Setting up a target of $5K per month in cash-flow.

Setting up a target of $5K per month in cash-flow.

Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes

I have been in IT profession for about 20 years. Even after these many years, there is no guarantee that I will be spared during next company-wide layoffs due to economic conditions.
I hate it and want to kick them before I get kicked.
I have much interest in RE since last few years, and have learned about it during my spare time (which almost non-existent). This interest born after I bought a property here in No. Cal as my primary residence and saw the appreciation going out of the roof. (It certainly came down in last two years but I still have some good equity in it).

I also have done few RE courses and following some online resources, including this one, during that time.
I even bought 3 properties on eBay and then ended up selling them there (with almost no profit).

I also bought an REO in Atlanta with all cash last year but still not sure what I am going to do with it.

So now here I am, wanting to get into REI so that to make living out of it.
The most ideal situation for me will be to have some (or many?) rental properties to generate a steady monthly cash flow, and also do few buy-rehab-sell per year to generate extra income.
My target would be to make at least about $5K per month from rentals and at least $15K per fix-upper, doing about 4 of these each year.

Do you think it is a reasonable goal for someone with very minimum RE experience ( but a lot of enthusiasm and energy, and of course some cash in hand) ?

I am already looking (and need help of gurus here) to identify which markets I need to explore for good rental properties.

Please help this newbie and make it a success story for BP :lol:

-MN

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

Absolutely an obtainable goal with some hard work and some education. Right here on BP is a great start to that education.

Secondly, as MikeOH stated, buying an REO, or any other property for that matter, without at least one exit strategy is a recipe for failure. Having the ability to pay cash for properties puts you in the driver's seat, but you must have a plan BEFORE you buy.

$5,000 a month in cash flow from rentals is no easy task and based on receiving $100 per door per month, you obviously would need 50 doors to reach that goal. Buying 50 homes can take several years or more, but a large amount of doors can be obtained in one purchase through apartments, or perhaps in other commercial purchases.
One buy, one loan, one location, multiple doors, you get the idea.

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Joshua D.Pro Member
BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
17y
Yes it is possible. Lets start with your name and where you live. Can you share that with us or on your profile? It'll make this discussion a little easier for me, at least.

It seems that you're not someone crippled by fear, so all that we need to do is help you to get educated about how to be successful - that's the easy part. If fear was a factor, that would be another story.

So . . . since it is obviously something you've got already, what is the deal with your Atlanta REO? Can you give us more info on that property. What are you doing with it? What is the deal?
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Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
I agree with Josh that you certainly can do it. However, you need to spend some significant time reading the forums here and really learn the business before you jump in. Buying a property without knowing what you're going to do with it is not a recipe for success. If you're serious about making a living from rentals, you may also need to move to a better area. California isn't known for property that will cash flow and moving to a more suitable area might make your new business a lot easier to start.

Good Luck,

Mike
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
I take it by IT and No. Cal you mean the bay area. Here's one suggestion. Move.

If some IT startup offered you a great job somewhere else, you'd move. If IBM or Dell or Oracle offered you a great job somewhere else you'd move. You want to start a rental property business. There are lots of places better than the bay area. I'd almost say anyplace is better. Do some research, find a location you like and that has great rental deals. Spend some time actually visiting locations. Any of the major midwestern cities are candidates. People here talk a lot about Dallas, Houston, Memphis. Kansas City may have some prospects. Lots of smaller cities that may be to your liking, too.

You could start trying to buy some properties before you move, but you'll have to manage them long distance and pay for a property manager.
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Absolutely an obtainable goal with some hard work and some education. Right here on BP is a great start to that education.

Secondly, as MikeOH stated, buying an REO, or any other property for that matter, without at least one exit strategy is a recipe for failure. Having the ability to pay cash for properties puts you in the driver's seat, but you must have a plan BEFORE you buy.

$5,000 a month in cash flow from rentals is no easy task and based on receiving $100 per door per month, you obviously would need 50 doors to reach that goal. Buying 50 homes can take several years or more, but a large amount of doors can be obtained in one purchase through apartments, or perhaps in other commercial purchases.
One buy, one loan, one location, multiple doors, you get the idea.
Podcast Guest on Show #130
2 Reply
Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Thanks for all your kind encouragement. I am pleasantly surprised to see so many people here who are willing to help/advice.

Josh:
I have corrected my profile and now shows my name and location.
Yes, I am here to get advice and help on how to achieve this goal, and make this transition.
I bought this upper fixer REO in Atlanta about a year ago for $18K. I paid cash for it. It is about 10 minutes from downtown, in a good rental area. Current market value is about $80K. Plan was to rehab it and then rent. Rentals in the area for similar properties run for about $700/mon. Renovation cost is about 20K. But then I did not get a chance to get anything done, mainly due to combination of some time constraints, long distance and not having local contacts there.
Now I was thinking about selling it, get some cash out and use it to pay as down payments for multiple rental properties.
I think I would now like to initially just concentrate on ready-to-rent properties and then, after some time, get into fixer-upper deals.
Do you think that will work?

MikeOH:
I have already realized that I am not geographically located in a good area for rental properties. But, due to my situation, I can not afford to just move. I need to work it out as such so that the transition is smooth and not causing any financial stress on the family.

Jon H.:
yes, I am in SF Bay area, north of SF in Marin county, a very expensive area, nothing goes less than half a million.
I wish I could just take your advice and move. But just can not do it due to having this single stream of income (my job) currently.
I do understand that it will be difficult to manage properties long distance. And, I do include property management cost in my expense numbers. It will lower my cash flow a bit but that is something I will just have to live with.

nationwidepi:
I do realize that this target can not be archived in a year or so. But I need to start from somewhere and then build upon it.
That is the sole purpose I am here to learn and get some advice/help from the gurus.
As you suggested, I do want to get into multi-unit properties than SFH. That way I am hoping to achieve my target sooner.

So, I have read books, done courses, browsed websites. I am just now too tempted to get started. Where do I go from here? What are the best markets for rentals? How do I go about finding some good deals?

Thanks again!

-MunirN
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Good markets are ones where their is job growth, which will drive population growth along with somewhat limited housing supply that will help create demand. Pricing vs. rents is key. An old rule of thumb is the rent should be at least 1% of the price. Rent is really the driver, so that really means you can't pay more than 100X the monthly rent.

That will, however, cost you money every month. That might work for long term appreciation (or might not), but its not your goal.

Read about the 50% rule. That says 50% of the rent goes toward expenses, vacancies, and capital items (roof, furnaces, etc.) So, if rent is $500, $250 will go toward expenses, leaving you $250 in NOI (net operating income). From that, you need to extract a cut. $100 is a common goal. That leaves $150 as the maximum you can have for a P&I payment (taxes and insurance are in the 50%). At 7% and 30 years, that gives a max loan of about $22,500. That makes rent 2.2% of the purchase price. That's the origin of the "2% rule".

If rent is $1000, expenses are $500, leaving $500 for NOI. Subtract $100 and you get $400 as the max payment. That gives a max loan of about $60,000. That makes rent 1.66% of the purchase price.

If you're just buying outright, assume 20%-25% down. However, use the above calculation as the PRICE. This will make your cash flow a little better.

The 50% rule includes some percentage for property management. Most managers for SFRs (in my experience) take 10% of the collected rent plus half to a full month's rent when they fill a vacancy. So, on that $1000/month rental and with a tenant change every year, the manager is going to take $2200 a year or 18% of your gross rent. If you never have a vacancy, its just $1200 a year or $100 a month. That's the difference between you getting $100 a month and $200-$283 a month. That's the difference between needing 50 units and 18-25 units.

Keep in mind the tax benefits for rental income are significant. You should pay much less taxes on $5000 in rental income than you would on $5000 in W2 income from a day job.

You might consider looking inland from where you are. I've heard people say there are opportunities in Sacramento and areas around there. Research prices (easy), rents (bit harder -- papers, craigslist, driving around), vacancies (drive around and look for "for rent" signs), and jobs (read the papers.)
2 Reply
Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
In order to find the best cash flow markets, you need to know how to perform your DD and market analysis and know how to properly crunch the numbers.
Locating good cash flow markets is the easy part, finding the great deals takes work and effort. Most great deals will not be on the MLS so you need to look elsewhere and let everuyone know you are in the market to buy.
Podcast Guest on Show #130
1 Reply
Robert Mack
Real Estate Investor · Bergen County, NJ · Member since 2008 · 390 posts · 72 votes
17y

Read the renal forums on BP, join the out of state group, and find out what people are saying about different areas. When you find a couple areas you are interested in do what Jon said, get the economic factors - population, unemployment # etc..

Then when you decide to dig deeper in a certain area, contact the local experts from BP, ask for references to successful investors in the area, join the local REIA, find a couple of PM companies and interview them about the rental market,time to re-rent, vacancy rates etc..

:idea: Think about all the info you get about your own town just by sitting behind your computer doing google searches, reading the paper, finding local blogs, forums etc... and do that in the area you want to invest in.

City-data will give you some local stats as will Wikipedia
0 Reply
Norm Chrostowski
Real Estate Investor · Lakeview, NY · Member since 2009 · 309 posts · 49 votes
17y
My 2 cents:

You've certainly come to the right place for advice. Jon. Mike, and Will, among a host of others, are the "Guru's" that are happy to help, and will not steer you in the wrong direction.
0 Reply
Brian P.
Wholesaler · Salt Lake City, UT · Member since 2009 · 1k+ posts · 401 votes
17y
Munir

Yes there are easier places to do business in other parts of the country where if you have $1.98 you can wheel and deal.

But I'm very familiar with your area as a former Mill Valley resident who sold many Novato homes to S.F. police officers in the old days.

I just finished a deal in Santa Rosa that cost me $500 out of pocket and I have not been in the state in 5 years or more.

I have a son based in San Rafael that is still doing deals with minimum money and has a full time job in the city. So it is still out there.

Wholesaling and flipping are the way for you to get going. I did 6 deals in the Bay Area in 2008 with little money. Sold 5, kept one, I could have sent my money to Michigan or somewhere with cash flow properties but made a million sitting at my desk in Salt Lake City.

Don't care to learn Detroit or Cincinnati and else where. Every thing you need to know to make money where you are is in the archives here and at a few other sites. Doing it is the problem, so start. 95% of investors fail due to lack of action, not money, not knowledge, not credit.
0 Reply
Jim Doine
Real Estate Investor · Myrtle creek , OR · Member since 2008 · 343 posts · 13 votes
17y
Munir, I to live in an area with terrible cash flow opportunity such as yourself, I began investing out of state and in spite of a few bumps in the road my business plan is moving ahead nicely. You need an excellent team of quality property management, Realtor, contractors, and I have found a local person in my investment area to be my eye's. This team needs to be in place before you begin investing. I made this mistake once but never again. The Midwest in my opinion is the place to go. You can buy buy 10 multi-family properties in my area that that will cash flow $100 per door easily (using the 50% rule) for what you would have to pay for one decent single family in your area.Kind of opens your eyes about cash flow potential in the Midwest. :D Jim
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
17y
Originally posted by Munir N:

I bought this upper fixer REO in Atlanta about a year ago for $18K. I paid cash for it. It is about 10 minutes from downtown, in a good rental area. Current market value is about $80K. Plan was to rehab it and then rent. Rentals in the area for similar properties run for about $700/mon. Renovation cost is about 20K. But then I did not get a chance to get anything done, mainly due to combination of some time constraints, long distance and not having local contacts there.

Munir -
If you need any help with local Atlanta contacts (or if you're looking to sell the property), feel free to PM me...

I have a lot of contacts down here, and am happy to help where possible...

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Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Hi J Scott,
I tried to PM you, but since I am not your colleague, BP does not allow.
Yes, I am looking into either selling or finding a partner to rehab and then sell that Atlanta property. Please let me know if either you or someone else would be interested.
You can also reach me via my email address below in my sig.
Thanks!
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Munir, get a BP Pro Account and you can send messages to anyone, along with many other advantages. It is well worth the money if you want access to all the benefits of BP Nation!
Podcast Guest on Show #130
1 Reply
Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Hi,
I just wanted to give some update on where I am regarding my target. I have been actively looking for cash flow properties, and have identified few with $100 to $250 cash flow per month. I am currently negotiating with the sellers, and doing my DD.

I have couple of questions for the gurus here:

1. If a property gives good cash flow, do you much care about the equity on the property? For example: if property gives $200 cash flow per month and about 35% annual cash on cash ROI, but have about 10% equity on it. Is it a good deal?

2. Is there any spreadsheet (excel or other) which you guys use to calculate the cash flow?

Thanks again!

-MunirN
0 Reply
Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y

I haven't seen a property that can be bought at 90% of the market value and will cash flow $100 per month, let alone $200 per month. I would strongly suggest reading the "50% Rule" threads in either the General or Landlording forums (they're sticky and right at the top of these forums).

Good Luck,

Mike
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Cash flow is very easy to calculate. Take the rent and divide by two. That gives you the NOI (net operating income) based on the 50% rule. Then, compute your P&I payment. Do that with Excel, a financial calculator, any of the numerous online mortgage calculators or a table. If you don't have Excel, buy a financial calculator and figure out how to use the Payment, Present Value and Future Value functions. Be sure to use investor interest rates, which are about a point higher than anything you see advertised. Ignore any down payment. Subtract the computed payment from the NOI and that's your cash flow.

Cash flow is NOT Rent - PITI, no matter how many people tell you it is.

If you put in a down payment, your cash flow will be higher. But that's really the return from your money rather than return from the deal.
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Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Hi Mike,
This is what I have for one of those properties. Please let me know what is wrong here, or if I am missing something.

Market Value: $40,000
Asking Price: $36,000
Down Payments: $5000
Closing Costs: $1000
Total out-of-pocket: $6000
Currently Rented for $710 (12 months lease started in April '09)
Cash-Flow (after all expenses, debt services): $171
Annual ROI: 34%

Thanks!
0 Reply
Josh Green
Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
17y
in the above situation, the prurchase price of $36k would have:

rent: 710 (710/2=355)
payment: 239.51

$355-$239.51 = $115.49 (cash flow)
0 Reply
Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Hi Josh,
How did you come up with $239.51 payments?

I am financing $31K at 5.8% for 30 years (no PMI).

Thanks!

-MN
0 Reply
Josh Green
Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
17y
the 50% rule takes into account the purcahse price and not just the loan amount. the reason is because the money you are putting down could very well be working somehwere else for you so it must be brought into the picture.

i'm surprised at your 5.8% rate. that is pretty impressive. if you are sure on the rate, then it's looking like this:

36k purcahse price (710 rent)
355 (noi)- 211.23 (P&I) = $143.77

0 Reply
Dick Green
Residential Real Estate Broker · Conroe, TX · Member since 2008 · 1k+ posts · 43 votes
17y
I would sell the REO and invest in multi units.

Think Big!
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Munir N
OP
Real Estate Agent · San Jose, CA · Member since 2009 · 34 posts · 0 votes
17y
Josh,
So, do you think it is a good deal? I am told that, on average, $100 cash-flow per door is a good deal.

Dick,
This particular property does not have much equity so I am not sure if I will be able to sell it right away.
I am also looking for multi-units in any good market. Do you have any advice or suggestion?

Thanks!

-MunirN
0 Reply
Josh Green
Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
17y
based on the numbers provided, it looks like a good deal. $100 per door is a target and you are almost 150% of that. pretty solid.
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Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y

The 50% Rule simply says that throughout the United States operating expenses run 45% to 50% of the gross rents. The 50% Rule has nothing to do with financing.

Having said that, your statement that you should consider the opportunity cost of any downpayment is certainly true and that's the reason to simply calculate the cash flow with the assumption that the entire purchase price (plus rehab) is being financed.

Mike
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