I do much larger commercial deals on a daily basis, but that does not matter here. Your statements are your opinions only and that does not mean they are correct. You like to spout off here as the all knowing and everyone else who does not adopt your ideas is wrong or silly. Wake Up

Find me a newbie investor who has an entity with credit history that can guarantee a loan - I didn't think so.
Loans are acquired and guaranteed personally and then title can be simply transfered into the entity. Entitlys need at least 3 years in business and a alrge income/asset base in order to acquire loans on their own. What newbie has an entity with that kind of history? Entity formation is also over sold by the gurus. Do not be a slum lord or negligent landlord and there will be no lawsuites. A simply umbrella policy of 1-2 million would also suffice for a small time investor and give the same protection for less money.

Not all investors have the ability to self manage or do their own handyman work nor do they live near their investments, nor do they all want that type of work load. Many investors have to go to other states to invest which requires building a team of professionals to do the majority of the tasks. Many do not have the time to put in 12-18 hours a week doing repairs and management because they have full time jobs. That is the beauty of RE investing. You can have your money work for you while you continue to earn your W-2 income. Many newbie investors are not capable of jumping into the business full time. By your preached methods, they have to leave work to go paint their rental house.

You keep spoting off that everyone needs to buy properties with a 2% rent to purchase price ratio. Show me 1 new construction property over 200k anywhere in the country that you can get 4k per month in rental income. All you can show is some dump you got for 20k or 30k and rent it out for 500 per month. That is the only 2% rule example you have and those properties have very very low potential of great appreciation for the future. Even if they were to double in 10 years, thats only 50K or 5k a year, big deal.

My duplex for $155k comes with well screened, paying tenants with large security deposits, lease contracts to protect the owners for at least one year terms, and have $0 maintenance because they are new with builder warranties. This is simply a different strategy than your low income rehab rentals for 30k. They are also in areas which are growing and have great upside potential. Your low income sf rentals will not have the same future appreciation. Oh, excuse me, your family can't eat appreciation, right! So you keep doing your landlord business and I will do mine. In 10 years time, you will still be painting houses and trying to find the next low income tenant who will trash your house, just to sustain your " cash flow" I will have cashed out on many investments with large chunks of equity due to the appreciation and principle paydowns. And that will be in addition to the 10 years of cash flow.

As I said before, lets agree to disagree. You have your methods that work for you, fine. That does not make my methods poor, silly, or wrong.
I am very successful in my business and so are my investors.