How are you making any money with Rentals? OK... I know. Pretty general question. But truly... how are you doing it to your satisfaction. Now here is the reason for the question, and of course I would like to hear input. I am brand new to this forum, so I suppose I would like to get a feel for how everyone 'thinks' or processes their real estate investment. OK.. I purchased a home for 40K that will rent for $650. After all expenses, debt service, vacancy and maintenence, the cash flow will only be $145/mo. So I will be receiving $650/mo but only keeping $145/mo until the first small crisis that will cost 2K (roof/ furnace/ toilet, etc...) AT which time will not make any of this worth my time. NOTE: I will be doing all of the property management, etc... sleepless nights, etc... So..... why do you do it? Honest question. And honestly, I appreciate all responses.

@Anthony Newbold How much do you have into the property? If you put down 20%, then your cash on cash return is like 20% with that $145 a month. If you put down 25% your cash on cash is 17%. Ive got to say those are phenomenal returns. Yeah $145 a month may not be a large amount of money, but you did not invest a lot of money. (I was not factoring in closing costs just to make the math easy) What is investing? It is deploying capital to get a return on that capital. If I am deploying my capital to get a 20% cash on cash return, I would do that every day.

A first property is a learning process You aren't losing money you are making that $145.00 a month or $2,350 a year. You are getting a large tax loss that is saving you money every year. You are paying down your principal every year and your property should be appreciating 2% or 3% every year. You are getting ON The Job Training. Manage it your self and make another 10%. It's not the worst senario in the world and you have your start in Real Estate Sounds OK to me.

Do the deals where the numbers work for you and don't do the deals that don't pay you enough. If you can't go through a house and see what will need to be fixed soon pay for an inspection. Most of mine I buy in decent shape and mainly do paint, clean, and flooring to rent it. In 5 years I try to have the rent buy the house and repairs. Others that need more work I just try to double the value of the house in 5 years. An average deal for me is paying 20-25k spending maybe 1k to fix it up right away and rent it for around $700. I have about $100 in interest that I pay (fully financed) $150 covers taxes and insurance, I manage them myself, so that leaves $450 a month ($5400 a year) for cash flow, paying it off faster, and to cover repairs as they come up. That can cover your major expenses which could also increase your rent, increase the value of the property and you should run out of major things to fix before having to replace them again. Most things aren't that expensive and those that are like a roof should last at least 30 years. Stuff like a toilet is $100 so that month I make $350 rather than $450 and don't worry about the toilet again for quite a few years.

This Investor already bought this property and it's a done deal. He needs to know what to do from this point on. There is no point to saying he should not have purchased this property. That part is Over. He has learned what is wrong with this buy. Now it could be worse. It could be a complete loss. Let him talk to his accountant and see what he can retrieve in Taxes plus Principal pay down, plus appreciation. He could have invested the same amount in a Geru course and gotten sick behind that. Instead there are some positive things he can focus on and one of them is his education in Real estate. He has done his first deal and the second one will be better. I wonder how much money he put down here?

I am going to go against the grain a bit here, and not try to convince you that is an acceptable return. I wouldn't have bought that house. Your profile says Indiana. So I am going to assume we are talking about a no-appreciation area, in the North. In such a case, being in a property that cheap with rent that low can murder you. Cash on cash or IRR calculations aside, big ticket maintenance items will eat years of cash flow overnight. You need to scale up somehow. Either with more properties like Seth says, or with more expensive/higher rent properties. I will take a $100k house that rents for $1000 over a $40k house that rents for $650 every time, regardless of CoC. Especially is there is a reasonable prospect of appreciation. The roof on the $100k house will not usually cost 2 1/2 times what the roof on a $40k house does. Grow or die.

Anthony, Here's another angle to look at. Why are you investing can make a big difference on the returns expected. I am fortunate that I have a business that I have built up that gives me a nice income. So with my REI I am not looking for a large cash flow at this point. In fact I put my properties on 10 year amoortization to a maximum of 15 years. I am looking for income from the paid off properties when I retire versus income now. So when I retire in a few years, I will have free and clear properties that will then provide the cash flow that I need at that point. Jim

How do I make money doing this? I don't buy deals that don't match all three of my buying/profiting criteria: 1 - I must get enough cash back within 3 months to invest immediately in the next deal. 2 - I must NCF at least $300/month...with the "small crisis" proactively covered...and not paid for by relying on part of the NCF 3 - I must get all of the cash I put into the deal back within a minimum of 12 months

You need to run the numbers before you purchase to determine if the return is going to be worth the time, investment and effort. There's not enough information here to determine how much you're making per month (assuming the $145 is before maintenance/capex), but if your cash-on-cash return is very small, it may not be worth the investment. Find deals that ARE worth the investment. Run the numbers upfront. Make sure you factor in everything, long-term. For example, I only do deals where long-term I'll generate 12%+ returns -- and that includes someone else doing the management for me so that I can be relatively hands-off. Here's an example of that type of deal: https://www.biggerpockets.com/forums/522/topics/11...

@Anthony Newbold I hear you loud and clear. I would never buy a low end property for a net of a few hundred bucks. This is why I would rather loan the $40k that is secured by the property. You get the return without the fuss. Especially if there is little upside for appreciation. To answer your question as to why I do it.... Return on investment, appreciation upside, and high rental demand. High rental demand gives you higher quality tenant. Higher quality leads to low maintenance costs and they stay longer. I am from the school of thought that appreciation potential is one of the primary factor investment choice. Also, if you have a property meeting those factors and you buy right (below retail) you are will always have a good exit route in an emergency (low risk). Hard to come by these days for me because I don't actively market for leads. Those are my SFR commandments. Just my $0.02

to answer your questions: 1. yes 2. because the cash flow adds up after you buy multiple properties (particularly ones youre in under 20k paying 1000 a month) and I enjoy A. working for myself and not some corporation trying to kill me while paying me as little as possible B. being able to determine my own income C. telling anyone not liking what I do/how I do it to go straight to hell without passing go or collecting 200 dollars.

How are you making any money with Rentals?

Gabriel G.

Real Estate Agent · Baltimore, MD · Member since 2014 · 215 posts · 123 votes

11y

**DISCLAIMER, I AM A NEWBIE**

with that disclaimer out of the way, I would venture to say that what is frustrating you is that you are investing your money AND your time for a low return. I think one of the things I have learned is to calculate the ROIs with property management and repairs in mind. If you have a property manager involved, you do not have to invest (or waste, depending on how you want to look at it) your time with the day to day of managing the property. I would gladly take that $100-150 in passive income if I knew that all I had to do was supervise my property manager and make sure he is on point. Its different when you are investing 15-20 hours managing the property, collecting rent, finding tenants, signing leases etc. I consider myself to be worth more than $150/15 hours. What I am getting at is for your next deal, calculate the expenses with property management and major repairs in mind and if the ROI is still pretty good then go for it!

Best of luck!

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Oliver Trojahn

Kansas City, MO · Member since 2008 · 143 posts · 41 votes

11y

That is a scary thought however. A roof should last 25 years. and an old furnace or ac actually only costs 800 to replace installed. Remember, you pay wholesale for repairs not full price.

Also, if you are truly making 146 dollars cash flow your expenses should already include CAPEX (Capital Expenditure Reserve). So, your deal above isn't a deal.

Good luck:)

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Christopher Brainard

Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes

11y

@Anthony Newbold

As others have mentioned, in a cash flow focused / low appreciation area, this isn't a very good rate of return. With that said, you can still build a business with those types of returns. Rentals are a long term game - you need the vision to see 10 years or 20 years down the road, where you not only enjoy the cash flow you're getting, but have increased holdings and decreased principals. Real Estate is also one of the few businesses where you can (in large part) control your income by expanding your portfolio - at a pace that you deem acceptable.

-Christopher

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Maggie Tasseron

Investor · Palm Desert, CA · Member since 2015 · 215 posts · 64 votes

11y

This is probably obvious, but try to always buy the worst property on the best street; that way you have built-in equity right from the start so don't need to worry too much about the cash flow. More importantly, I think it's vital to learn as much about repairs and maintenance as possible. If you don't like doing any of the work, you will pay for that and pay a high price. Even if you don't do the work yourself, it's important to at least be knowledgeable about whatever can ail a property or you will get ripped off on a regular basis. Best of luck!

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Maggie Tasseron

Investor · Palm Desert, CA · Member since 2015 · 215 posts · 64 votes

11y

This is probably obvious, but try to always buy the worst property on the best street; that way you have built-in equity right from the start so don't need to worry too much about the cash flow. More importantly, I think it's vital to learn as much about repairs and maintenance as possible. If you don't like doing any of the work, you will pay for that and pay a high price. Even if you don't do the work yourself, it's important to at least be knowledgeable about whatever can ail a property or you will get ripped off on a regular basis. Aside from that, it's vital to learn which improvements will get you higher rent and better tenants. It's not always the best tactic to buy the most expensive products; for example, I never buy pricey paint as in all my years as an investor/landlord I have never cleaned a wall in preparation for a new tenant and find if I stick to one color for all my properties it doesn't take that long to just put on a fresh coat of paint. Same with mini-blinds and verticals; tenants always seem to break these so buy the cheaper brand and be prepared to just change them out. I'm sure you get the picture... Best of luck!

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Anthony Newbold

OP

Investor · Bedford, IN · Member since 2015 · 69 posts · 29 votes

11y

That puts me all in at $45k. I rent the house for $600 (what a coincidence), which is rented to a great tenant with a good income, and wherein I will raise the rent slowly beginning next year to market (~650-700). I paid cash for the house, but probably this winter I will cash out refinance at 75% of appraised value:

75% of 60k, let's say = $45k. I get all of my actual cash spent back through the increased equity in the house. Payment = $228. Insurance ($500) and taxes ($480) = $82.

JD.... perhaps this is why I am confused. Perhaps a little more enlightening please. Looking above it looks like your deal is awfully similar to mine and you pointed out that I chose poorly. (of which I don't completely disagree.).. anyhow you are all in for 45K and rent for $600 is good, and my $40K that rents for $650 is poor.

Here is my breakdown: Payment= $231 (very close to yours), Insurance= $900 (you've done better so please advise), and taxes= $1280 (horrible, but non-negotiable).. Oh also, I calculated 10% vacancy and 10% maintainence.

Now, like yourself, I paid CASH. I just used a LOC to acquire with cash, of which I will mortgage my purchase that will pay off the LOC in FULL.. and simply do it again and again. I just simply am not happy with only $145 and have seen lots of $40K pieces of junk ... this one doesn't need much at all (actually purchased for 35K last week, but have budgeted 5K to bring up to standard.

You have been so helpful, so please continue to advise as well as all of these great folks on this forum.

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JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes

11y

Originally posted by @Anthony Newbold:

That puts me all in at $45k. I rent the house for $600 (what a coincidence), which is rented to a great tenant with a good income, and wherein I will raise the rent slowly beginning next year to market (~650-700). I paid cash for the house, but probably this winter I will cash out refinance at 75% of appraised value:

75% of 60k, let's say = $45k. I get all of my actual cash spent back through the increased equity in the house. Payment = $228. Insurance ($500) and taxes ($480) = $82.

JD.... perhaps this is why I am confused. Perhaps a little more enlightening please. Looking above it looks like your deal is awfully similar to mine and you pointed out that I chose poorly. (of which I don't completely disagree.).. anyhow you are all in for 45K and rent for $600 is good, and my $40K that rents for $650 is poor.

Here is my breakdown: Payment= $231 (very close to yours), Insurance= $900 (you've done better so please advise), and taxes= $1280 (horrible, but non-negotiable).. Oh also, I calculated 10% vacancy and 10% maintainence.

Now, like yourself, I paid CASH. I just used a LOC to acquire with cash, of which I will mortgage my purchase that will pay off the LOC in FULL.. and simply do it again and again. I just simply am not happy with only $145 and have seen lots of $40K pieces of junk ... this one doesn't need much at all (actually purchased for 35K last week, but have budgeted 5K to bring up to standard.

You have been so helpful, so please continue to advise as well as all of these great folks on this forum.

Well, they're not really similar, only in the purchase price and amount of rent they demand:

Mine: Bought for my cash; yours: bought with a loan.

Mine: Insurance & taxes $80/mo; yours: I&T $181/mo

Because I used my own money, and you used someone else's money, when I cash out refi this property I will be ahead of you about $150/mo on this house, and $500 ahead of you on my next house (rent minus insurance/taxes/other expenses). For the same amount of money outlay, I will be pulling in $650 more than you, because I started with money that came from myself, not from a loan/LOC, that would just be sitting or going into mutual funds or stocks. You have to settle for low return rates because you don't have your own money - you paid cash, but it was someone else's cash that you have to pay back. I believe that when you are working off low spreads, on small houses such as these, you really should own one or two outright to provide you with strong cash flow to help buoy the others until you reach a critical mass.

I can't really advise you on the insurance. I use Allstate, but maybe I get a better rate because I've been with them forever, or maybe because I've had few claims over the years. You also have very high taxes for such low-value houses; in your area, buying cheap houses might not work as well because of things like that. You have to customize the strategy for where you live; if your area can support higher rents, and you have certain fixed costs like taxes and insurance that only move incrementally, you might need to buy more expensive houses.

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Al Williamson

Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes

11y

@Anthony Newbold once you get the hang of being a classic landlord, you might want to consider a more times intensive but up to 8x more profitable approach and operate your SFH in a non traditional manner - more niche.

There are atleast five different ways to operate a SFH rental: traditional, rooming house, dorm, short-term, and corporate housing. Each way has its own pros and cons, each has its own profit margin.

Just keep yourself open. You don't have to stay in the classic role.

I've tried all five models and uncovered opportunities I wouldn't have found if I stayed in the classic landlording groove. Now that I've found what working in my focus neighborhood, I'm expanding to met the demand.

There are world of possibilities waiting for you to explore them.

And, honestly, passive landlording kills your cash cow.

0 Reply

Anthony Newbold

OP

Investor · Bedford, IN · Member since 2015 · 69 posts · 29 votes

11y

Well, they're not really similar, only in the purchase price and amount of rent they demand:

Mine: Bought for my cash; yours: bought with a loan.

JD,, OK, so here's where I may not understand our similarities, but let me explain my position.

Yes, you are correct: You bought yours with hard CASH. I bought mine with an LOC.

You withdraw hard CASH out of your bank account. (Your CASH was your collateral)

I withdrew hard CASH out of the banks bank account. (My Home was my collateral)

We both are going to mortgage our investment properties at full value, and have a mortgage payment for said property. (Therefore we are in the same position.)

You will take that money to buy your next investment.

I will take that money to payoff the LOC so that I can get another LOC to buy my next investment.

Now granted: Your deal looks better than mine. But yet they are so similar. I simply cannot control the taxes (that I hate), and yes, my insurance is more (something I can work on....)...

Most of all I appreciate the discussion. I am learning with every post that I read.

1 Reply

Anthony Newbold

OP

Investor · Bedford, IN · Member since 2015 · 69 posts · 29 votes

11y

Thank you Al,

An interesting perspective that I had not considered. Very interesting, I will have to explore more.

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Ozzy SmithPro Member

Specialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes

11y

I agree with J Scott... you can absolutely find higher ROI properties, you just have to do some digging to find them. When I look at any property ( flip or rental ) I always work the numbers backwards. First decide what the profit number needs to be ( mine is 25%) I either get all my money back in 4 years or sooner or I don't do the deal. That is almost unheard of in most markets but in mine I can find these all the time. My last house I have purchased and repaired for about $10K and have it rented for $620/m. That's about $7500/yr or an ROI of 75%. Same thing with my flips...

Sale Price - 30% profit - repairs = max purchase price

Example house that I can sale for 100K

$30K profit - $15K in repairs = $65K

If I can purchase it for anything less than 65 its a good deal, won't touch it over that number. Do the same thing with your rental numbers... purchase, plus repairs, plus holding costs and vacancies = a number. If you can get that much $ or more in a set time frame you do the deal, if not keep looking. I hope this helps. Feel free to connect with me if you still have questions.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Originally posted by @Anthony Newbold:

Well, they're not really similar, only in the purchase price and amount of rent they demand:

Mine: Bought for my cash; yours: bought with a loan.

JD,, OK, so here's where I may not understand our similarities, but let me explain my position.

Yes, you are correct: You bought yours with hard CASH. I bought mine with an LOC.

You withdraw hard CASH out of your bank account. (Your CASH was your collateral)

I withdrew hard CASH out of the banks bank account. (My Home was my collateral)

We both are going to mortgage our investment properties at full value, and have a mortgage payment for said property. (Therefore we are in the same position.)

You will take that money to buy your next investment.

I will take that money to payoff the LOC so that I can get another LOC to buy my next investment.

Now granted: Your deal looks better than mine. But yet they are so similar. I simply cannot control the taxes (that I hate), and yes, my insurance is more (something I can work on....)...

Most of all I appreciate the discussion. I am learning with every post that I read.

You're both right. What Anthony is referring to, and why he can claim he is "kind of" doing the same thing, is what a refer to as a "cash like substance". The way he is using his LOC, or should/could be using it, is just like cash. There is a hitch though that he may be missing...and that is he still needs to pay it back...but like he understands, not all at once, and not right away. He needs a "cash reserve" to make his payments for him, that he can add to as needed. This will buy him the time to develop his system, jsut like the "all cash" system. It's one of the "entrance/exit" strategies I use...and teach.

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Anthony Newbold

OP

Investor · Bedford, IN · Member since 2015 · 69 posts · 29 votes

11y

Thank you Ozzy,, Great information, And just knowing what people near me are doing it makes me feel very good.

As far as 'connecting'... I'm brand new, so I don't know what that button does.

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How are you making any money with Rentals?

How are you making any money with Rentals?

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