Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
I was just reading Ben's latest blog post and he brought up some real numbers after owning 100 doors. His experience has led him to the conclusion you need to get $1000 per month(sfh) in order to cover expenses and still make a profit. Now he is in Ohio but he is convinced this rule applies nearly everywhere. There are some exceptions for being local but if it was under $1000 that was more of a job/investment vs a semi passive income play.
I do not agree with it. Only one of my single family homes makes over $1,000 in gross rent each and I still make money on them.
Dawn you are savvy enough to be one of the exceptions. Would you think this is generally a good rule for newbies starting out?
Generally, anyone new at anything is going to make more mistakes than someone more experienced. However, newbies to real estate on Bigger Pockets have access to thousands of more experienced investors to help them with deal analysis and any questions they may have. So it's like having thousands of mentors at your fingertips. Plus, there are many people who are willing to work with someone locally just by having that person offer to buy them lunch or coffee.
Without having the internet, and sites like this, newbies didn't have as much of a support system. So now, someone could take on a project like this. It's just important to know your own limitations.
I do not agree with it. Only one of my single family homes makes over $1,000 in gross rent each and I still make money on them.
Dawn you are savvy enough to be one of the exceptions. Would you think this is generally a good rule for newbies starting out?
Generally, anyone new at anything is going to make more mistakes than someone more experienced. However, newbies to real estate on Bigger Pockets have access to thousands of more experienced investors to help them with deal analysis and any questions they may have. So it's like having thousands of mentors at your fingertips. Plus, there are many people who are willing to work with someone locally just by having that person offer to buy them lunch or coffee.
Without having the internet, and sites like this, newbies didn't have as much of a support system. So now, someone could take on a project like this. It's just important to know your own limitations.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
11y
Dawn I agree. Now I think I am still a fan of this rule for some reasons not exactly stated in Ben's post. Reasons centered around time/hassle/returns and exit value. But I hear ya with the interweb and bp opening doors.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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@Tony Gunter I would tend to agree if you are using some expensive contractors and aren't able to get things done cheaply. Cheap rentals require cheap repairs.
One interesting thing I just observed is that over a 20 year period on a sfr my monthly cost for maintenance, cleaning, repairs and capex were $171 pm while a duplex during the same time had a monthly of $195; only $24 higher for the extra unit.
The big thing though is that the sfr has appreciated at twice the rate as the duplex.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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@Matt R. I would tend to agree if you are using some expensive contractors and aren't able to get things done cheaply. Cheap rentals require cheap repairs.
One interesting thing I just observed is that over a 20 year period on a sfr my monthly cost for maintenance, cleaning, repairs and capex were $171 pm while a duplex during the same time had a monthly of $195; only $24 higher for the extra unit.
The big thing though is that the sfr has appreciated at twice the rate as the duplex.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
11y
I actually agree in principle.
Major expenses (think roofs, furnaces, etc) vary less in price from area to area than rents vary. And that is a problem, if your goal is investment as it is traditionally defined, rather than a job operating a rental housing concern.
I have a modest little house that rents for $1200 in my newest lease. It has all new major systems, because that is what I do. And that $4000 new roof would probably cost about the same in Ohio, but in large parts of that state, the rent might be more like $750.
I think the lower-priced rentals mean one of two things. Either you are essentially "living off the principal" by not fully accounting for future capex, OR you are basically doing your own management and making up for the lower rent there.
Let's pretend you guys were out of the country for the next 18 months. Would your rentals be just fine or is the hands on value you provide so critical that you would be worried?
Let's pretend you guys were out of the country for the next 18 months. Would your rentals be just fine or is the hands on value you provide so critical that you would be worried?
Outstanding question. THIS should be the new "rule", the one that determines whether you are "investing" or "working."
I have a property under a PM where the rent is $675, and $810. I've never seen the tenants and the PM does the work.
I entirely believe it. My questions then would be how old is the roof, and are you accounting for 1/20th of the cost of a new one in your annual expenses. The same with furnaces, hot water heaters, etc.
Rental Property Investor · St Paul, MN · Member since 2013 · 91 posts · 45 votes
11y
I don't think anything with a $ value is a viable'rule of thumb'. Markets are always change, inflation happens. Even if it was true today, it won't be for long.
On one $750 house a new 50 year roof was installed in 2007 and a new gas furnace and central air was installed in 2012. So I'm not anticipating a big expenditure soon, but there is always the unforeseen.
I've had 2 properties involved in car accidents. One just about totaled the house, car left the road, at 4 AM and went through the concrete foundation and ended up in the basement, causing severe structural damage. I don't have a contingency for car accidents involving houses. Ended up donating the house to a college, who sold it as-is to a rehabber. Another house was in a flood zone where the 100 yr flood level was 8 ft above the ground, and in recorded history there never was flood waters higher than 8 ft. A super storm/hurricane came through and we had 13 ft of water, 5 ft on the 2nd floor. I didn't have a contingency for that either.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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The other really big problem is the cheaper houses tend to be in cities that are hurting financially with a declining tax base from their housing so taxes are disproportionately higher. Always check taxes. Looking at houses in Rochester NY it appeared that some wouldn't cash flow w/o a mortgage.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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@Matt R. not designed my life to be away for that long. I like the hands on process of interviewing and qualifying new tenants. Could stay away until a vacancy came up though. Cell phones are a great thing and texting is awesome if you have a handyman you and your tenants trust.
Managing 7 units is a minor inconvenience and I actually enjoy it. This could certainly be changed but I just don't care for managers of any kind be it property or money, or as a boss.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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@Jeff S. That makes sense Jeff. My experience with sub $1000 is limited to one. So dealing with a PM did not make much sense. If I had 7 I would most likely go the PM route but understanding that could be a gamble as no one will ever care more about your investments than you. I am guessing in Portland tenants are generally decent. I think in some areas where the sub 1000s exist the tenants are a bit more challenging. I had good luck but I realize that could backfire anytime. I think for newbies Ben"s rule is probably a good one with the exceptions noted.
The numbers will be different per location, but if an investor doesn't accrue for these expenditures, then they won't have a clear and accurate picture of how the investment is really performing. Sure they may be making money today, but will the major expenditure in five years eat up the previous years' returns? That's what Ben is getting at.
If you are cash flowing $300 a month, but you aren't accurately accruing for cap ex (anyone can say cap ex is 10% monthly gross rents but that doesn't mean it's accurate), then are you truly cash flowing $300 per month? The answer is no. Ben wants people to understand that accruing for expenditures should be a part of your business processes and also your financial analysis for currently owned rentals and potential investments.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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@Brandon Hall Agreed. We really need to learn what the IRR is. That hidden value is what Ben's analysis discovered. After 100 doors he has a grasp on those numbers. But for sure IRR is the bottom line and lets you know when is the best time to exit. According to Ben if it is sub $1000 per month rent that time is now. I am incline to believe him, thankfully before I went down that road.
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
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Not another stupid rule that will be contorted in every which way for evil! Can't we just agree that there doesn't have to be a rule for an investor to account for future capex? You only see this problem with people that foolishly invest for cash flow, what ever the hell that is, and not for profit. Newbies, invest for profit and don't be a cash flow loser.
$1.000 rent? My lowest rent property is $1,095. It has no furnace, it has no kitchen, only two windows, less than 300 sf so little paint and flooring expense. Geez, I could totally rent it for $995 and cover capex and make a profit. No $1,000 rule for me.
Everyone might also want to guess how much that $5,000 roof is gonna actually cost is 20 years.
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
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Someone has to manage a rental. There has to be someone to answer tenant questions, get paperwork processed, make sure rents are going where they need to be, etc. If it wasn't me, it would be someone else. Right now I'm at 34 rental units with tenants and I still have time to do volunteer work. When the tenants are good, you don't have headaches. The headaches come when tenants don't pay or cause issues.
Let's pretend you guys were out of the country for the next 18 months. Would your rentals be just fine or is the hands on value you provide so critical that you would be worried?
Outstanding question. THIS should be the new "rule", the one that determines whether you are "investing" or "working."
Agreed, I want to get into real estate as an investment, not to give myself another job. It will take a lot of work to get there, but that's the goal. Not to just save a few dollars because I'm managing them all myself, and now I work twice as much as I did when I had a "regular job"