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

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

Irwin Haddox
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
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. 

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  • Irwin Haddox
    OP
    Delaware City, DE · Member since 2016 · 25 posts · 13 votes
    9y
    Originally posted by @James Masotti:

    @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.

     Wut?

    0Reply
  • Irwin Haddox
    OP
    Delaware City, DE · Member since 2016 · 25 posts · 13 votes
    9y
    Originally posted by @Diane Manders:

    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!

     I would also like to give people a nice place to live but the math is just not on my side here

    0Reply
  • Irwin Haddox
    OP
    Delaware City, DE · Member since 2016 · 25 posts · 13 votes
    9y
    Originally posted by @James Masotti:
    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.

     Thanks I will definitely keep this in mind. Maybe I will start out as a land lord. Question though: If I do have a property management company do they usually pay for evictions or do they charge me? 

    0Reply
  • Eric Armstrong
    Investor · Wilmington, DE · Member since 2013 · 394 posts · 123 votes
    9y

    @Irwin Haddox- I'm thinking you should be able to get at least $950 for a 3bd in Del City, maybe up to 1100-1200 if the home is nicer.  That area is becoming more desirable.

    @James Masotti and @Glen Beringer - let me know if you get that drink.  I'm thirsty for real estate.

    0Reply
  • Ryan K.
    Investor · Richmond, VA · Member since 2015 · 139 posts · 43 votes
    9y
    Originally posted by @Glen Beringer:
    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.  

     Yes, multi units will have lower maint/capex numbers, that is true for sure. But in my opinion it doesnt matter if everything is gutted and new - you will still have to replace all the capex items again at some point if you plan to hold long term. Therefore its is wise to budget for it. Also you previously stated that you do 99% of repairs yourself and so only have materials to pay for, so your expenses would obviously be much less than anyone who is contracting out these services. Labor rates and service calls are getting quite pricey and for folks that cant do the repairs themselves they need to factor those expenses into the overall deal.

    0Reply
  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ 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 

     If you are budgeting $780 per year for evictions, there is seriously something wrong. If you truly are expecting to have 1 or 2 evictions a year, don't look at a property in a warzone. You should expect less than one eviction per 10 years, PER UNIT (not across a large portfolio). And that's being generous. Budgeting that much for evictions on single family, sounds like new BP lore I may have missed recently.

    On that property, your long term expenses are probably $425/mo. (50%), less the mortgage. Thats about a ~$100 "cash flow" per month. Not too bad but you can do better! Good luck.

    0Reply
  • Adam Christopher Zaleski
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    9y

    A water heater at Home Depot is around $400. It doesn't really matter if you are installing it into a 65K house or a 200K house, it's still $400. However, the $400 is going to hurt your profits on the 65K house more than the 200K house.

    My preferences are houses within the 150K to 200K range that rent for $1500/month to $2000/month.

    0Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y
    Originally posted by @Eric Armstrong:

    @Irwin Haddox- I'm thinking you should be able to get at least $950 for a 3bd in Del City, maybe up to 1100-1200 if the home is nicer.  That area is becoming more desirable.

    @James Masotti and @Glen Beringer - let me know if you get that drink.  I'm thirsty for real estate.

     Looking forward to it!

    Podcast Guest on Show #312
    0Reply
  • 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 @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.

     If you never plan to sell and are in it for the long haul than I think the math works out better for you. Eventually $100 a month in cash flow becomes $600 a month. Do that for 10 houses over the next 20 years and you're making $72,000 a year almost tax free. I too am in the same boat as you. I don't plan to sell which is why it's worth the $100 a month in cash flow now while I still have a W2 job and can afford not to live off the cash flow but rather reinvest it in principle pay down, and then reap the benefits of paid off houses down the road when I retire.

    Podcast Guest on Show #312
    1Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y
    Originally posted by @Adam Christopher Zaleski:

    A water heater at Home Depot is around $400. It doesn't really matter if you are installing it into a 65K house or a 200K house, it's still $400. However, the $400 is going to hurt your profits on the 65K house more than the 200K house.

    My preferences are houses within the 150K to 200K range that rent for $1500/month to $2000/month.

    Here in NJ property taxes play a huge roll too. When I buy my new house and rent out my current home it will be negative cash flow. I paid $185k for it, but it has taxes of $4700 a year. Combine this with market rent being right around $1450 and it's a loss all day long....that is until the mortgage is paid off and it starts to cash flow quite a lot and I just view it as another investment vehicle like a 401k or IRA at that point since I get the cash flow later and the tax write offs now.

    Podcast Guest on Show #312
    0Reply
  • Adam Christopher Zaleski
    Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
    9y
    Originally posted by @James Masotti:
    Originally posted by @Adam Christopher Zaleski:

    A water heater at Home Depot is around $400. It doesn't really matter if you are installing it into a 65K house or a 200K house, it's still $400. However, the $400 is going to hurt your profits on the 65K house more than the 200K house.

    My preferences are houses within the 150K to 200K range that rent for $1500/month to $2000/month.

    Here in NJ property taxes play a huge roll too. When I buy my new house and rent out my current home it will be negative cash flow. I paid $185k for it, but it has taxes of $4700 a year. Combine this with market rent being right around $1450 and it's a loss all day long....that is until the mortgage is paid off and it starts to cash flow quite a lot and I just view it as another investment vehicle like a 401k or IRA at that point since I get the cash flow later and the tax write offs now.

    I tend to invest in states with low property taxes. My Colorado house is worth around 335K and the property taxes are 1700/year. My Florida house is worth around 225K and the property taxes are around 1350/year.

    I grew up in the suburbs of Chicago and the property taxes are very similar to New Jersey. One of my friends bought a townhouse for 180K in 2007. The property taxes were around $4500/year. About 10 years later the townhouse is worth about the same (180K)  but his taxes are $5400/year.

    I feel like high property taxes put somewhat of a limit on house appreciation. Houses in high property tax areas can only appreciate so much. Buyers can justify the extra principle payment because in theory they will own a more expensive house at the end of the mortgage. However, you don't really get to keep any of your property tax payments at the end of the mortgage cycle.

    My mom owned a rental for 25 years. It was actually in the neighboring county with slightly lower property taxes. The house is worth 120K and the property taxes are around $2,500/year. Her mortgage was on average $50 more than the rent. She never got to the point where it was paid off, but she claims it was worth it. I don't think that type of cash flow would be worth it for me. To me it just seems like a way to force yourself to save.

    0Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y
    Originally posted by @Adam Christopher Zaleski:
    Originally posted by @James Masotti:
    Originally posted by @Adam Christopher Zaleski:

    A water heater at Home Depot is around $400. It doesn't really matter if you are installing it into a 65K house or a 200K house, it's still $400. However, the $400 is going to hurt your profits on the 65K house more than the 200K house.

    My preferences are houses within the 150K to 200K range that rent for $1500/month to $2000/month.

    Here in NJ property taxes play a huge roll too. When I buy my new house and rent out my current home it will be negative cash flow. I paid $185k for it, but it has taxes of $4700 a year. Combine this with market rent being right around $1450 and it's a loss all day long....that is until the mortgage is paid off and it starts to cash flow quite a lot and I just view it as another investment vehicle like a 401k or IRA at that point since I get the cash flow later and the tax write offs now.

    I tend to invest in states with low property taxes. My Colorado house is worth around 335K and the property taxes are 1700/year. My Florida house is worth around 225K and the property taxes are around 1350/year.

    I grew up in the suburbs of Chicago and the property taxes are very similar to New Jersey. One of my friends bought a townhouse for 180K in 2007. The property taxes were around $4500/year. About 10 years later the townhouse is worth about the same (180K)  but his taxes are $5400/year.

    I feel like high property taxes put somewhat of a limit on house appreciation. Houses in high property tax areas can only appreciate so much. Buyers can justify the extra principle payment because in theory they will own a more expensive house at the end of the mortgage. However, you don't really get to keep any of your property tax payments at the end of the mortgage cycle.

    My mom owned a rental for 25 years. It was actually in the neighboring county with slightly lower property taxes. The house is worth 120K and the property taxes are around $2,500/year. Her mortgage was on average $50 more than the rent. She never got to the point where it was paid off, but she claims it was worth it. I don't think that type of cash flow would be worth it for me. To me it just seems like a way to force yourself to save.

     You're 100% right. It's just a way to force yourself to save. In my specific situation I owe $162k on a house that is worth $155k so it wont be worth it for me to sell for a few years...and by that point the rest of my rental portfolio will more than make up for one bad property. 

    Podcast Guest on Show #312
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  • Irwin Haddox
    OP
    Delaware City, DE · Member since 2016 · 25 posts · 13 votes
    9y

    I was doing the cap rate wrong i would only put 20% down not pay the full amount in cash so the cap rate would be much higher.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Irwin Haddox:

    I was doing the cap rate wrong i would only put 20% down not pay the full amount in cash so the cap rate would be much higher.

    The MARKET cap rate never takes your mortgage into account. It is what it is. (But it's not cap rate that you are dealing with regarding properties smaller than a 5-plex, it's COMPARABLE value - known as Comps). You're likely referring to Cash-on-Cash, or Return-On-Investment.

    For a home that YOU can buy for $65k, what are the comps? If similar homes sell for a similar price, then how will that help you in your quest to obtain BIGGER pockets?

    eg. There are markets around where you can get $895/m - for just $45k rehabbed (or even less). So why are you paying $65k (seeing as you want someone else to Manage it for you anyway)?

    ie. If you're going to be hands-off anyway, why does it have to be in YOUR location? Cheers...

    0Reply
  • Jay J.
    Investor · East Haven, CT · Member since 2016 · 53 posts · 25 votes
    9y
    All it says is you should not do 850 minutes mthly rent 3-bedroom deal, ever.
    0Reply
  • Irwin Haddox
    OP
    Delaware City, DE · Member since 2016 · 25 posts · 13 votes
    9y

    Thank you all for the very insightful info. What I learned so far is that I was doing the cap rate wrong its about 100/mo profit with cap rate of around 10% not bad but i can do better. I don't need to budget that much for evictions and I don't need to have a investment property in my area if im going to be hands off anyway (even though it makes me more comfortable). My big concern now is how to get the money to get started. If I do bank loans to finance the 20% down I would need to pay them back around 300/mo which makes the property negative cash flow. how do get started?

    0Reply
  • Ashton Sharp
    Rental Property Investor · Bakersfield, CA · Member since 2016 · 58 posts · 27 votes
    9y
    Eric Armstrong that's was so cheesy! ;)
    1Reply
  • Dustin Hawks
    Topeka, KS · Member since 2014 · 51 posts · 29 votes
    9y
    Doing quick math I came up with a cap rate of 6.3%. I used all of the numbers provided but I didn't include the eviction number and correct me if I'm wrong but you don't include the mortgage in the calculation for cap rate. Also as stated above scaling this business is where the money is. Lastly, I personally think that real wealth is built over time in this business and almost any other business. The difference is that I don't know of anything else that provides the ability for someone else's $$ to essentially build your wealth for you. That last statement is times 2! Lenders $$$ and tenants pay the mortgage. You do hold the RISK! No risk No reward. My day job is in the stock market/insurance side of investments. Please find me any other invest other than real estate that you can take income off it and it doesn't drawdown the value. Open to other opinions on this. Dustin
    0Reply
  • Eric Armstrong
    Investor · Wilmington, DE · Member since 2013 · 394 posts · 123 votes
    9y

    @Irwin Haddox if you are buying an investment property and plan on bank financing, you are going to have to find a way to get 20% down.  If you don't already have it, you will have to borrow from a private lender.  You will not get a loan for 100% of the property and rehab.  Maybe you can find a seller willing to hold the financing for a period of time, but they are going to want you to have skin in the game, probably a min of 10%.  

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    Irwin your math is mostly correct in that it would take volume or appreciation to make it worth the trouble/risk. There could be better fit ways to earn more cash flow faster with same amount of investment/expense. Good luck!

    0Reply
  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 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 

    Your expenses are not correct.  Where is your real estate insurance? And why are you including "eviction" as an expense? 

    I suggest you Google "APOD", which stands for Annual Property Operating Data.  This is a template created by CCIM.  You should be able to locate an excel spreadsheet in the proper format.  Use ONLY this format to do your analysis.

    Also, why are you focusing on Delaware?  You don't have to.  Figure out what your investment goal is, then decide how and where to invest to achieve it!  If you're looking nationally you CAN achieve it.

    There's no such thing as a free lunch.  It will require work.  So you should determine an investment strategy and what problems you will fix so you can add value to properties you acquire.

    This is one common strategy: Acquire a property at a good price and in an area that is appreciating. Rehab it and improve it's value. Stabilizer it with a high quality tenant.  Collect cash flow and eventually cash out refi and pull out tax free cash for your next purchase.

    I wish you the best.

    0Reply
  • Joseph Rice
    North East, MD · Member since 2016 · 60 posts · 24 votes
    9y
    Irwin, Hello Everyone I'm just going to chime in real quick. James is on target, as well as others replying. One thing you have to remember Irwin you live in Delaware City, and 50% or more work in Delaware City Refinery. So the rent could be a bit higher. I have a relative who lives down there and they pay 1,100 a month for a 3-1 row. Also I didn't see anyone mention this, I may have overlooked it; but if the asking price/sale price doesn't work for you reduce your offer until it does make sense and the make an offer based on your number. Remember if your offer isn't insulting your probably overpaying as an investor. I say that also with the utmost respect to all investors!! I hope that helps
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