Rental investments: I don't see the math working out

Delaware City, DE · Member since 2016 · 25 posts · 13 votes

All,

I cant understand the math behind the rental investments even though I would love to get started in it. Where I am from (Delaware) a 3 bed 2 bath can rent for 850 a month. If I find an amazing deal and it costs only $65,000 for the property and I do the cap rate its around 1 percent. My expenses eat up the profit I would love to make 250 in profit but I cant see it working out. This is the scenario i am struggling with.

cost of property: $65,000

income: $850/mo

Monthly Expenses:

Property management $85

Vacancies: $60

Maintenance: $85

Capital Expenditures: $150

Property Taxes: $125

Mortgage: $220

Eviction: $65

So I end up with 60 dollars per month in profit........ This does not even include any HOA, tenant screening costs from property management, liability insurance, etc. Am i doing something wrong? Does anyone expect to find a class C or B home for under 65K that wont have a huge cap ex? Why are people making significant profits while still paying mortgage on properties? I am interested in the BRRR strategy but this does not make sense unless you remove the eviction cost after the first year or so and raise the rent by 75 dollars. Even then the cap rate is still low and I cant break 200 profit.

-Irwin

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Account Closed

Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes

Amazing deals don't have CAP rates of 1%. Also your budget for maintenance and cap-ex is way too high. Should be closer to 10% of gross rents.

You should self manage for awhile and learn the business, until you are so busy that you need to hire help. That will add 10% to your bottom line.

Keep searching for that great deal.

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Account Closed
Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
9y
Amazing deals don't have CAP rates of 1%. Also your budget for maintenance and cap-ex is way too high. Should be closer to 10% of gross rents.
You should self manage for awhile and learn the business, until you are so busy that you need to hire help. That will add 10% to your bottom line.
Keep searching for that great deal.
4 Reply
Joseph Rice
North East, MD · Member since 2016 · 60 posts · 24 votes
9y
Irwin,
PM me, I am from the area. Anything I can do to help you, let me know.
2 Reply
Diane G.
CA · Member since 2016 · 1k+ posts · 1k+ votes
9y
Saj is right on.... Hands on management is the key to success here...
2 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Irwin Haddox:

All,
I cant understand the math behind the rental investments even though I would love to get started in it. Where I am from (Delaware) a 3 bed 2 bath can rent for 850 a month. If I find an amazing deal and it costs only $65,000 for the property and I do the cap rate its around 1 percent. My expenses eat up the profit I would love to make 250 in profit but I cant see it working out. This is the scenario i am struggling with.
cost of property: $65,000
income: $850/mo
Monthly Expenses:
Property management $85
Vacancies: $60
Maintenance: $85
Capital Expenditures: $150
Property Taxes: $125
Mortgage: $220
Eviction: $65
So I end up with 60 dollars per month in profit........ This does not even include any HOA, tenant screening costs from property management, liability insurance, etc. Am i doing something wrong? Does anyone expect to find a class C or B home for under 65K that wont have a huge cap ex? Why are people making significant profits while still paying mortgage on properties? I am interested in the BRRR strategy but this does not make sense unless you remove the eviction cost after the first year or so and raise the rent by 75 dollars. Even then the cap rate is still low and I cant break 200 profit.
-Irwin
I think it depends on your area. I invest in the City of Wilmington and have a 3/1 renting for $1100 a month on a $63,000 mortgage. I'm about to finish another 4/2 that I expect will rent for $1200 with a $73,000 mortgage. Now I don't take into account eviction costs and do 9% each for Property Management, Maintenance, Capital Expenditures, and Vacancies.
After this I cashflow ~$150+ a month...and that's only if I actually have those vacancies and maintenance...etc. I'm fortunate I don't need the cashflow so the whole $400+ not going to debt service, taxes and property management stays in the account and grows over time. At a certain point it doesn't make sense to have $20-30k just sitting in the bank not doing any work for me. So with scale comes more flexibility to redeploy the capital.
Podcast Guest on Show #312
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Diane Manders
Flipper/Rehabber · Patchogue, NY · Member since 2015 · 73 posts · 29 votes
9y
Hi @James Masotti. I have family in Wilmington and have considered doing some buy and holds there so I'm interested in knowing what areas of town you invest in and if you have any local team members there you could recommend?
0 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
@Diane Manders - If you have family in Wilmington then you know it has opportunity, but can also be a challenging place. I'm in the process of shopping for a new lender right now and everyone wants to keep warning me about not investing in the A+ neighborhoods. I know the area I'm investing in. I've studied the crime maps, the demographics, the vacancy rates, etc. I know my client base and I know the risks. For me it's about knowing the kind of landlord you want to be and investing accordingly. I want to be able to give people a better quality home that they can live in. Just because you are a renter doesn't mean you should have to deal with a crummy place to live. I take care of the houses and fix things the right way. This allows tenants to take pride in the home and stay longer because they only need to move if something in their life circumstances change, not because they have a better option.
Anyway...small rant done but it's been on my mind this week.
I invest in Baynard Village and Northwest Wilmington as well as a very small area of Quaker Hill. Other areas I've considered though are Browntown and Hedgeville because the City has been developing there a decent amount. I stay away from anything on the east side as well as the 4th to 8th St area.
My team is still decently new to me(only the last year) but so far I'm mostly happy with them. Still need to spend some time refining the processes a bit to make things smoother. Feel free to message me for more details.
Podcast Guest on Show #312
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Diane Manders
Flipper/Rehabber · Patchogue, NY · Member since 2015 · 73 posts · 29 votes
9y
Thanks @James Masotti. I like to think of my investing as creating homes so I couldn't agree with you more on giving people a nice, decent place to live and taking great care of it. I will definitely PM you. Thanks again!
0 Reply
Glen Beringer
Investor · Wilmington, DE · Member since 2015 · 68 posts · 35 votes
9y
@Irwin Haddox -I wouldn't budget for eviction costs. Also- I do my own property management and also place my own tenants (I actually like doing this part of the work and I feel comfortable with the people I place.) Therefore, I don't budget for property management either- but that is completely up to you.
What do you consider as "maintenance" vs. "capital expenditures"? i.e maintenance is lawn care and snow removal or calling a plumber to fix a leak? If it is lawn care and snow removal I would just build that in to the lease to be handled by the tenant. Generally, I would lump maintenance (like fixing leaks and calling an electrician) and capital expenditures together and budget around 10%. I do 99% of my own repairs so it is just the cost of the material for me, which in general is super cheap.
That all being said, I tend to buy more expensive houses than what you are looking at and rent them for 1300-1450 per mo. (Purchase price is around 110K-130K so mortgage is in the mid 80's) My spread between fixed costs and rental income is anywhere between 550-750 per mo, which I am happy with. There is a bit of a point you need to get to where you get a critical mass and it makes it all a little less stressful. (You can shift the cashflow between properties to cover big repairs if needed)
I understand that people need to get in to the business and are willing to take a lower monthly rent (and house purchase cost) to get started, but it doesn't seem worth the headache to have a top line of $850 per mo, pay for property management, and hold a mortgage. If you can spend a little more money and get a duplex and rent each side for $850 per mo, it may be more worth it to you.
2 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
@Glen Beringer - What have you been up to lately sir? You haven't been too active on BP recently. Real estate going well I hope?
Podcast Guest on Show #312
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Tim JacobPro Member
Real Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
9y
try baltimore county in Baltimore if you are willing to go further. It would be a pain to manage remotely. Maybe have someone reputable lease it. Then manage it by having an on call plumber or electrician. Im sure Philly has some good places as well.
Baltimore including everything
Home price 110000
Gross rent. 1350
PITI on 30 yr loan good credit 600 with 25% investment money down
Vacancy. 100. Good pm and leasing
Maintenance 50. Getting a place without many things wrong.
Capex. 130. Seems high for this but will be conservative.
Good leasing means zero evictions.
Hoa. 50
Profit 420
Look around you can find better deals. Get a place in a c neighborhood not a d neighborhood wherever you invest
2 Reply
William Walker
Investor · Wilmington, NC · Member since 2016 · 211 posts · 262 votes
9y
Drop the $65 / month eviction cost. If you are spending $800 a year on evictions you have a screening problem. You shouldn't pay screening costs from property management, you will more likely pay a one time placement fee (mine is $150 for a 12 month lease and $75 to renew). If you have a property manager you shouldn't be paying anything for evection, they will handle that and you've already calculated in vacancy so that is seperate. Your capex seems very high, while it's good to be conservative 10% is what most people consider normal/conservative. Part of that depends on the state of the property you purchase. For CAPEX think roof replacement, HVAC replacement, big things that you'll save for overtime. For repairs think fence gate sagging, painting, etc.
2 Reply
Glen Beringer
Investor · Wilmington, DE · Member since 2015 · 68 posts · 35 votes
9y
Originally posted by @James Masotti:

@Glen Beringer - What have you been up to lately sir? You haven't been too active on BP recently. Real estate going well I hope?
I've been busy. Finished my short sale flip to rental and finally got it rented last week. Took about 3 months start to finish, but is my best deal so far- right in the Triangle.
I now have to turn over a property for Feb 1 in Trolley, but won't be vacant for even a full day between tenants. Not a bad problem to have!
I am itching to get a new place now but I need to build up the cash reserves again. Probably won't buy until the fall/winter time unless I miraculously come in to a large sum of money or find an incredible deal. Let me know if you need help with anything along the way. I tend to get bored sitting around on weekends :-P
How are things going with you? Are you still planning on using the BRRR strategy? I am a bit more conservative and have just been buying with my own cashfllow and pouring my monthly rental cashflow back in to the business. (paying down some of the loans, etc) PM me if you want to get together for a drink or something one of these days.
All the best,
Glen
0 Reply
Tim JacobPro Member
Real Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
9y
If you do add property management say 7% monthly and 100% leasing fee with leases going for 30 months on average. Obviously the lease is written for that amount but if you get a large enough place a family will most likely take it and your turnover will average to that
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James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Tim Jacob:

If you do add property management say 7% monthly and 100% leasing fee with leases going for 30 months on average. Obviously the lease is written for that amount but if you get a large enough place a family will most likely take it and your turnover will average to that
Are you actually paying 7% monthly for property management? I've never seen someone that low. Not saying it doesn't exists...I'd just be very curious how they are managing their business.
Podcast Guest on Show #312
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James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Glen Beringer:

Originally posted by @James Masotti:
@Glen Beringer - What have you been up to lately sir? You haven't been too active on BP recently. Real estate going well I hope?
I've been busy. Finished my short sale flip to rental and finally got it rented last week. Took about 3 months start to finish, but is my best deal so far- right in the Triangle.
I now have to turn over a property for Feb 1 in Trolley, but won't be vacant for even a full day between tenants. Not a bad problem to have!
I am itching to get a new place now but I need to build up the cash reserves again. Probably won't buy until the fall/winter time unless I miraculously come in to a large sum of money or find an incredible deal. Let me know if you need help with anything along the way. I tend to get bored sitting around on weekends :-P
How are things going with you? Are you still planning on using the BRRR strategy? I am a bit more conservative and have just been buying with my own cashfllow and pouring my monthly rental cashflow back in to the business. (paying down some of the loans, etc) PM me if you want to get together for a drink or something one of these days.
All the best,
Glen
Things are going well enough. Taking longer than I'd like to place a tenant in my one property, but I know the missteps we made there. Finishing up one next week to start marketing as well. Really need to get tenants in both of these so that I can BRRRR the next couple of houses. Hoping to add a few more to the portfolio this year and maybe do a few flips to bring in some needed capital. Trying to bring on another private lender or two in order to help facilitate that. Then 2018 with private lenders in place I will be largely focused on flips to accelerate the principle pay down on the portfolio before starting to add more or expand into commercial. But lots of things to do and put in place for that to all work out. Work has been busy as well...so accomplishing both is proving challenging, but no matter what 2017 will be a good year.
Expect a PM about that drink as well.
Podcast Guest on Show #312
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Ryan K.
Investor · Richmond, VA · Member since 2015 · 139 posts · 43 votes
9y
As others have already said dont worry about a separate expense for eviction if using a PM.
I'm a little surprised by the responses regarding the maintenance and capex numbers. I'm usually fairly conservative, especially for SFHs on these items. If planning to hold for a long time these can be very significant. Every property is unique and you can somewhat calculate capex in todays dollars. But only budgeting 10% of total rent for BOTH is far too low IMHO. For your scenario that's only $85/month, or about $1k a year. Start adding up replacement roof, hvac, water heater, appliances, flooring, siding, windows, water/sewer lines, painting, etc., and $1k a year will never cover everything that eventually need to be replaced.
0 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Ryan K.:

As others have already said dont worry about a separate expense for eviction if using a PM.
I'm a little surprised by the responses regarding the maintenance and capex numbers. I'm usually fairly conservative, especially for SFHs on these items. If planning to hold for a long time these can be very significant. Every property is unique and you can somewhat calculate capex in todays dollars. But only budgeting 10% of total rent for BOTH is far too low IMHO. For your scenario that's only $85/month, or about $1k a year. Start adding up replacement roof, hvac, water heater, appliances, flooring, siding, windows, water/sewer lines, painting, etc., and $1k a year will never cover everything that eventually need to be replaced.
I agree 10% for both is too low. 16-20% would be more appropriate depending on the level of renovation and class of property. I mostly invest in older homes (1900-1920) so even if I do a big renovation I still expect there to be unexpected things which is why I budget 18-20% total
Podcast Guest on Show #312
0 Reply
Glen Beringer
Investor · Wilmington, DE · Member since 2015 · 68 posts · 35 votes
9y
Originally posted by @James Masotti:

Originally posted by @Ryan K.:
As others have already said dont worry about a separate expense for eviction if using a PM.
I'm a little surprised by the responses regarding the maintenance and capex numbers. I'm usually fairly conservative, especially for SFHs on these items. If planning to hold for a long time these can be very significant. Every property is unique and you can somewhat calculate capex in todays dollars. But only budgeting 10% of total rent for BOTH is far too low IMHO. For your scenario that's only $85/month, or about $1k a year. Start adding up replacement roof, hvac, water heater, appliances, flooring, siding, windows, water/sewer lines, painting, etc., and $1k a year will never cover everything that eventually need to be replaced.
I agree 10% for both is too low. 16-20% would be more appropriate depending on the level of renovation and class of property. I mostly invest in older homes (1900-1920) so even if I do a big renovation I still expect there to be unexpected things which is why I budget 18-20% total
It all depends on your top line rent, tenants etc. If I am renting a townhome for $1450 and it is only 950 sq ft, has top quality tenants and I have completely gutted the inside and has a new roof, I don't see approximately 10% as wrong. Especially if you are handy. Plus my 10% is way different than 10% on a property renting for $850. (why I said a duplex with 2 units renting for 850 would be more reasonable)
For a B, C or lower level property, I can see that being a much bigger number based on the tenants as well.
0 Reply
Irwin Haddox
OP
Delaware City, DE · Member since 2016 · 25 posts · 13 votes
9y
Originally posted by @Account Closed:

Amazing deals don't have CAP rates of 1%. Also your budget for maintenance and cap-ex is way too high. Should be closer to 10% of gross rents.
You should self manage for awhile and learn the business, until you are so busy that you need to hire help. That will add 10% to your bottom line.
Keep searching for that great deal.
Saj I am concerned that cap ex of 10% wont yield enough to cover the fixtures, roof, floor, paint, appliances all of these things have a lifespan. For example if a capital expenditure like a roof, x, and y all need replacing in 10 years but I only saved up (85*12)(10) = $10,200 then I only have enough for the roof before x and y start eating into my profits. Also I work full time so a property management company is a must for me.
0 Reply
Irwin Haddox
OP
Delaware City, DE · Member since 2016 · 25 posts · 13 votes
9y
Originally posted by @James Masotti:

Originally posted by @Ryan K.:
As others have already said dont worry about a separate expense for eviction if using a PM.
I'm a little surprised by the responses regarding the maintenance and capex numbers. I'm usually fairly conservative, especially for SFHs on these items. If planning to hold for a long time these can be very significant. Every property is unique and you can somewhat calculate capex in todays dollars. But only budgeting 10% of total rent for BOTH is far too low IMHO. For your scenario that's only $85/month, or about $1k a year. Start adding up replacement roof, hvac, water heater, appliances, flooring, siding, windows, water/sewer lines, painting, etc., and $1k a year will never cover everything that eventually need to be replaced.
I agree 10% for both is too low. 16-20% would be more appropriate depending on the level of renovation and class of property. I mostly invest in older homes (1900-1920) so even if I do a big renovation I still expect there to be unexpected things which is why I budget 18-20% total
so how do you even make money? 17% cap ex is $150
0 Reply
Irwin Haddox
OP
Delaware City, DE · Member since 2016 · 25 posts · 13 votes
9y
Originally posted by @Diane G.:

Saj is right on.... Hands on management is the key to success here...
But I have a full time job...... I cant be woken up in the night for a leak in the toilet
2 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Irwin Haddox:

Originally posted by @James Masotti:
Originally posted by @Ryan K.:

As others have already said dont worry about a separate expense for eviction if using a PM.
I'm a little surprised by the responses regarding the maintenance and capex numbers. I'm usually fairly conservative, especially for SFHs on these items. If planning to hold for a long time these can be very significant. Every property is unique and you can somewhat calculate capex in todays dollars. But only budgeting 10% of total rent for BOTH is far too low IMHO. For your scenario that's only $85/month, or about $1k a year. Start adding up replacement roof, hvac, water heater, appliances, flooring, siding, windows, water/sewer lines, painting, etc., and $1k a year will never cover everything that eventually need to be replaced.
I agree 10% for both is too low. 16-20% would be more appropriate depending on the level of renovation and class of property. I mostly invest in older homes (1900-1920) so even if I do a big renovation I still expect there to be unexpected things which is why I budget 18-20% total
so how do you even make money? 17% cap ex is $150
It's not 17% for CapEx...but 9-10% Repairs and 9-10% CapEx which is how I get to 18-20% depending on the type of renovation I do. You make money not with one property but with 10. Scale is what allows you to spread your risk a bit more. So that one property going vacant is covered by cash flow from others. And same for CapEx. The more you you'll get better pricing from your contractors and when one needs it you'll have funds or at least a line of credit to be able to make the needed repairs. I too have a full time job, which is why I don't need to make huge cashflow with every property. In the long run...especially after taking into account all the tax write offs...it's a no brainer for me. Happy to go through things in more detail if you'd like but that's a long post and more of a sit down for drinks kind of conversation.
Podcast Guest on Show #312
0 Reply
James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Irwin Haddox:
Originally posted by @Account Closed:

Amazing deals don't have CAP rates of 1%. Also your budget for maintenance and cap-ex is way too high. Should be closer to 10% of gross rents.
You should self manage for awhile and learn the business, until you are so busy that you need to hire help. That will add 10% to your bottom line.
Keep searching for that great deal.
Saj I am concerned that cap ex of 10% wont yield enough to cover the fixtures, roof, floor, paint, appliances all of these things have a lifespan. For example if a capital expenditure like a roof, x, and y all need replacing in 10 years but I only saved up (85*12)(10) = $10,200 then I only have enough for the roof before x and y start eating into my profits. Also I work full time so a property management company is a must for me.
Not sure how you're paying $10k for a roof on a $60k house. I only pay 4-5k for that. And if you add in other major mechanical things...it might run up to $10k...also on the lower rent range you will need to have a higher percentage because while a roof's cost will vary by the size and class of the property...things like heat and air and water heater and appliances are relatively fixed therefore being a larger percentage of your rent. @Glen Beringer is right that on his higher end rental he wont need to set aside 10% because he's charging 75% more in rent to cover the same fixed cost.
Podcast Guest on Show #312
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James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
9y
Originally posted by @Irwin Haddox:

Originally posted by @Diane G.:
Saj is right on.... Hands on management is the key to success here...
But I have a full time job...... I cant be woken up in the night for a leak in the toilet
Old wives tale. Ask most investors who self manage they will tell you this "never" happens. Of course it can and statistically it is going to happen to someone...but just think about your own home. How often do things actually brake in the middle of the night or on Christmas day or something like that. It hasn't happened to me in 30 years. Doesn't mean it can't...but I'd say that's a pretty good ROI on my time. Now... I have property management because the City of Wilmington Code says I have to. Since you're in New Castle County you wouldn't be required to do this.
Podcast Guest on Show #312
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Irwin Haddox
OP
Delaware City, DE · Member since 2016 · 25 posts · 13 votes
9y
Originally posted by @James Masotti:

Originally posted by @Irwin Haddox:
All,
I cant understand the math behind the rental investments even though I would love to get started in it. Where I am from (Delaware) a 3 bed 2 bath can rent for 850 a month. If I find an amazing deal and it costs only $65,000 for the property and I do the cap rate its around 1 percent. My expenses eat up the profit I would love to make 250 in profit but I cant see it working out. This is the scenario i am struggling with.
cost of property: $65,000
income: $850/mo
Monthly Expenses:
Property management $85
Vacancies: $60
Maintenance: $85
Capital Expenditures: $150
Property Taxes: $125
Mortgage: $220
Eviction: $65
So I end up with 60 dollars per month in profit........ This does not even include any HOA, tenant screening costs from property management, liability insurance, etc. Am i doing something wrong? Does anyone expect to find a class C or B home for under 65K that wont have a huge cap ex? Why are people making significant profits while still paying mortgage on properties? I am interested in the BRRR strategy but this does not make sense unless you remove the eviction cost after the first year or so and raise the rent by 75 dollars. Even then the cap rate is still low and I cant break 200 profit.
-Irwin
I think it depends on your area. I invest in the City of Wilmington and have a 3/1 renting for $1100 a month on a $63,000 mortgage. I'm about to finish another 4/2 that I expect will rent for $1200 with a $73,000 mortgage. Now I don't take into account eviction costs and do 9% each for Property Management, Maintenance, Capital Expenditures, and Vacancies.
After this I cashflow ~$150+ a month...and that's only if I actually have those vacancies and maintenance...etc. I'm fortunate I don't need the cashflow so the whole $400+ not going to debt service, taxes and property management stays in the account and grows over time. At a certain point it doesn't make sense to have $20-30k just sitting in the bank not doing any work for me. So with scale comes more flexibility to redeploy the capital.
I'm in it strictly for cash flow. CAP rates and capital expenditures are very important to me because I dont ever plan on selling any properties.
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