Newbie Crunching Numbers

6 Replies

Good evening everyone, I utilized my VA loan in early 2018 and I have a 1700sqft 3/2.5 in Chesapeake, VA. With the option of being able to transfer to a new duty station or stay in the area, I'm debating on how to proceed. Please let me know if I've done these numbers correctly utilizing the four square method to determine cash on cash return.

Rental comps: $1800-2k. Using $1850 for these examples.
Utilities (elect, gas, water, sewer, cable/int) will be covered by tenant.
I'll cover HOA.
No Vacancy or Capital Expenditures calculated (original loan doesn't afford it. refinanced loan allows it but should I transfer somewhere new I'd have to fund a PM).

Original Loan: $80 Cash Flow monthly / $960 annually. Zero out of pocket money. But I have a 960% return? (Doubtful).
Refinance: $295 Cash Flow monthly / $3,540 annually. A 17.7% Cash on Cash Return.

1) Based on experience how important is the vacancy/Cap Ex fund? I ask since this is a highly populated military area for rentals.

2) Anyone invest in Virginia where I've heard laws favor the tenant even if they've violated the agreement.

Ultimately, if possible I'd do the refinance option, manage the property myself, and utilize the remainder of my VA loan to buy another property for the additional three years I'll be in Virginia.

Any help and advice is greatly appreciated. Thanks!



Vacancy and capex are huge parts of ensure you are financially safe. Take your refinance option and add in these variables... One month of vacancy eats half your total annual cash flow. HVAC goes out? That's 2 years of cash flow. New roof? 2-3 years of cash flow. Did you factor in taxes? If you have to run scenarios as you did where "you cannot afford it", that means it is not a good scenario. Realistically, you should also be including 10% for property management as well because you might want to self manage now, but believe me, military life gets in the way and one day you may be sick of self-managing. Honestly, I would sell the place, take your profits (however much they may be assuming you did little money down with the VA loan), and get yourself into a 2-4 unit place and house hack that.

CapEx and Vacancy aren't important at all until a hurricane takes your roof off and your tenant moves out.

I'm not familiar with VA loans...you had literally no money out of pocket at closing?

Also, go ahead and provide the full numbers as far as expenses go, it'll help us help you.  If I'm reading what you wrote correctly, you're saying that there is zero cash flow on $1850 gross under your current loan terms?

Also I hear you about military presence and am familiar with Hampton Roads, but there is for sure vacancy. Whether or not your property will sit vacant depends on a lot of things, but even a tenant changing duty stations will often result in a month of vacancy/turnover. What you said about VA tenant law is true...most is written/designed to protect the tenant, but it's ALSO written to protect the landlord.  I hope that helps.

- JM

Originally posted by @Anup Debideen :
No Vacancy or Capital Expenditures calculated (original loan doesn't afford it. refinanced loan allows it but should I transfer somewhere new I'd have to fund a PM).

You cannot just not budget for vacancy and repairs because you don’t feel you can afford them.  That’s a bit like saying I have a car that maxes out a 60 miles an hour, but I’m going to plan to get to my destination at a rate of 100 miles per hours because I have to be there by such and such time.  Just because you say it, doesn’t make it so.  

2) Anyone invest in Virginia where I've heard laws favor the tenant even if they've violated the agreement.
Yes, I both landlord and property manage in Virginia and it’s just the opposite.  All things considered, Virginia is still a very landlord friendly state.  I would not remotely say our laws are in favor of the tenant. 

Ultimately, if possible I'd do the refinance option, manage the property myself, and utilize the remainder of my VA loan to buy another property for the additional three years I'll be in Virginia.
Based on what you have said so far, I think you would be making a huge mistake trying to manage this rental on your own.  You don’t know what you don’t know.  I really think you are best off just selling this property, but if you are hell bent to rent it, please hire a professional property manager.  I promise you it will cost you far more to put the first person who passes the fog and mirror test in your home to avoid a vacancy, than it would ever cost if you set reasonable rental criteria and screen to that criteria.

FYI that in 2020 the VA cap is going away!  Whoo hoo for anyone who is eligible to use them!


 

@Patti Robertson

Hi Patti, thank you for your guidance. I was trying to stay optimistic about it but you’re correct, the numbers don’t lie and being inexperienced it’ll cost me more in the long run in hard learned lessons than to be smart about it.

I think the best plan of action is to continue to reside in the house since I’ll be here anyways and maybe in a few years sell and be in positive equity.

@Anup Debideen

If there's anything I've learned over the years doing real estate investing and self-managing properties it is that there are ALWAYS a host of options at our fingertips. Some better than others, certainly, but continue to educate and assess other options.

A couple options I see off the bat:

1. IRRRL - since this was a VA loan, depending on what rate you financed at last year you're highly likely to shave off a 1/2 percent or more if you refinance. Look into it, you can instantly increase your cash flow. I'm doing it now and will save over $600 a month on my payments (which, due to the lower interest rate, means principle paydown happens that much faster....$300 a month more in my case)

2. Try renting out each room - I'm not sure what the going single rates are in VA but if it's $650 to $800 a month you could also increase your cash flow pretty substantially (and budget for CAPEX, vacancy, etc.). I did this in my MD condo for 2 years and it worked out well. Including utilities is a good marketing tool too and can help justify above market rate rents (and make paying the bills easier if you self manage)

3. House hack - not sure if this is an option for you but if it is you can do a number of things with the rental income.

Never stop learning, that you're here is a great first step. Being a vet, VA loans have done very well for me over the last 7 years. Best of luck!