Las Vegas , NV · Member since 2017 · 11 posts · 1 vote
Hello BP, it's my first post so go easy on me.
How do some of you estimate what a property will cash flow and what your expenses will be before you buy? Is there a formula or perhaps a "rule of thumb"?
I'm currently active duty and wanting to use my VA benefits to purchase a four plex but before going into it, I want to understand how some of you get your numbers. I don't want to be naive and just calculate rent and mortgage. What are expenses that are often over looked?
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Nicholas Judd Others have hit on some of the key things, my additions would be:
1.) Look at "life expectancy" of capex areas like roof, HVAC, etc. It's easy to stomach a garbage disposal, water heater, etc. with monthly income but may be harder for an HVAC system replacement. If you have 2 years of life left in a roof that's a real (major) expense that is coming due and your net income won't cover it so you have to factor that in. Stuff like that doesn't show up in a calculator or spreadsheet because it's property specific. Nevertheless it's real!
2.) If you buy out of the area (even if you have a PM) you'll want to visit the property. Plane tickets, hotels, car rentals, food, etc. all add up. It doesn't take look long before your "check-in" trip costs $2K. If you buy a rental (as many do) that cash-flows $200/month that check-in trip costs you 10 months of cash-flow! Again, it doesn't show up on spreadsheets but it's a real expense even if it's just once a year.
Hope this helps.
Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
9y
@Nicholas Judd Welcome and enjoy the real estate journey. There are many experienced Pros on here that will chime in at some point. But here are the basics to account for.
Property taxes, Insurance, Capital expenditures, Simple repairs and maintenance, and Vacancies in the other units. My minimum rule of thumb would be a 1% return per month on investment. That means that the rent you collect each month is at least 1% of your purchase price. On a four plex I would want to cash flow about $200 per month per door. There is a lot of math that goes into such a purchase. But I know experienced investors on here have templates they like to use. There are also the BP calculators that you can try for free 5 times under tools. I suggest you attend all the webinars that this site has to offer. They will at the very least open your eyes to how much you have to learn so you don't get burned on a deal. I will leave it at that and let the men and women on here that actually own four plexes give you some more information.
Las Vegas , NV · Member since 2017 · 11 posts · 1 vote
9y
@Kristopher Hanks thanks for the swift reply. When you talk about the 1%, I want to clarify that I should be shooting for 1% per unit, not 1% per month overall?
Iv read the 3 books that Brandon turner wrote and he does talk about this sort of thing but I wanted to get some real world advice as to what I'm going to expect when I purchase something like a 4plex. I'm currently listening to the pod cast and soon will have a pro account on here to try the calculators out freely. I really appreciate the advice.
Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes
9y
@Nicholas Judd it is harder to get a sense of what is a good deal with straight percentage rules. They are a place to start, not a place to end. The quality and condition of the property are going to have a great influence. Does it need a lot of work? You should look into an important concept called Cap Rate. The higher the cap rate, the more the income it generates relative to the price / value of the place. BUT typically the higher the cap rate, the sketchier the neighborhood / property. So part of what you need to be thinking about is whether you want to buy a nice place in a nice neighborhood that doesn't generate a lot of cash flow but has potential for appreciation and doesn't need much work (called Class A or Class B) or a Class C place that might have a higher vacancy rate and need more maintenance but cash flows better when you have good tenants (which are harder to fine in a class C building / neighborhood).
Pay attention also to who pays the utilities.
And finally, you should be aware that a lot of people are buying up multi-family real estate now, including what some people here refer to as "stupid" money. As in "I got outbid on a place by stupid money." This refers to people who will pay more than a place is worth either because they don't know any better, or because they just want to park some money there. We are seeing a lot of money from overseas buying up places. In other words, don't pay more than a place is worth TO YOU.
Rental Property Investor · Davenport, FL · Member since 2016 · 593 posts · 382 votes
9y
@Nicholas Judd When I talked about 1% I mean for example: You purchase a four plex for $100,000. I would at the very least want the rent from all the units to equal $1,000 per month total. @Daniel O. makes some very valid points that you need to take into consideration. I like cash flow so I am willing to go into lower end neighborhoods. All three of my rentals in Cleveland are in less than desirable neighborhoods, at least for my standards. But that market has thousands of people that have rented their entire adult lives so they are used to living there and paying rent. All three of my rentals follow the 2% rule. I get about 2.5% per month on my properties because of the areas I chose to invest in. I took big risks, but they are working for me.
I will give you an example of one of my rentals so you can see what I mean. I bought a house for $12,500. Rehab was $13,500 plus about $500 in closing costs. I am in it about $28,500. I rented it in 2 weeks for $725 per month. $725 divided by $28,500 = 2.544% per month. Those are the kind of properties I like. I invest for cash flow. Higher end neighborhoods you invest for appreciation and a little bit of cash flow. But they are not for everybody. The 1% rule is something that would be a good deal in an A or B class neighborhood.
Disclaimer, again I do not own any multi-family properties so there is a lot more that goes into them like Daniel said. You need to know who pays the utilities on those properties. That could eat into your potential profit really quick.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Nicholas Judd Others have hit on some of the key things, my additions would be:
1.) Look at "life expectancy" of capex areas like roof, HVAC, etc. It's easy to stomach a garbage disposal, water heater, etc. with monthly income but may be harder for an HVAC system replacement. If you have 2 years of life left in a roof that's a real (major) expense that is coming due and your net income won't cover it so you have to factor that in. Stuff like that doesn't show up in a calculator or spreadsheet because it's property specific. Nevertheless it's real!
2.) If you buy out of the area (even if you have a PM) you'll want to visit the property. Plane tickets, hotels, car rentals, food, etc. all add up. It doesn't take look long before your "check-in" trip costs $2K. If you buy a rental (as many do) that cash-flows $200/month that check-in trip costs you 10 months of cash-flow! Again, it doesn't show up on spreadsheets but it's a real expense even if it's just once a year.
Hope this helps.
Las Vegas , NV · Member since 2017 · 11 posts · 1 vote
9y
@Daniel O. Thank you for your reply. I will look into Cap Rate and try to use towards my first buy. I will also pay attention to those "Stupid" money sales. I really appreciate the advice!
Las Vegas , NV · Member since 2017 · 11 posts · 1 vote
9y
@Kristopher Hanks Thank you for the reply! Im going to try and apply what you are talking about to my first purchase. I think that generating 1% with the rental rates as they are in Las Vegas it should be attainable.
Las Vegas , NV · Member since 2017 · 11 posts · 1 vote
9y
@Andrew Johnson That is great advice but my question is this. If I do have to replace a roof or HVAC, doesn't some of the expense roll into increasing the property value?
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Nicholas Judd I would say "kind of" in that I don't think there's a lot of value change in a property with a 2 year old vs. a 7 year old HVAC. You do get to start a depreciation clock ticking, which is nice. Ultimately, the issue is that you have to have the cash. If any capex expenses show up before the property itself has generated the required reserves you're going out of pocket. Going "out of pocket" for a property that is "supposed to make me money!" can be frustrating for those that don't anticipate it. Especially if their plan was to use revenues from Property 1 to help save for the down payment on Property 2. Consequently, a "foreseeable expense" suddenly because their equivalent of a "disaster".