BiggerPockets

Let's say $2,000 for the rent.

Gross rents: $2,000
Operating Expenses: $1,000
NOI: $1,000

Mortgage Payment ($155K, 30 yr, 7%): $1,031

Monthly Cash Flow: $31 LOSS

This is NOT a good deal.

Mike

Ok, partially because I personally know how much MA SUCKS on cashflow, I'd like to help you out here. Found two 2-unit properties on realtor.com you should take a look at in Lowell.

http://www.realtor.com/search/listingdetail.aspx?pg=1&cmid=1076765%2c1076768%2c1076769%2c1076770%2c1012335%2c1076773%2c1076775%2c1012346%2c1012351%2c1076784%2c1076785%2c1076787%2c1012368%2c1076793%2c1012385%2c1012387%2c1076802%2c1012400%2c1076813%2c1012430%2c1012433%2c1076822%2c1076828%2c1076829%2c1076830%2c1076831%2c1076834%2c1076837%2c1012463%2c1076839%2c1076841%2c1012483%2c1012494%2c1076848%2c1012514%2c1076865%2c1012543%2c1076876%2c1076877%2c1076881%2c1012558%2c1012560%2c1012566%2c1076887%2c1012570%2c1076889%2c1076891%2c1076895%2c1012582%2c1012594%2c1076899%2c1076902%2c1076903%2c1012608%2c1100887%2c1012506&typ=4&sid=68087010bf724995bba86379d0586c36&lid=1092612088&lsn=1&srcnt=1088#Detail

http://www.realtor.com/search/listingdetail.aspx?pg=1&cmid=1076765%2c1076768%2c1076769%2c1076770%2c1012335%2c1076773%2c1076775%2c1012346%2c1012351%2c1076784%2c1076785%2c1076787%2c1012368%2c1076793%2c1012385%2c1012387%2c1076802%2c1012400%2c1076813%2c1012430%2c1012433%2c1076822%2c1076828%2c1076829%2c1076830%2c1076831%2c1076834%2c1076837%2c1012463%2c1076839%2c1076841%2c1012483%2c1012494%2c1076848%2c1012514%2c1076865%2c1012543%2c1076876%2c1076877%2c1076881%2c1012558%2c1012560%2c1012566%2c1076887%2c1012570%2c1076889%2c1076891%2c1076895%2c1012582%2c1012594%2c1076899%2c1076902%2c1076903%2c1012608%2c1100887%2c1012506&typ=4&sid=68087010bf724995bba86379d0586c36&lid=1097768463&lsn=2&srcnt=1088#Detail

Now I know nothing on Lowell rent prices. Get a list of repairs necessary to make the spaces livable, find the rents and see where these take you.

Thanks Tim, We looked at the house in Montague...Needs ALOT or work, more than 100K, all units need a complete overhall. As far as Lowell, I think it might be too far for our 1st renal property. It's at least an hour and a half away. Do you recommend starting close to home for your first couple of deals? MA does suck as far as cash flow, perhaps we should start looking in southern VT and NH. Do you know anything about those 2 states?

Mike, thanks again for your reply. I read to take 40% as far as NOE go, looks like you suggest %50? My question is, considering we will have a brand newhome at this point would %40 NOE be more realistic? We " should" have no huges expenses for a long time, ie roof, electric ect. What do you think?

Thanks again guys!

Mike, thanks again for your reply. I read to take 40% as far as NOE go, looks like you suggest %50? My question is, considering we will have a brand newhome at this point would %40 NOE be more realistic? We " should" have no huges expenses for a long time, ie roof, electric ect. What do you think?

Throughout the United States, operating expenses run 45% to 50% of gross rents. Therefore, I use 50% to be conservative.

That 40% figure you saw probably did not account for vacancies or capital expenses, which is why it's 10% lower than the 50% figure I use.

Even though you may not have large capital expenses for a long time, you still need capital expenses in your equation or you won't have any reserve for theses expenses when you incur them in the future. In addition, you will CERTAINLY have maintenance even if things are all new in the beginning.

That 50% figure doesn't only include the expenses that come out every month, it also includes the expenses that only occur occassionally. For example, significant damage done by tenants in excess of the security deposit (often thousands of dollars), is an expense that may only occur once in a many years. However, when it does occur, it can wipe out literally many years of cash flow if you haven't accounted for it. That is an error that is fatal for many businesses. I see it all the time and have bought numerous properties from failed landlords that have made this mistake.

Good Luck,

Mike

If your saying that you have a new roof, appliances?, etc...you should be fine.

Appliances? The wrong tenant can ruin the appliances in less than a year.

Mike

I've been reading a bunch of the discussions where the 50% rule has been brought up. I have to say, I had may doubts that it was anywhere close to that high. So, I finally decided to go back and check the history on both my duplexes and compare. Here's the results:

Duplex 1
I've owned for 10 months. It's a 30 year old property that had been neglected. It needed minor cosmetic rehab work when I purchased it, and it was empty. So, after replacing some carpet, painting the whole place, and some other minor improvents, here's where I'm at.

Expenses $9600 (including everything but mortgage)
Income $17300
Expenses=55% of gross rents

Duplex 2
I've owned for 8 years, and it was 3 years old at the time of purchase and needed nothing but a little touch up painting at the time.

Expenses $31200 (including everything but mortgage)
Income $104200
Expenses=30% of gross rents

Total expenses between the two = 34% I do expect this number to go up a as the property that is now 11 years old starts to need more repairs. However, the property that I purchased last year will not need as much work over the next year or two since I have taken care of most of it. So, I would think that 40% is a decent long term average between these two properties.

In any case, I think the amount of your expenses will be dependant on the quality of tenants that your property attracts, the age of your property, and the number of units (the duplexes probably require a little less maintenance than say an 8 unit).

What Mike is saying about 50% costs is probably a good rule of thumb for conservative cashflow estimates. It'll pretty much garauntee that you cashflow if you use that number when you are looking at purchasing a property.

I have averaged around 5% vacancy, just from tenants moving in and out. My numbers are actual income, not scheduled. So, my numbers would include the lack of income for those months when the properties are vacant.

Also, those numbers include one eviction with a tenant who did about $2500 in damage, and one tenant who broke the lease, and moved out early.

I have averaged around 5% vacancy, just from tenants moving in and out. My numbers are actual income, not scheduled. So, my numbers would include the lack of income for those months when the properties are vacant.

That means that your expenses are about 35% and 60% of the (scheduled) gross rents on your units? What are you including in those figures for management? And what reserve are you including each month for capital expenses?

Mike

Expenses $9600 (including everything but mortgage)
Income $17300
Expenses=55% of gross rents

" My income that I listed was actual income, not scheduled income. Therefore, if I had a vacancy, there was no income for that time frame. So, the 30% and 55% numbers include vacancy."

Unfortunately, the math doesn't work like that. The 50% rule is based on Scheduled Gross Rents and includes the vacancy as an expense. If you have about 5% vacancies, that means that your Scheduled Gross Rents would be about $18,200. Your expenses with the vacancies would be $10,500 ($9,600 + $900). Therefore, your expense ratio is $58%. Now, add in the allowance for Capital Expenses, about 5%, and you're up to 63%. You didn't mention management. If you're not including management expenses, then that's another 10% (or you're working for free).

Assuming that you ommitted these expenses on your other property, that 30% will become about 50% when you include the management, vacancies, and capital expenses.

My only point is going through all of this is that all of these expenses do occur in the real world. When you have a small portfolio, these expenses don't happen often and it's easy to ignore them. Unfortunately, as your portfolio grows (or even with a small portfolio over the long term), these expenses catch up with you and must be accounted for (because you have to spend real money to pay them). In your examples, your 30% expenses became about 50% when you include all the expenses and your 55% expenses became about 73%. Obviously, your 73% included the startup expenses, so over time this should come down to the normal range of 45% to 50% or something close to that.

Good Luck,

Mike

Well Mike and Deuce,

I think between the 2 of you I can consider myself well informed!! :lol: