If I'm cash-flowing why does Bigger Pockets make me feel like I failed?
Investor · Decatur, GA · Member since 2014 · 56 posts · 16 votes
I just joined Bigger Pockets. I'm a buy and hold landlord with 6 properties in a middle class area of Atlanta. All are rented and rents are all $500 above PITI. So, though there's been some repairs, for the most part they all do okay in my book. Yet, only one met the 1% rule.
I like renting out Middle Class housing where their close to my house, most of the renters are easy to deal with and take good care of the homes. But it's soooo hard finding properties that fit in most of the calculations that I have found on Bigger Pockets.
I don't want to buy bad deals. I don't want to have to go too far out for a deal. And I still want to grow my portfolio, so I'm not sure what to do.
David
Hey David
It's funny reading this post. I am actually sitting in Atlanta in the West End.
I am going to tell you this. If it makes financial sense and the properties support themselves then I don't actually see the issue. It may not fit their criteria, but if a property is putting a cushion in your pocket every month then keep doing what you are doing. Your niche makes sense to you. It definately makes sense to me.
Keep going!
Best of Luck to you!
Gerald
And as someone else pointed out, it just takes one good tenant to turn bad and totally skew the cash flow situation - and we had one recently. A tenant halfway through his 3rd year, excellent payer, always friendly/polite, no trouble at all - gave us 3 days notice that he and his family were moving out of state, and left $7K in damages. And we couldn't even show the place for the first 5 weeks of renovation. Basically, 2 months' lost rent.
An SFR, while vacant and waiting for the new tenants to move in the next week, had the copper pipes stolen. $1700 plumbing bill and a delay of 2 weeks (half a month's rent) before the new tenants moved in. So while these may be rare incidents, they do occur. When you least expect it, expect it, and have that cushion.
Lots of properties work as long as things go well. But as soon as you have a major problem you're suddenly out of pocket thousands of dollars. Big repairs do eventually need to be made - roofs, furnaces, sewer lines ($6200 last summer). Tenants do occasionally require evictions and cause extensive damage. Some months your only expenses are taxes and insurance. Some they're not.
There are many good posts and great encouragement ehre but this post by Jon is what I would put at the top of your list. 6 properties that cash flow is fantastic, but how long have you had them? I, like you, thought I was doing really well and was cash flowing quite nicely on 2 properties bought pre-BP.
Truth is, I was right...until vacancy. I had tenants for over 3 years and was feeling pretty good about myself, but as soon as the units went vacant there was the realization of repairs. Not just holes in wall, carpets, paint but facia boards, roof, full AC tune-up (Phoenix) new landscaping, windows treatments and more. This was to 'fix' the property AND needed in order to attract new tenants and keep the rent where I wanted. It then took a while to rent at that rate and suddenly the 50% rule that I didn't see in years 1-3 jumped to 70% in year 4! All told, I probably average around 45% expenses across the 2 properties over 6 years. The point is, my cashflow was not nearly as good as I believed once stuff happened. I think that is Jon's point. If you are closer to 1% you will struggle where as you will have much more wiggle room and 'real' cashflow after big repairs if you get closer to 2%
I realize you may have a totally different experience and our markets are different but I wanted to point out that the expenses can catch up to you and that's why getting 2% is great. I have never had it, but it sounds great :)
If you are newer, I suggest taking a look at the blogs. Mark Ferguson has a great blog showing that you do not have to necessarily fret over the 2% rule. I think he gets around 1.3% and he does quite well. I am finding the best deals (for my taste) in my area are around that same mark. If you are under 1% it just doesn't work...usually.
as others mentioned, ROI, COC return and more all play into if the property is a good deal or not. Great to see you cashflow on 6 properties.
check out the blog from Mark here, its a very good read and may bring a bit of piece of mind:
Brian
I never, ever stated that. In fact, other than to say that I wouldn't be interested in a 6%, I haven't made a single statement in this thread related to my personal buying criteria.
But you already know that.
For some reason, instead of trying to help people, you seem to like to try to derail threads for no apparent reason. In this case, you made up ridiculous arguments, asked to see the math, and when I showed you the math (that validated what several of us have been saying), your response was, "But hey, made you guys do math!"
As if your entire goal was to waste our time responding to you.
Other than the misuse of the term "generates" not sure what you are complaining about?
The other thing I am complaining about/correcting is the definition of NOI in a cap rate. There is no professional that will define Net Operating Income as 50% of Gross rents. To compute a cap rate you NEED NOI. And EVEN then if you present an investor a cap rate comp with ALL components of the NOI they will analysis EACH component to see if the BUYER that created that cap rate comp actually bought a market NOI. Anyone not doing an analysis of each cap rate comp will not be making an informed offer.
12% return? Are you saying I can place $12,000 in my pocket every year during my holding period AND KEEP IT? What is your definition of this "return"?
I've explained to you in the past (several times) how this works, but let me try again...
You start with your gross income. You subtract expenses and capex. Then you subtract debt service. What is left is your cash flow. If you divide cash flow by your total investment, you get your cash-on-cash return.
This is just one return metric. There are many others, and different investors will use different metrics in their business.
That cash flow will be reduced by your business operating expenses and deductions, and that is you net income. You'll pay taxes on your net income, and the rest is yours to keep.
Here is more information:
http://www.biggerpockets.com/renewsblog/2010/06/30...
If you have additional questions, I'd recommend starting a new thread as this is a good bit off-topic from what the OP was asking...
There is no professional that will define Net Operating Income as 50% of Gross rents.
I'm starting to think there is a comprehension problem here, Bob...
Nobody here is defining NOI as 50% of gross rents. The definition of NOI is very well defined (Google it), and there is nothing in the definition related to gross rents.
We are simply stating that -- on average, over long periods of time and across many units in diverse locations and using property management -- NOI is typically pretty close half of gross market rent. Sometimes it's closer to 45%; sometimes it's closer to 55%, but in general, it's in the 50% range.
We refer to this as the 50% rule and it has nothing to do with the definition of NOI.
If you're still confused, please start a new thread and I'll try to explain it my simply.
I never, ever stated that. In fact, other than to say that I wouldn't be interested in a 6%, I haven't made a single statement in this thread related to my personal buying criteria.
But you already know that.
For some reason, instead of trying to help people, you seem to like to try to derail threads for no apparent reason. In this case, you made up ridiculous arguments, asked to see the math, and when I showed you the math (that validated what several of us have been saying), your response was, "But hey, made you guys do math!"
As if your entire goal was to waste our time responding to you.
So now you are saying that to make a decision to purchase a property you will get cap rate comps AND then divide the subject property's NOI by the comp cap rate INSTEAD of using the subject's anticipated cap rate by dividing the NOI by your purchase price? OK? Then my work here is done.
But, the fact that you said you would not be interested in a 6% cap rate tells me that you don't understand cap rates. What if the market cap rates were 4%? You could do a quick flip and make money.
If you think my pointing out correct ways that investors utilize real estate concepts and terms is NOT helping people here then I would have to question your motive. It does seem that some here prey on inexperienced investors and try to sell them a "return" that isn't. I notice you failed to respond to my question about your so called 12% return. You actually wasted a lot of MY time in another thread where I earnestly spent my time to help you understand how cap rates actually work in the professional market place. I made a mistake in my post and readily admitted and explained it. I made a joke. SORRY.
We refer to this as the 50% rule and it has nothing to do with the definition of NOI.
If you're still confused, please start a new thread and I'll try to explain it my simply.
Did you forget that earlier you were computing cap rates? Cap rate = NOI/Purchase price
You computed a cap rate using the formula (50% of gross rents/Purchase price= cap rate.
What did I miss?
Here in your own words...
Now, if you're familiar with Cap Rate, you'll quickly realize that this means our property has a 12% cap rate. In other words, if a particular property follows the 2% rule and you accept the 50% rule, you should expect that the property should generate about a 12% cap rate.
I have to say I felt the same way the OP did when I first discovered BP. What I quickly realized is that these rules of thumb do not apply to my market, specifically the properties I was interested in investing in. Like the OP I was only interested in A+ markets in the urban areas of Denver, and was happy to take a lower return.
People have brought up good points, however I have never even come close to 50% expenses, the expensive urban houses are often smaller both in square footage and lot size. The neighborhood I specialize typically has 25x125 lots, 1000-2000 ft homes and command $350-400 PSF. Repairs are no more expensive, maintaining a lot is no more expensive, property taxes in Denver are extremely low. My most recent purchase is 1500 sq feet and just rented for $3200 per month on a 25x125 lot. I can promise you I will not spend $1600 per month in expenses.
At the time I was just trying to learn as much as I could about real estate investment, and what I quickly realized once I started investing is to throw out the rules learned from this website and evaluate each deal individually.
@Grant P. I have never hit the 50% rule either. When tax rates can be ten times as much in some states as others it shows how flawed the rule is. Some states may have $400 a month taxes compared to $100 a month in other states for a property that rents for the same amount. If rents are $1,500 a month the costs would be 20% higher just from taxes alone!
People have brought up good points, however I have never even come close to 50% expenses, the expensive urban houses are often smaller both in square footage and lot size.
First, I don't mean to discount you (Grant or Mark or anyone else) who has different experiences. Obviously, all rules have exceptions (otherwise they'd be physical laws :-)...
Certainly, there are houses that will have NOI well above 50% of gross market rents and certainly there are houses that will have NOI well below 50% of gross market rents.
In my experience, houses that have expense ratios much less than 50% tend to be on the expensive side of average rental prices ($300K+); houses that have expense ratios much more than 50% tend to be on the inexpensive side of average rental prices (less than $50K).
This makes complete sense from a supply and demand standpoint...
Nobody should be relying on the 50% rule to make buying decisions, but from a modeling tool, discussion standpoint and use as a gut-check, it tends to be a pretty good tool in my experience...
12% return? Are you saying I can place $12,000 in my pocket every year during my holding period AND KEEP IT? What is your definition of this "return"?
That cash flow will be reduced by your business operating expenses and deductions, and that is you net income. You'll pay taxes on your net income, and the rest is yours to keep.
Here is more information:
http://www.biggerpockets.com/renewsblog/2010/06/30...
Thanks for answering. I appreciate the give and take as long as it doesn't get too personal.
In your blog you stated..
It
Good question @David Cohen I agree with @Ben Leybovich
While still a beginner with two properties I plan on being a true buy and hold investor for the 'long term.' I'm roughly at 1.6% rule on a recent duplex I bought. Cashflowing about $800 over PITI and expenses. I estimate a roof replacement, A/C replacement in both units, possible hot water heater replacements and minor repairs to occur over the next 10 years. Let's say its 12K in CAPEX (easy numbers). Even if I don't actually have to pay these expenses, chance are when I try to sell the buyer could make me reduce my price by the amount of the required CAPEX. Not only that but don't forget about the taxes you have to pay for depreciating the property. That will have to come from somewhere. Holding costs in between vacancies. All of those factor in. I couldn't imagine doing that with a property below the 1% rule.
Just my two cents but when you factor all of those back in, it's merely having reserves to account for unexpected (or anticipated) expenses as a true buy and hold investor.
Grant it, if you buy a 'rent ready house' and sell after 2-3 year before any failures take hold those rules may not apply so a lot of it depends on your exit strategy.
You did no distinguish between operating expenses and ALL expenses. You seem to repeat that other expenses only include taxes and "deductions" whatever that means. There are potential HUGE expenses besides these yet you tell me I can "pocket" the rest? Would you expand on all expenses and operating expenses as it relates to how much of that $12,000 "return" I get to keep?
Bob - I honestly have no idea what you're talking about.
I defined cash flow for you. I think we're in agreement there.
You asked how of the cash flow you get to keep. I can't give you that answer. You really need to speak with YOUR tax professional on that, because it's specific to your business and personal financial situation.
It will depend on how much you spend on other business expenses (tools, office space, employees, etc.), how much you pay in taxes, what deductions you have, etc. These are all things that are specific to your business and your personal financial situation.
If you want to get an idea of how much of your cash flow you'll actually pocket, you probably want to speak with a tax professional. He will be able to help you analyze your business expenses, your tax situation, etc, and then tell you how much of the cash thrown off by your rentals you'll be able to keep in your pocket.
If you want to discuss your specific situation and how much money you can keep in your pocket, please start a new thread with your specific questions...
You did no distinguish between operating expenses and ALL expenses. You seem to repeat that other expenses only include taxes and "deductions" whatever that means. There are potential HUGE expenses besides these yet you tell me I can "pocket" the rest? Would you expand on all expenses and operating expenses as it relates to how much of that $12,000 "return" I get to keep?
Bob - I honestly have no idea what you're talking about.
I defined cash flow for you. I think we're in agreement there.
You did not distinguish between operating expenses and ALL expenses.
You SEEM to be stating that ALL expenses of a property are included in the OPERATING expenses that are subtracted from the income to get the NOI. Well, except for income taxes. Operating expenses do not include roofs, driveway replacement, spalling, updates, excise taxes, etc. Operating expenses are pretty narrowly defined yet there are other expenses that come out of the cash flow. Can you think of any other expenses that are not operating expenses but are deducted from cash flow?
People like Ali Boone only include
"Calculate the Monthly Expenses: These include property taxes, insurance, property management fee (if applicable), mortgage or financing (if applicable), homeowner's association fee (HOA) (if applicable), vacancy and repairs" She does later state correctly that financing expense is not included.
Do you have an idea of what I'm talking about now?
Thanks to all for the education on these terms. I guess I was trying to figure out if I could continue my investment strategy or had to look for more lower class properties that could deliver better numbers. Seems like it's really a balance between finding properties I feel I can manage because they're close and the numbers.
I'd love to get 1% and now that I know the rule I've been desperately looking, but they're hard to come by.
You SEEM to be stating that ALL expenses of a property are included in the OPERATING expenses that are subtracted from the income to get the NOI. Well, except for income taxes. Operating expenses do not include roofs, driveway replacement, spalling, updates, excise taxes, etc.
Bob -
I already taught you that earlier in the evening when I wrote:
"...technically, capex is factored below the line for NOI, not above."
I'm trying to help you here, but you have to help yourself as well. Please go back and read everything I've written, and again, if you have additional questions, feel free to start a new thread.
You SEEM to be stating that ALL expenses of a property are included in the OPERATING expenses that are subtracted from the income to get the NOI. Well, except for income taxes. Operating expenses do not include roofs, driveway replacement, spalling, updates, excise taxes, etc.
Bob -
I already taught you that earlier in the evening when I wrote:
"...technically, capex is factored below the line for NOI, not above."
I'm trying to help you here, but you have to help yourself as well. Please go back and read everything I've written, and again, if you have questions, feel free to start a new thread.
But if you're doing below the line capex figures you will only use the amount that you spend THAT year. What number are you using? Also in your 12% example you did not do any below the line factoring so what are you talking about? Now after I've bought your "deal" you want to throw in some below the line expenses. I want my $12,000, (minus income taxes, of course) LOL!
Even though I've been involved in more than $40,000,000,000 in valuations
I don't mind learning something but you need to know what you're talking about.
Turn Key? More like Turn Coat!
I have to say I felt the same way the OP did when I first discovered BP. What I quickly realized is that these rules of thumb do not apply to my market, specifically the properties I was interested in investing in. Like the OP I was only interested in A+ markets in the urban areas of Denver, and was happy to take a lower return.
People have brought up good points, however I have never even come close to 50% expenses, the expensive urban houses are often smaller both in square footage and lot size. The neighborhood I specialize typically has 25x125 lots, 1000-2000 ft homes and command $350-400 PSF. Repairs are no more expensive, maintaining a lot is no more expensive, property taxes in Denver are extremely low. My most recent purchase is 1500 sq feet and just rented for $3200 per month on a 25x125 lot. I can promise you I will not spend $1600 per month in expenses.
At the time I was just trying to learn as much as I could about real estate investment, and what I quickly realized once I started investing is to throw out the rules learned from this website and evaluate each deal individually.
Yes repairs are going to be similar for some things but I'd bet you'll spend more on others like appliances or carpet. But your taxes, insurance, vacancies, and mgmt fees (if you have any) will be driving your total expenses closer to 50% over the long run. Just to reiterate the 50% rule is only a rule of thumb and is only meant as a way to remind people particularly newbies, that there will be a lot of expenses that they may not be considering when looking at deals or determining cash flow.
A few months back, I believe you were bragging that you had done $20B in valuations...I guess it's been a good couple months for you, huh?
If you're going to make up stories, you need to be able to keep them straight...
Thanks to all for the education on these terms. I guess I was trying to figure out if I could continue my investment strategy or had to look for more lower class properties that could deliver better numbers. Seems like it's really a balance between finding properties I feel I can manage because they're close and the numbers.
I'd love to get 1% and now that I know the rule I've been desperately looking, but they're hard to come by.
David,
I once took an investment class that flipped a common financial planning rule around. We commonly see the investment calculators that calculate how much money you will have at age 65 if you put in X amount and earn a (completely BS) average market return of 12%. You know the one that is on Fidelity or Vanguard's site. Well, what if you determined what you needed and then solved for the rate of return? This is much more difficult for a financial planner to do, and it is even harder to provide you with above stock market rates of return; however, I think this is the key. Hidden in the J. Scott vs. Bob Bowling glossary war of mid-2014 is the idea of cash on cash rate of return. How much is your invested amount making you is the real goal you need to look at. If you can figure this out, then you compare multiple investments. If you need 6% to get to your goal, but 6% yielding assets. If you need 20%, buy those. Most of us BP kids like real estate a lot. However, there is such a range of returns out there due to different markets and techniques. J. Scott is no amateur so he his advice and plan on those capital requirements coming in the future. If you can structure your investment while planning on this factor, you will be successful for a long time and not just the next few years. Ultimately, that is what we are all doing this for isn't it?
A few months back, I believe you were bragging that you had done $20B in valuations...I guess it's been a good couple months for you, huh?
If you're going to make up stories, you need to be able to keep them straight...
Check my profile...or are you just trying to piss me off so I won't follow up? Com'on, don't let my experience intimidate you. It seems you are trying to derail this thread like you did the last one. Can we please continue with a civil discussion?
So last discussion was below the line adjustments. Balls in your court.
:-)
Just for some context, Bob comes around here every few months and starts to troll just like he did in this thread. Normally I ignore it, but he caught me in an obnoxious mood today...
:-)
Just for some context, Bob comes around here every few months and starts to troll just like he did in this thread. Normally I ignore it, but he caught me in an obnoxious mood today...
Seriously? ................................................Did NOT!