Am I overestimating my expenses on the Rental Calculator?

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Am I overestimating my expenses on the Rental Calculator?

Anthony Rullo
Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes

Hello BP Community! 

Long-time lurker, First-time poster. I'm looking to make my first Multi-Family purchase to rent out. When I plug all the numbers into the BP Rental Property calculator, every property I check is operating at a loss (Negative ROI). I live in Los Angeles, and things are currently priced above what I'm willing to pay for my first investment property. Therefore, I have looked into out of state options, knowing full well I'm not familiar with the areas. However, I want to see what my options are. I've looked in AZ, OR, WA, and NV. Almost every property I have checked will lose me money unless it's under $100k purchase price. I have currently run reports on around 25 properties. I put in 20% Down Payment on all properties. I research how much rent I can get in those areas if the listing doesn't state how much rent the apartments are pulling in. Then I check the property taxes and the average insurance for the city. I'm putting Vacancy and Repairs at 5% each. I'm inputting Capital Expenditures and Property Management at 10% each. Then I'm putting all of my Future Assumptions at 1%. I'm currently using LoopNet, MLS, and Zillow to research the properties. If you're still with me after all that information, Thanks! So, onto my questions. Am I overestimating my expenses or have I legitimately not been able to find a decent deal yet? Should I shift my focus to Single Family? Should I look into a different strategy? Or should I just give all of my money to this very credible Nigerian Prince that keeps emailing me? Looking forward to your guidance and wisdom. Thanks!

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Bob E.
Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
8y

@Anthony Rullo I live in Phoenix and have a few rentals. In addition my wife is a realtor and we have been watching the duplex and 4 plex market for several years. Every year the MLS adds say the same thing, rent is under market at (525-550).

These sellers are not generous, they just cant get more out of the property - the tenants are working poor and have not seen much in the way of wage growth for the last 10 years, they CANT pay more.

Keep looking but know that cap rates are very compressed right now and it is going to take a lot of digging to find even one deal.  If you do find a deal it will be sold in 24 hours so you need to have cash or be pre-approved.  

A better alternative to MLS listing would be to look on Craigs list and call looking for tired landlords.

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  • Katlin H.
    Investor · Sacramento, CA · Member since 2018 · 28 posts · 12 votes
    8y

    Can you upload a sheet you’ve completed using the tools? Which tool are you using?

    0Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    Hi Katlin,

    Here is just one of the reports I made. This is one of the more expensive properties I was looking at. With 20% down, the mortgage is almost $2,900. The going rent in this area is about $1,500 for a 2 bedroom. Entire homes rent in the area for $2,100. As you can see I would be losing a considerable amount of money and this assumes the tenants will take care of all utilities. I didn't even include stuff like landscaping on this property. I've tried dropping the purchase price significantly and raises the rent and I would still be operating in the red. Even if I was able to get this property for $200k less than what they are asking, which I don't think is possible, I would still be losing $650/month. Am I over-estimating my expenses or is this just a bad deal? I'll try and add another report on the lower end. Thanks!

    0Reply
  • Larry Frank
    Rental Property Investor · Racine IL · Member since 2017 · 41 posts · 15 votes
    8y

    yup looks right.  Welcome to the housing bubble.  5% for repairs is probably a little high and maybe you can get PM down to 8% if your in higher rent areas.  

    On second thought 2600 for mortgage is way too high for a property that would rent for 1600.  What year are you using in amortization for your mortgage.  2600 is a property that costs around 500k.  

    0Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    Here is a lower end home that I found in Phoenix. Even with me raising what the current rent is for the property, I would be losing money. I would drop down the purchase price to see what price I need to buy the property at in order to make positive cash flow and it is less than $100k, more than 50% off the asking price. Am I calculating things wrong or should I just keep looking? Any areas you recommend purchasing for Buy and Hold? Thanks!

    0Reply
  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    8y
    Anthony Rullo you are not giving us enough information. What is the purchase price, terms of financing, how long (30 year mortgage?)
    0Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    Hi Larry,

    I put the mortgage for 30 years, with 20% down.

    0Reply
  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    8y
    How many units. How many beds/bath in the units
    0Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    It is all in the reports attached. Are they not popping up? 30 Year mortgage, 20% down. The Portland one is listed at $699k. There are 2 units. Both 2 Bedroom, 1 Bath. Same goes for the Phoenix one, but that purchase price is $199k.

    0Reply
  • Account Closed
    Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
    8y
    In today’s market you’re going to have to go to the Midwest or the South to get cashflow. The investors finding deals in the markets you’ve been looking in are typically cash buyers. They are buying distressed homes off market and rehabbing them to get them at prices that will pencil out for cashflow. They are buying from wholesalers or they are buying foreclosures etc. Finding a property listed online that will cashflow with a 25% down payment is very very hard at this time anywhere west of the Rockies. 5 years ago you could but the market has risen too high. Lots of markets cashflow well. Cities like Indianapolis, Milwaukee, Kansas City, Memphis, Etc etc. I have a duplex in the Seattle area that is worth double what I payed for it 5 years ago....it’s insane. I’m going to buy in the south until the next market correction.
    2Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    @Account Closed Thanks for the tips! I'll start looking in the Midwest and Southern markets. Seeing as how we are both in the LA area, I'd love to get together and pick your brain sometime over a cup of joe, if you're interested. My treat. Let me know. Thanks!

    1Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    8y

    @Anthony Rullo I would say the short answer to your questions is: no, it's probably not a good deal and second, there is not way to tell if you assumptions on expenses are right without knowing the property. There is no generally good % number for repairs and capex, it depends on the property and it's condition. You basically have to build those numbers based on a repair and capex budget for the next 3, 5, 10 years and then break that down to a monthly %. To illustarte: a new property or a completley remodelled house will take much less in both categories than a property that has not seen a contractor in 30 years. It takes a bit of experience to ballpark both numbers correctly. You should not buy anything that does not cash flow well AND has a positive outlook on value development. You need cashflow like the air to breath, but cash flow does not creat wealth. It takes 166 years to make a million on $500 in cash flow. Mortage pay down and appreciation will get you there many times faster. I have leads on two off market duplex portfolios, but they are both larger investments. Otherwise there are plenty of SF and single duplexes in good areas. Feel free to contact me if you want to know more about Milwaukee. 

    1Reply
  • Katlin H.
    Investor · Sacramento, CA · Member since 2018 · 28 posts · 12 votes
    8y

    it doesn’t look like anything is wrong, the number just down work. It’s not a good deal:/ keep looking!

    1Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    @Marcus Auerbach Thanks for all of the info. Milwaukee is an area on my radar. I would love to know more about your expertise over there. I will shoot you a message. Thanks!

    1Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    8y
    Anthony Rullo Look at it this way, a water heater replacement will cost you $600 in materials. now on a 120k property that’s 5%, on a 300k property that’s 2%, on a 600k property that’s 1%. Same theory goes to rent. So negative cash flow on an LA property if you put the same percentages will be worse than if you put actual figures, maybe 10% on maintenance on other states will only be 4-5% of CA. And, you should put 0% down to guage if it REALLY cash flows. I could declare that all properties in any location will cash flow if I put 100% down. Now when talking about money out and money in, say putting 20% of a 600k property is 120k, and say i break even each month and gain appreciation, vs 20% of 5 properties worth 100k which and i get say 100 each in cash flow, so that’s 500/mo for my 120k and no appreciation, i’d rather go with appreciation than the 500. On the 500, if something breaks down like one of the roofs, my 1 year profit (say 6k roof replacement cost), and gain nothing. On the appreciation side, i get nothing a month and maybe only 100k in appreciation in say 3-5 years. I’d rather take that than fly/drive out to fix an issue. A true investor will count their time going there, the cost of hotel/plane ticket, their efforts, and all associated expenses, time is always money.
    1Reply
  • Anthony Rullo
    OP
    Real Estate Agent · Beverly Hills, CA · Member since 2017 · 19 posts · 10 votes
    8y

    @Manolo D. Thanks for breaking things down for me. Weighing the appreciation against the cash flow is something I will make sure I consider. Are there any areas in CA that you recommend I look? Thanks!

    0Reply
  • Andy Rumple
    Wholesaler and Real Estate Broker · Indianapolis, IN · Member since 2009 · 438 posts · 293 votes
    8y

    If you are you are the first.

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Anthony Rullo I live in Phoenix and have a few rentals. In addition my wife is a realtor and we have been watching the duplex and 4 plex market for several years. Every year the MLS adds say the same thing, rent is under market at (525-550).

    These sellers are not generous, they just cant get more out of the property - the tenants are working poor and have not seen much in the way of wage growth for the last 10 years, they CANT pay more.

    Keep looking but know that cap rates are very compressed right now and it is going to take a lot of digging to find even one deal.  If you do find a deal it will be sold in 24 hours so you need to have cash or be pre-approved.  

    A better alternative to MLS listing would be to look on Craigs list and call looking for tired landlords.

    2Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    A lot of markets are HOT @Anthony Rullo. It's possible you just haven't found that deal yet. I agree with your expense estimates. 

    Keep looking. Be patient. Stick to your numbers. 

    You'll eventually find one and it'll be well worth the wait. 

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    To many people are chasing deal right now, if everything is listed for 125 people think that 115 is a deal when, in fact, the numbers only support a price of 90-100.  

    Stick to your numbers and realize there are a few things you can do.  1)  Look for value add opportunities like sub metering and 2)  Be creative in how you look for deals, anyone bringing you a "deal" knows whet the market is and has marked it up as much as they can get away with so you will probably have to put some work into how you source your deal.  3)  Wait.

    2Reply
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