Rental Property Questions

11 Replies

Hello!

My name is Jonathan Atkins. I am looking to buy my first home and hold out in the Colorado Springs area. I have used the BiggerPockets rental property calculator however there are some questions I have about Future Assumptions. How do I predict these numbers? Also, how do I predict homeowners insurance? I have a lot more questions but I figure I would start with those first two.

Any advice/direction will help. Thank you and have good rest of your week!

Tough to accurately predict future prices if thats what you're referring to with assumptions. There are records of market growth / decline amounts I'm sure you could find online with some research. 

You need to make sure you have plenty of cash flow and are buying right. Over the long term your property should appreciate in value if you continue to hold throughout any dips and can continue to cash flow. Insurance you can call and get quotes. 

Well don't predict homeowner's insurance. Call your insurance provider (or any insurance provider) and get a quote for that specific address. Same with property taxes- don't guess, check the county's tax assessor website. 

When you say Future Assumptions, what specifically are you talking about?

Also, just make sure you are up on running numbers. Colorado Springs doesn't typically offer much in the way of cash flow. Happy to send some easy equations on how to do it if you want.

@Jonathan Atkins - thanks for posting. As @Ali Boone suggests, where there's no way to ACCURATELY predict the cost of hazard insurance, multiplying an asset's value by .0055 will get you close. And the assessor website she's referring to is here: http://land.elpasoco.com. Visit the site and enter the address you're looking for. You'll be taken to its information page, where the amount of taxes payable for the current cycle will appear below the "Market Information" section. 

And below it is a link to the County Treasurer's page that will share additional details.

If not mistaken, the Future Assumptions include projected rent and expense increases, for which we use 2% and 1% respectively.

As for Colorado Springs not "typically offering much in the way of cash flow", this is merely a matter of perspective and/or proper expectations. For example, the Public Record Property Information page displayed is for one I analyzed yesterday, where I was able to project $343 a month net. And keep in mind, facetiously if it makes a dollar after expenses, its cash flowing. As @Kyle Doney said, when buying to hold "if you continue to hold throughout any dips and can continue to cash flow", you'll generally be alright in the long run.

All the best!

@Jonathan Atkins - Most factors in real estate are predictable but some are not but you can get a rough idea. For figuring out what insurance is going to cost is somewhat predictable. I would recommend talking to the insurance agent you'd like to go with and ask them for a series of prices (a $200,000 home with $2,500 deductible for wind/hail is going to cost $X,XXX / year, for a $225,000 home... etc). Taxes is easy as they are almost always listed on major sites. If the home is going to be remodeled, you can use comps to predict what the homes value will be in as-is condition and after renovations condition by using comps. An investor friendly Realtor can help you with finding and valuing comps. Annual maintenance and capital expenditures I would recommend planning on saving about 1% of the homes value. While we can't predict what the value of the home will be next year, we can look back several years and see general appreciating factors for a given area and cross our fingers the trend continues in the same direction or better.

If you talk to the right person, most factors in any real estate investment are actually quite predictable.

@Kyle Doney . Thank you for the response.  I will defintely begin using my insurance to receive quotes. 

@Ali Boone . Thanks for responding. I have seen property taxes on the MLS listings and what I mean by future assumptions are the critera that has to be filled out in the Bigger Pockets rental property calculator (Annual Income Growth percentage, Annual PV Growth percentage, Annual Expenses Growth percentage and sales expenses). These are number that I was talking about that I dont know how to determine them, and how accurate they have to be in order to determine positive cashflow on a property. Also, I would greatly appreciate some equations to use because I do not think my excel equations are getting the job done! Thanks again.

@Norberto Villanueva .  Mr. Villanueva, you and I have met breifly at one of the Meetups.  I was not ready to meet for lunch with you because I did'nt even know what my goals were and I needed to do more research to get a better grasp on that.  Nonetheless, thank you for your input and the reference to the website.  Can you go into more detail about the 2% and 1% please?  I need to continue searching in the Colorado Springs area because I haven't found anything with a cap rate thats above 4%, or much of a positive cashflow.  However I think my numbers are a little flawed.

@Colin Smith .  Thank you for your response.  And thank you I will make sure to utilize my realtor to provide me comps on the houses that I am looking at.  Do comps provide comparisons of other rental properites in that area?  What if that area is not high in volume for houses being rented out?  

@Jonathan Atkins - Like using a Realtor to provide comps for home values, a property management should be able to provide comps for rentals, however, those resources are limited to the public. Unless rented through the MLS, which most rentals are not, you have to have a high level of knowledge of the area. The properties are listed for rent on sites like Zillow, Hot Pads, etc, after the home is rented out it's taken off the sites and no one can go back see what it's actually renting for. A property management company knows they just rented a nearby unit for $X/month, and another nearby was rented out a couple months ago for $Y/month. Therefore I would encourage you to talk to the right real estate company that is investor friendly. They will not be able to help you determine value and negotiate a great deal on a property, but also be able to provide the insight you need to know what the property is going to rent for after it's purchased.

Don't forget property taxes.  Assume you can pass rental increases to offset cost increases.  I am not familiar with your market, but most midwest markets taxes do not increase so much where that cost could not be passed along.  

@Jonathan Atkins - both escalators and though only able to directly control one, each should increase by at least as much per year.  It's estimated rental rates have increased 6% - 10% in the last year.

A mere snapshot in time, be careful relying on cap rate alone, which factors neither principal reduction or appreciation into the equation. Check out this article for an explanation http://smallbusiness.chron.com/equity-capitalizati...

This said, not only should a target cap rate of 4% be achievable, I also wouldn't expect the asset to produce much cash flow, which has me thinking something's off. 

Of course, each investor has their own tolerance for risk and performance expectations. Given current market conditions, not only have I found being able to project $100+ a door net cash flow without you in it to be acceptable, but above average. For obvious reasons, one should expect negative cash flow when house hacking, especially in this market. I know this seems counter-intuitive but, just think of it this way, even the investor must pay to live somewhere.

I wouldn't worry about or focus on those numbers. They are all speculative anyway, so only apply to potential future growth in the property's income. That's a dangerous way to analyze and buy properties because what if those numbers (i.e. guesses) don't pan out? You first need to get a handle on what the today numbers are. Just what you know now. Assume nothing will grow. Is it sustainable then? Unless you are purposefully and solely investing for appreciation (dangerous, and not recommended unless you really know what you are doing), then those future numbers should only be considered bonuses. Assume they won't happen to be more accurate with your assessments.

I never include those on my spreadsheets.

You absolutely do want to concern yourself with the long term pricing and rent trends in the market you invest in ... they absolutely will have a profound impact on the profitability of your investment. As mentioned, a property management company can tell you about rents, and one that has been in business a long time can tell you about the long term trends in rents. Sales prices in most markets is public record, so you can see what similar properties sold for 10,20,30,40 years ago ... by comparing that to what they are worth today you can compute a CAGR to use in your projections. Note that you want to study it for a long time period, spanning multiple up and down cycles ... this will give you a good idea of the way the market has behaved over long hold periods ... tough to figure what it will do next year or in any short term timeframe, but much easier and more accurate to predict what it will do on average over long holds (10+ years) ... telling new investors to run the numbers, and then telling them to ignore some of the most important numbers is really bad advise IMO ... yes, run the numbers ... run ALL the numbers (not just some of them and ignore the others) and compute IRR. Then make sure you get a great deal where you can force some appreciation, sell for a profit to give you an alternate exit strategy if you should need or choose to take it, and insulate yourself to some degree from short term market volatility or if your projections are off.

@David Faulkner - I agree, to ignore any of the numbers is to go out half baked. Yes, potential investments must pencil today but, in a market where one must often be OK with either marginal cash flow or straddling the fence until another down cycle (or crash), it's nice to be in tune with the trends you mentioned so that we may assess overall risk AND execute while reasonably planning for the inevitability of change.

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