Why can't this property cash flow?

Question

Alex Craig · Answer

Account Closed Agree 100% :)

I always look at the unit itself and develop a firm number based on property class, complexity of house, how many bed/bath, etc.  A 3/1 home that has vinyl plank instead of carpet with a carport that is 1,200 sq ft will with $750 rent will likely have a much different % of rent then a 4/2 home, 2200 sq ft with 2 car garage (why do tenants constantly break these things), carpet in a large % of the home with a much larger AC unit.

Also, original condition of home will make a big difference. A fully rehab house would have much less maintenance then a home made "rent ready." Personally, I love a little 3/1 as getting the home ready for the next tenant can basically be done in 1 day, the plumbing bills are lower and when a new AC unit would need to be replaced, the cost difference between a 2.5 ton and a 4 ton is pretty big.

Matt Herring · Answer

thabks everyone for all the replies!  I think this one just isn't going to work...

Account Closed The insurance amount was quoted by my insurance company at $47/month. Also, I'm sure you are right about that maintenance estimate. I was pretty unsure of what to expect with that.

I just don't think this one will be a winner. Thanks again everyone

Account Closed · Answer

Skip it.  Your maintenance budget is too small and even with getting a lower rate on a loan, you're still not going to cash flow.

I have three rentals and I routinely spend much more than $210 on maintenance every couple of months.  Even if I do the work myself, taking into account mileage to and from the rental, I can hit that number very easily...call out a handyman and that money will be gone in flash.  You'll be in the red with an electrician or a plumber and when you go to flip the unit, you're going to be short as well.

My guess is insurance estimate is a bit low too (maybe by about $5 or $10 per month based on my experience - my cheapest rental in a good location is $56/month).  You're in Florida - is the property in a flood zone?  If it is, it's going to run you an additional $750+ per year (and be required if you have a loan on it).

The ONLY way I see this working is by putting more money down and reducing your monthly mortgage payment...or paying cash for the property rather than financing it.

Jim Adrian · Answer

Why 6.5% interest?  This seems high to me.  The deal becomes better with lower rate  but as others said its one to pass on.  Your cash on cash return is only in the 6% range.  This needs to be higher.

Eric James · Answer

That is a high interest rate. Some (many) areas don't work well for investing. You can spend months trying to find each deal there, or look elsewhere deals are more plentiful. Also, sometimes certain types of properties that are overlooked and can be had for good prices.

Alex Craig · Answer

Vacancy is # 1 cash flow killer. If you are budgeting $900 in maintenance a year, it will be hard to be profitable. Can you lock in longer leases such as 18 month or 24 month leases. It is really hard, if not impossible to use leverage and flip a tenant every 12 months.  Also, you can control certain aspects of why tenants move. 2 big reason why tenants move is dissatisfaction in the unit and landlord. With your rent being $600, I am assuming lower income area.  Don't feel like you have to raise rents on them.  $25 a month, while may not sound like much, it is huge to tenants in this space.  Not to get political, but if the current budget passes, it could dramatically effect lower income tenants if there food stamps are cut and SSI benefit for one of their children are cut. I would guess only 10% of our management portfolio has a rent under $750, but I would guess 80% of our tenants under that rent are working, but also receive food stamps and someone in the house is getting SSI.

David Dachtera · Answer

@Matt Herring,

Remember that if it's on the MLS EVERYONE sees it. The "good" properties (bargains) are long gone.

Matt Herring · Answer

thanks for the replays! So far I have only used the MLS. And I thought the taxes seemed super high. I'll have to confirm that is correct. If it's not correct, maybe I could possibly get closer to where I neee to be.

Chris Ramirez · Answer

Take a harder look at your budget:

is it common in that area for property taxes to be over 2%?

Can you get a better interest rate for your loan?

In an area with $50,000 properties, can you reduce your maintenance costs to receive an annual savings?

In the end...you can't force a deal to work if it doesn't want to work.  The 2% rule is a thing for a reason.

Why can't this property cash flow?

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