With mortgage in mind, how do you calculate rent

Buying & Selling Real Estate

With mortgage in mind, how do you calculate rent

Investor · Honolulu, HI · Member since 2016 · 362 posts · 93 votes

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!

85 views

Most Popular Reply

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

10y

Originally posted by @Zach Quick:

@Account Closed 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.

See this reply in the discussion

27 Replies

Jump to latestLatest

Sort by

Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@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).
0 Reply
Justin Young
OP
Investor · Honolulu, HI · Member since 2016 · 362 posts · 93 votes
10y
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.
0 Reply
Bryan O.
Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
10y
@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!
0 Reply
Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
10y
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.
[email protected]Podcast Guest on Show #301
1 Reply
Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
10y
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.
@Account Closed might have some good advice.
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
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."
0 Reply
Brit Foshee
Investor · Fort Myers, FL · Member since 2012 · 462 posts · 200 votes
10y
@Account Closed
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. =)
0 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
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.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Brit Foshee:

@Account Closed
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.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Thomas 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.
0 Reply
Brit Foshee
Investor · Fort Myers, FL · Member since 2012 · 462 posts · 200 votes
10y
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.
0 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
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.
0 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
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.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Thomas 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?
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Brit Foshee:

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.
0 Reply
Zach Quick
Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes
10y
@Account Closed 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 :)
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Thomas 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.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Zach Quick:

@Account Closed 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.
2 Reply
Jay DeCima
Redding, CA · Member since 2016 · 224 posts · 143 votes
10y
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
1 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
10y
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"
0 Reply
Chad Olsen
Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
10y
@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.
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Account Closed cash flow is getting paid today and appreciation is getting paid tomorrow. Why wouldn't a smart investor want both? @Brit Foshee makes the good point that appreciation is good when things are going up. It is not logical to believe that because prices went up in the last year, that they will go up in the next year. I will challenge that concept based on historic data. There will likely be periods where prices are flat or even decline. You say cash flow is only good as long as it is coming, but the same is true of appreciation. Buying the right properties for appreciation also takes skill. Even if your primary plan is appreciation, you still need to have a tenant in there to pay the bills while you hold the property.
The other thing nobody is telling @Justin Young is that your mortgage is not the only expense. Properties need maintenance and upkeep. Also as the value increases, so do your taxes.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Of course you want both cash flow and appreciation but ONLY the appreciation markets gets both so why waste your time and money in no appreciation markets for possibly a few dollars in immediate cash flow?
My appreciation rates are based on decades of data and yes it fluctuates but duplicates itself in every decade.
Rents are good and needed for most people but I know a few people that never rent and walk away with hundreds of thousands of dollars in appreciation.
The thing about relying solely on rents is that if you are not a good landlord/manager you have no profit. Appreciation happens without that skill. Truely passive income.
1 Reply
Justin Young
OP
Investor · Honolulu, HI · Member since 2016 · 362 posts · 93 votes
10y
I appreciate all comments and feedback. @Bob Bowling, how do you determine when a certain market will appreciate? Is that achievable? I only ask because there are a few areas I'm looking at investing in but I'm not even sure if appreciation is in the equation so for now I should probably just bank on steady cash flow. Just asking for your feedback as to figuring out if and when appreciation takes place.
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Simple answer. Experience. Location, location, location. I always ask myself if rental demand dropped 50% why would renters/buyers prefer my place.
Unless it is a completely new area it WILL have an appreciation rate. Ask an old experienced Realtor/investor what the property type you like was selling/renting for in the 00's, and the 90's and the 80's, etc. I just look at the stabilized highs for each decade and sure enough the values match the typical rate in each decade. For condos in the Diamond Head area that has been about 8-9% but seems to be trending a little less because general inflation has been so low for quite some time. I believe when interest rates and inflation upticks it will revert to about 9% long term.
I just looked at my rents on my 1978 property and I generally see 6% rent growth but it is actually about 6.3%. .3% sounds trivial but if you are looking over a 30-40 year period it really adds up.
Now I don't do it but it would probably be good to look at the low rent/sale in each decade also.
I do think I have a feeling for the bottom of the market. I have bought in three states in the last 5 decades and have had a property double in value within about 2 years in each decade! For the top I usually calculate the high from last decade and if it has doubled in the current decade I assume that is about the top although there will generally be sales 10% over that but those usually lose that value in the next down cycle.
Not a lot of economic graphs blah, blah but I do keep a general feel for the economy and its short and long term direction.
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free