Just Starting out, bad numbers?

5 Replies

Hey all, so I'd just gotten started on here, but have been interested in REI for a long time. I've watched youtube, and read blogs, but finally decided to jump in.

So one of the things I've been doing is looking over the MLS, and specifically trying to find properties that already have tenants, and are within my price range (leveraged cash deal). Seems like any way I crunch the numbers, most of these deals are turning out to be at least somewhat profitable. (Usually in the 7-8% range for ROI).

Of all the properties I've looked at and done the numbers on, there's only been a few that turned out to not look good (on paper at least).  Granted I know that 7-8% isn't great for some people, but I'd be happy taking that for my first property. 

On the other hand though... it kind of feels like I'm probably doing something wrong here.  Like why would people be selling properties that have a positive cash flow?

If you show us an example of your math we may be able to point things out that you are overlooking if you are.  Also you could just be in an area where the numbers work a lot of the time.  The reasons why people sell vary, some don't want to deal with tenants, some want to buy something bigger, some are moving away, divorces deaths etc.

@Justin Matesic ROI is too narrow to look at. You could be doing an FHA or homestyle loan put 5% or less down and that will make any minimal profit look great if you don't account for vacancy, mantainace, taxes, insurance, management, etc.... What you need to do is calculate those expenses subtract them from the mortage and you should still be cashflowing around 100-150 a door.

Example:

Rent 1200

Mortgage 750

Insurance+taxes: 90

Repairs: 120

Vacancy: 120

Management: 120

1200-(750+120+120+120+90) = 0

The deal is too thin.  If you have a tenant thrash the place, you get mortgage insurance, property taxes go up.  You are in the negative. Most people don't take into all the variables and still do the deal too thin.  This leaves them with a liability rather than an asset.

If you find this helpful please vote it up or ask me a question how I can better clarify it.

@Aaron K. One of the examples looks like this... Property value is 35k, monthly income is 800.  Taxes are 869/yr, utilities paid by tenants, insurance (approximating 500).  

So taxes/ins- 114
PM is roughly 8-10% for the companies I contacted  80.
Maintenance+Cap Ex-150
Loan-303
Vacancy-50

800-647=103

So that leaves about 103/mo cash flow. (didn't account for vacancy before)

@Jackson Pontsler I was actually going to use a HEL on my primary residence. I have a 15y fixed 4.25% already locked in (with the option to increase the loan amount up to about 100k). I was kind of wanting to start smaller for my first property, and keep to around 40-50k (that way if it didn't work out, I could afford to pay the loan and not lose my house).

I'll also be transferring the cash to an LLC in order to build equity/assests for that, so that's a reason I decided to go the route I'm going. Instead of using a conventional mortgage.

Ok with properties this cheap paying almost any rent gets a large return, however in most places properties in this price range will either need repairs almost immediately or often be occupied by less than ideal tenants.

@Justin Matesic one other thing to point out is that properties listed on the MLS will often (but not always) have lower cashflow than properties you find that are off-market deals. Additionally, you'll hear about people who analyze hundreds of properties, make a hundred offers and only actually close on one deal, so don't get discouraged just because you haven't had any luck yet. If it was easy, everyone would be doing it. Good luck!