With mortgage in mind, how do you calculate rent

27 Replies

Aloha BP! My wife and I have started looking at properties this past week. We haven't put in an offer yet but it seems as though we're getting closer and closer to landing that first deal. Getting the first deal under our belt would definitely ease some of the anxiety I'm going through. I really want to be sure the first deal makes sense, logically and financially.

When figuring out rent, I know its common to find out what comps are charging for rent. This number will be the ballpark value when figuring rent for the subject property. Now lets say I have mortgage that is slightly higher than the rent value, should I disregard this property for investment purposes because it doesn't cashflow from day 1? Or should I eat the cost and pay out of pocket for now knowing the property will cashflow later? Or I could pour some capital into the property along with rent to bring the mortgage down quicker and refi later?

I feel as though I'm over-analyzing properties but I just want to make sure I can align as many factors as I can before we pull the trigger. Thank you to all in advance, ALOHA!

@Justin Young , regardless of why* you would even think of buying property that will not cash flow (even before  you account for other expenses like vacancy and maintenance costs), rent will always be determined by the market! ie. you're right: "find out what comps are charging for rent". Aloha...

* (Yes, I'm aware that some think that Hawaii property appreciation is bullet proof so buy buy buy).

Originally posted by @Brent Coombs :

@Justin Young, regardless of why* you would even think of buying property that will not cash flow (even before  you account for other expenses like vacancy and maintenance costs), rent will always be determined by the market! ie. you're right: "find out what comps are charging for rent". Aloha...

* (Yes, I'm aware that some think that Hawaii property appreciation is bullet proof so buy buy buy).

 Thanks for clearing that up @Brent Coombs. Now I know where to start off when I run numbers. Slowly but surely, I'm gaining confidence with the process.

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@Justin Young I looked at HI property not too long ago. I was there for a few years in the military and it looked as if my sister was going to move out. If you are investing for cash flow it will be very difficult for you. You will likely have to become very familiar with rent-by-the-room rules and methods because that may be the only way you can cash flow.

If you are paying money into the property every month instead of making money then you are not investing. In that case you are putting money into a long term savings account.

Unless you are really sure that spending money in a very expensive market is the best thing you can do (some are very worried about investing away from home), I would focus some energy into learning about ways to partner and find someone doing deals that do make money (predictably) or if you get confident on your own do those remote deals yourself. With all of the advances the internet provides with communication, documents, bill pay, etc. there are less reasons to fear distance. As the Real Estate Guys say, "Live where you want to live; invest where the numbers make sense."

Best of luck and happy investing! Aloha!

rents are determined by the market, not your expenses.

Remember that cash flow is: income - expenses - debt service. NOT income - PITI

if your rental income is $1000 and your PITI is $900...you're losing way more than you realize.

Investing in a property that negatively cashflows (income-wise) isn't always a bad deal. I would at least want the rent to cover my PITI and a majority (if not all) of my expenses. If the houses you're looking at are in really good areas and will appreciate 80 - 100% over the next decade, seems legit to me. Just do your research: job growth, market rates for appreciation over the past 3 decades and current rental rates. This would really be awesome if you could get tenants to foot a 15 year note.

@Bob Bowling might have some good advice.

Median home price up 9% and condo up 22%.  There's your profit.  And yes rents will follow.

Cash flow is for poor investors and investors that are poor.

http://www.bizjournals.com/pacific/news/2016/07/01...

July 5 Pacific Business News

"

the median price of single-family homes hit $760,000, up 9 percent from the median price of $700,000 in June 2015. The median price of condominiums was $413,000, up 22 percent from $338,500."

@Bob Bowling

While I can appreciate someone who owns 40,000,000 in real estate, I'd have to disagree that "Cash Flow is for poor investors"

I don't know a single poor cash flow investor unless they're just getting started or didn't actually cash flow.

Appreciation is nice as long as things are going up. =)

Cash flow is for investors, appreciation is for speculators.

Based on that Bob is correct. If you are making a living from investing you are considered "poor" in that you must earn a income to live. If you are already rich you do not need an income and speculating on appreciation is simply a hobby.

Originally posted by @Brit Foshee :

@Bob Bowling

While I can appreciate someone who owns 40,000,000 in real estate, I'd have to disagree that "Cash Flow is for poor investors"

I don't know a single poor cash flow investor unless they're just getting started or didn't actually cash flow.

Appreciation is nice as long as things are going up. =)

Cash flow is only good as long as it is coming in.  Appreciation happens without your management/skill/tenant.  You cash flow is in your tenants hands.  Yuck!  Cash flow investors have to pass on very profitable properties JUST because they fixate on cash flow and not profits.

Originally posted by @Greg S.:

Cash flow is for investors, appreciation is for speculators.

Based on that Bob is correct. If you are making a living from investing you are considered "poor" in that you must earn a income to live. If you are already rich you do not need an income and speculating on appreciation is simply a hobby.

speculate

[ˈspekyəˌlāt]

VERB
  1. form a theory or conjecture about a subject without firm evidence:

I have firm evidence.  I do not speculate.  Working for cash flow is a job.  It is not investing, it is scraping the money together to pay your cable bill. 


@Bob Bowling

Cash flow is only good as long as it is coming in.  Appreciation happens without your management/skill/tenant.  You cash flow is in your tenants hands.  Yuck!  Cash flow investors have to pass on very profitable properties JUST because they fixate on cash flow and not profits.

I don't "fixate" on cash flow.  I'll take less cash flow in an area that I think will appreciate more over time. I'm not a fan of the linear markets probably for reasons you'd agree, but I certainly do love cash flow and appreciation is the icing on the cake for me.

Bob for some earning a living is not fixating it is wise money management through investing. It pays the bills, puts food on the table and pays for toys. Some of us are very content earning what we do without having to wait to earn obscene amounts of useless money some day in the future. 

I would rather enjoy it today than die in a car accident tomorrow and have my children squander it away.

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Sorry to say Bob but although you may have past evidence to speculate on what may happen tomorrow you have no proof that it will in fact happen.

I have firm evidence to prove that sexual relations produces offspring. I am fairly certain you would not dispute that fact however to state that having sex will produce an offspring is speculation.

A investment is something that is anticipated to pay a regular return on a ongoing bases.

Speculation is based on past practice and involves an assumption that it will repeat in the future.  

Speculator is not a dirty word Bob, so try not to be such a financial elitist snob.

Nothing in life is a guarantee. 

Originally posted by @Greg S.:

Bob for some earning a living is not fixating it is wise money management through investing. It pays the bills, puts food on the table and pays for toys. Some of us are very content earning what we do without having to wait to earn obscene amounts of useless money some day in the future. 

I would rather enjoy it today than die in a car accident tomorrow and have my children squander it away.

Greg, nothing wrong with working for a living.  I do have a few quibbles with your live for today attitude.  But you are confusing investing with a job.  You are working for your tenant.  THEIR cash is what pays your bills.  THEY can fire you at any time and you have less protections for your "pay check" than the typical wage slave.  If you are happy with your job why does my post upset you? 

Originally posted by @Brit Foshee :

@Bob Bowling

Cash flow is only good as long as it is coming in.  Appreciation happens without your management/skill/tenant.  You cash flow is in your tenants hands.  Yuck!  Cash flow investors have to pass on very profitable properties JUST because they fixate on cash flow and not profits.

I don't "fixate" on cash flow.  I'll take less cash flow in an area that I think will appreciate more over time. I'm not a fan of the linear markets probably for reasons you'd agree, but I certainly do love cash flow and appreciation is the icing on the cake for me.

Perhaps you are in the wrong restaurant.  I don't work for my tenants for scraps.  Appreciation is meat.  The cash flow is nice but really more like small potatoes.

@Bob Bowling I get your points and I think largely you want people in high appreciation markets to invest in their backyards over venturing out into the "cash-flow markets" but you certainly have a way of portraying that at times :)

Originally posted by @Greg S.:

Sorry to say Bob but although you may have past evidence to speculate on what may happen tomorrow you have no proof that it will in fact happen.

I have firm evidence to prove that sexual relations produces offspring. I am fairly certain you would not dispute that fact however to state that having sex will produce an offspring is speculation.

A investment is something that is anticipated to pay a regular return on a ongoing bases.

Speculation is based on past practice and involves an assumption that it will repeat in the future.  

Speculator is not a dirty word Bob, so try not to be such a financial elitist snob.

Nothing in life is a guarantee. 

"Speculator is not a dirty word Bob, so try not to be such a financial elitist snob."  Gotta love when the hoi polloi use big words.  Greg, I have no trouble with the word speculator.  I do point out when it is misused like you have. 

Having sexual relations is not GUARANTEED to produce offspring.  In fact the success rate is actually pretty low.  Where's your speculation argument now? 

An investment also does NOT have to pay a regular return on an ongoing basis.  You have a wage slave paycheck mentality. 

Originally posted by @Zach Quick :

@Bob Bowling I get your points and I think largely you want people in high appreciation markets to invest in their backyards over venturing out into the "cash-flow markets" but you certainly have a way of portraying that at times :)

Mahalo.

Justin

Interesting conversation here.  I like all kinds of real estate and have bought most of them.  But I have to suggest, if you are beginning, that you seriously  put monthly cash flow up front.  It is not fun to take money out of your paycheck to pay for a negative s flow home that MAY go up in value.

My biggest success over the years came from buying GROUPS (5-8 houses) of older homes on a single parcel, in older, blue collar parts of town (not slums). Because banks will not finance these types of properties, 90% of the time I got seller financing (on over 250+ rental homes I had at my high point). The seller knew he/she would be taking back the financing. I did not have to talk them into it. My down payments usually were around 10%.

There are several blogs on my website that may benefit you.  If you are interested go the my website listed in my profile, go to right side of screen and scroll down to "CATEGORIES" and choose "REAL ESTATE INVESTING VS. SPECULATING".

I also started a BP post and will be posting on these type subjects probably weekly.

Good luck.

Fixer Jay DeCima

Having sexual relations is not GUARANTEED to produce offspring. In fact the success rate is actually pretty low. Where's your speculation argument now?

My point exactly, evidence shows that sex produces offspring, having sex does not guarantee it will produce offspring.

Evidence shows that real estate appreciates, purchasing real estate does not guarantee appreciation, hence appreciation is speculative. 

"Speculator is not a dirty word Bob, so try not to be such a financial elitist snob." Gotta love when the hoi polloi use big words. 

Are you referring to "spec-u-la-tor or fi-nan-cial"

@justin. There seems to be many different points being made on this tread. I would take them all with a grain of salt. Cash flow or appreciation or both? Really, in my opinion you need both. Starting out you really need CF and add you build your confidence and skills you mice more to both or just appreciation.

As for your initiate needs... you have to make sure you are taking all your expenditures into account. PITI is where your start but knowing the rest of your expenses is key.

Once you get a solid calculation of the NOI you can start looking at the metrics of the deal. You want to know the CAP rate, break even ratio, loan constant and the debt service coverage ratio. You want the BER<=0.85, DCR>=1.2 and your CAP rate to be higher than the loan constant of your financing. If you find a deal that meets all these criteria you have a really good chance at making it a good investment. But a poorly managed great investment is still a bad one.

Good luck! Let us know if you find something.