Buy and hold Rental SFR numbers

25 Replies

I'm in Dilemma in figuring out the number on couple properties that I about to submit an offer. 

Prop1: 

Asking price 170k

I'm submitting offer for 160k

Dp : 25%

tax  4688/year

HOA 350/annually

Ins 80/month

flood ins: 40/month

Rental is $1495/month,  it can go up max 10% in 3 yrs lease, so i'm thinking to have 1545/month cuz the lease is due in Feb 2019. 

Tenant will take care all the maintenance (Mowing lawn), Landlord is only responsible for Tax and insurance

But when I add Vacancy, Repair & maintenance, cap-ex, and management fees,  never in my life I see cash flow positive, even when the rent is 1% or 1.5% from the asking price. 

I'm not sure if I could have positive cash flow without putting huge down, even then my cash on cash will be very low. 

Prop 2

asking price $211.500

thinkin to submit offer 200k

the amount of fixing isnt that much, just paint and cosmetic ($5000)

Dp : 25%

tax 5668/year

HOA 250/annually

Ins 80/month

flood ins: 40/month

Rental is approx $1750/month, 

I put 5% on Vacancy, Cap Ex, repair and 7% for prop mangmt

Which came out negative for cash flow and cash on cash

So, do I have to low ball every offer, which I've done, but because it is competitive market, of course some of the seller didnt even bother to counter. 

This is out of state investment , because at my backyard the price is double and some triple, it just doesnt make any sense. 

Any advice, from y'all experience investor would be appreciated, just to make sure I didnt miss anything. 

Thank you

It might be helpful to know which market you are looking to invest in. 

I think the 1% rule is a good rule of thumb when deciding on properties to evaluate. If you are not meeting or beating the 1% rule, I personally wouldn't consider looking at it. Once you factor in any repairs, you will probably be negative on cash flow for those numbers. I also personally wouldn't ever consider offering on a negative or close to negative cash flow property.  By financially supporting a property, you are loosing out on the benefits of financial independence through rental income. UNLESS you don't mind spending money for the next 15-30 years to financially support your portfolio and are ONLY looking at the end game of paid off properties 20-30 years down the road. Personally, I like the idea of re-investing cash flow into the business to continue to scale, pay down loans faster, and replace regular W2 income with passive income. But everyone has their own goals and numbers that work for them. 

I would find other investors in markets you are looking in and ask for recommendations on reputable wholesalers in the area. If the market is crazy competitive, you will need to find other means of getting leads as there are very rarely going to be deals on the MLS.

Originally posted by @Cassi Justiz :

It might be helpful to know which market you are looking to invest in. 

I think the 1% rule is a good rule of thumb when deciding on properties to evaluate. If you are not meeting or beating the 1% rule, I personally wouldn't consider looking at it. Once you factor in any repairs, you will probably be negative on cash flow for those numbers.

I'm looking at Houston Market which still affordable, I also see some of SFR that in 1% rule but still after running the numbers, they're in negative. What makes it negative is the Cash reserve (Vacancy, Repair, Cap-Ex and Property management)

How much do you put on those?   if I put 10% from rent, I never seen any positive no matter in 1% or 1.5%  rule. 

When I am looking at numbers I do 10% for property management and then 5% for each of the others. So a total of 15% of monthly rent I'm saving for vacancies, repairs and cap-ex.  I have some properties that I am self-managing, but I went ahead and budgeted for property management in my cash flow calculations.  

Originally posted by @Franky Juwana :
Originally posted by @Cassi Justiz:

It might be helpful to know which market you are looking to invest in. 

I think the 1% rule is a good rule of thumb when deciding on properties to evaluate. If you are not meeting or beating the 1% rule, I personally wouldn't consider looking at it. Once you factor in any repairs, you will probably be negative on cash flow for those numbers.

I'm looking at Houston Market which still affordable, I also see some of SFR that in 1% rule but still after running the numbers, they're in negative. What makes it negative is the Cash reserve (Vacancy, Repair, Cap-Ex and Property management)

How much do you put on those?   if I put 10% from rent, I never seen any positive no matter in 1% or 1.5%  rule. 

Repairs and vacancy really depend on rehab and neighborhood.  If you're in a market where the renters are older the vacancy may be less than 5%.  If you're renting in a college town the vacancy might be 10%.  But both of those properties are no go for me.  The main problem with both properties is they have a variable you can't adjust: the property taxes are expensive.

@Franky Juwana the problem you are having is that you are looking in high property tax areas. In order to cash flow in markets like that you need to be at near "2%". For instance, I have a property in NJ with taxes at $5200. I have $117k in that one, it rents for $1600, and I'm cash flowing just about $200 after expenses. This property is at about "1.4%" and barely meets my minimum criteria, These two properties that you are looking at dont even meet the 1% rule.
Originally posted by @Jason D. :
@Franky Juwana the problem you are having is that you are looking in high property tax areas. In order to cash flow in markets like that you need to be at near "2%". For instance, I have a property in NJ with taxes at $5200. I have $117k in that one, it rents for $1600, and I'm cash flowing just about $200 after expenses. This property is at about "1.4%" and barely meets my minimum criteria, These two properties that you are looking at dont even meet the 1% rule.

Ok, yeah... the tax in houston tx around 2.5-3.2% 

Btw, Where in NJ? I have wholeseller contacted me last week in newark area but the repair was too much.  

@Franky Juwana Looking at the numbers, I'm assuming you are looking at areas of high appreciation. Appreciation play can be dangerous but it works for some. If that is the case it is really difficult to cashflow, I invest in seattle area and I make 80k downpayment I cash flow 300 a month with terrible roi. I make some money on appreciation every year, but the number never works out that's just the way it is. If you want cashflow and investor returns you definitely should consider somewhere in the midwest, wouldn't hurt to start out with a good turnkey company, then research on a good realtor in the area and do it your self. Even with turnkey company you can make 14% cash on cash with the BP calculator adding vacancy repair and capEx. Just make sure it's a good neighborhood.

I don't know your market, but only 7% for property management seems very low. I'm just starting out in St. Louis, and all of the property management companies I spoke to charge 9 or 10% and also charge a full months rent as a leasing fee. When you add that in, the percentage is actually quite a bit higher. I've managed to find cash flow positive properties there even after putting aside all of the expenses, but I've had to analyze a lot of properties--over a hundred so far. I'm hoping to sign multi-year leases to reduce the leasing fee over all.

However, I'm looking at properties at or under $125,000, and I think it's easier to find cash flowing properties at lower prices than higher prices. In St. Louis, for example, I would be hard pressed to find any single family homes at or over $200,000 that would rent for anything near $2,000 a month.

@Franky Juwana I would not touch it. 160k for a rental that will bring in only 1500, never. My clients buy props for 60k on avg with 1k - 1200 in rent with taxes only on avg 2200,  about 11- 15% nets on all props I provide . I sold a 4 unit yesterday that brings in 2400 a month for 140k, taxes 2500, net will be about 13%.  Last week a 3 unit about 1900 a month, , 80k, will be over 15% net. (  I can provide 100s of examples) . My  Personal's  of course I am over 20% nets per year, some over 30% . Look out of state. I see you  are from LI like me. I do all my business and investing in the Cleveland markets where it is just about 2% of PP. Good luck 

I'm always amazed and disappointed how investors from one area of the country say something can't be done elsewhere.  What's possible in St. Louis or Houston is going to be very different than Miami, Seattle or SF.  And I am perplexed why investors care so much about this 1% rule.  Firstly, it's not a rule, it's a guideline.  Second, it doesn't apply in most areas of the country.  Third, how did the rule creator get to 1%?  Why is it not 0.8%, 1.2%?  Why is it not some other function?  

I think the answer is to simplify things so even the most novice investor "believes" they know what they are doing.  But this simplification has done more harm than good.  How many deals have people not done because of it?  There really needs to be a caveat that 1% is applicable to this area, whereas 0.5% is appropriate for that area.  

And now onto the vacancy, repairs, cap-ex and maintenance allocations.  People seem to allocate monies to those based on the rent.  This is just stupid.  Repairs and maintenance depend on the property's value.  Cap-ex depends on a lot of things that are pretty much impossible to predict.  And while it's not the worst idea to allocate an amount to vacancy, don't let that arbitrary number dissuade you from buying a decent property.  And this brings me to the final point, relativity.

Returns are relative and should be with risk in mind.  And just because something has HAD a high return in the past is no guarantee of future results.  The concept that higher rewards require greater risk is much closer to a rule than the 1% rule.  So yeah, some turnkeys providers are able to get 14%, just double check what's included in that calculation.  

When looking at cashflow you really need to figure out what sort of area you're in.  Is it appreciation only like Seattle or San Francisco?  Is it cashflow only like Cleveland, Memphis, Indy, etc?  Or is it a blend like much of Texas, parts of Washington, Illinois, etc?  After all, maybe breaking even in a highly appreciating market is acceptable?  Just check to see if there are many independent reasons for that growth and not just a single industry.  

@Franky Juwana ascertain what sort of market you are in.  Then, when deciding between two properties (assuming they are your first) I would suggest buying the less risky of the two which also means considering the down payment.  If two properties are identical on paper but one requires a larger down payment, does that not mean you have more money at risk?  

yup.  

Until you've got 4 - 5 rentals under your belt I'd lean towards something that has a little less total risk.  This means cheap, cashflow-rich turnkey properties.  

@Patrick Britton   Thank you so much for your 2 cents,  that's what confuses me about 1% rule or guidelines or whatever your guys what to call it.  When it meets the  1% but after running the number after expenses, it turns out negative , every single time.

The market that i'm looking for is Houston market, and is appreciates slowly and rental is also going up slow. But in some area is the seller's market, houses selling like hot cakes

Yes, this is my first and I dont want to be over thinking it but I dont want o rush it either. 

Actually, I do have another one that I want to pick your brain out , tell me if it's a good deal or not

Property 3

SFR 5br 2 ba

Good school rating

Asking price 205k

Tax : 6329/annually 

HOA: 350/annually

Ins: 80/monthly

flood ins: 40/monthly

potential rent : 1800-2000/monthly

down payment :25% (because isnt my primary house)

rehab: 5000-6000 (estimate)

tax rate 2.888 

Tenant will handle maintenance around the house

Im thinking to put Vacancy, repair, and cap ex 4% , cuz all the big ticket items (roof, siding, HVAC) still good.   and Property management around the area charge starts from 6%-10%

please let me know if this an ok deal or should I run for the hill ? 

Thanks

@Franky Juwana if it's single family why not put down just 20%?  And I am not trying to be be political here and deflect the question, but only you can determine if it's right for you.

Maybe think of it this way, what has to go wrong for you to get into real trouble?  If your down payment vanishes, is it game over?  If the repair budget triples, is it game over?  If there's a vacancy for 6 months, is it game over?  Get my drift?  

Quite frankly, the harder it is to lose money, the easier it is to make.  

and forget about the details (the greater the number of variables, the greater the error term and the greater the variance), what is your net cashflow and return on your down payment?  How many months will it take to make your down payment back?  

Whatever those numbers are, do they work for you?  

Originally posted by @Patrick Britton :

@Franky Juwana if it's single family why not put down just 20%?  And I am not trying to be be political here and deflect the question, but only you can determine if it's right for you.

Maybe think of it this way, what has to go wrong for you to get into real trouble?  If your down payment vanishes, is it game over?  If the repair budget triples, is it game over?  If there's a vacancy for 6 months, is it game over?  Get my drift?  

Quite frankly, the harder it is to lose money, the easier it is to make.  

and forget about the details (the greater the number of variables, the greater the error term and the greater the variance), what is your net cashflow and return on your down payment?  How many months will it take to make your down payment back?  

Whatever those numbers are, do they work for you?  

If I miss 6 months, game over? no... not really. but like everybody else, I'd like to buy it at the right price and like everybody here says... if the numbers if good, most likely it can be a good deal or an ok deal to say the least. 

25% DP is because that's the requirement from my bank to put down, because It's my second house. 

but would you do the deal if you see it thru your lense?  I would do it, but I may miss something that you guys who much more experience than me see. 

Originally posted by @AJ Singh :
@Franky Juwana I would not touch both due to hoa fees. They impact cash flow numbers a lot. Other idea would be to go ltv 50 to Improve cash flow monthly. Be persistent and wait for a good deal

Thats annually just as you know, in houston market, HOA is mandatory for all property because it's sub divisions SFR. So most about $250-$400 per year which only $20-$40 a month.

I dont think HOA is a deal breaker for me because they arent condos.

Originally posted by @Patrick Britton :

I'm always amazed and disappointed how investors from one area of the country say something can't be done elsewhere.  What's possible in St. Louis or Houston is going to be very different than Miami, Seattle or SF.  And I am perplexed why investors care so much about this 1% rule.  Firstly, it's not a rule, it's a guideline.  Second, it doesn't apply in most areas of the country.  Third, how did the rule creator get to 1%?  Why is it not 0.8%, 1.2%?  Why is it not some other function?  

I think the answer is to simplify things so even the most novice investor "believes" they know what they are doing.  But this simplification has done more harm than good.  How many deals have people not done because of it?  There really needs to be a caveat that 1% is applicable to this area, whereas 0.5% is appropriate for that area.  

And now onto the vacancy, repairs, cap-ex and maintenance allocations.  People seem to allocate monies to those based on the rent.  This is just stupid.  Repairs and maintenance depend on the property's value.  Cap-ex depends on a lot of things that are pretty much impossible to predict.  And while it's not the worst idea to allocate an amount to vacancy, don't let that arbitrary number dissuade you from buying a decent property.  And this brings me to the final point, relativity.

Returns are relative and should be with risk in mind.  And just because something has HAD a high return in the past is no guarantee of future results.  The concept that higher rewards require greater risk is much closer to a rule than the 1% rule.  So yeah, some turnkeys providers are able to get 14%, just double check what's included in that calculation.  

When looking at cashflow you really need to figure out what sort of area you're in.  Is it appreciation only like Seattle or San Francisco?  Is it cashflow only like Cleveland, Memphis, Indy, etc?  Or is it a blend like much of Texas, parts of Washington, Illinois, etc?  After all, maybe breaking even in a highly appreciating market is acceptable?  Just check to see if there are many independent reasons for that growth and not just a single industry.  

@Franky Juwana ascertain what sort of market you are in.  Then, when deciding between two properties (assuming they are your first) I would suggest buying the less risky of the two which also means considering the down payment.  If two properties are identical on paper but one requires a larger down payment, does that not mean you have more money at risk?  

yup.  

Until you've got 4 - 5 rentals under your belt I'd lean towards something that has a little less total risk.  This means cheap, cashflow-rich turnkey properties.  

 I agree with regards to 1% as it alone does not reveal the other perhaps more critical influences like the direction and velosity of the values and rents or schools and vacancy rates. Plenty of 2%ers with 15% vacancies and or any % is maybe the starting point. Some could start sub 1% and overtime be over 3%. Or start 2% and overtime end up abandon due to hood going south. 

@Franky Juwana for the "1%" rule to be a guide, you first have to know your market. It's absolutely useless by itself. Where I was investing (an looking like you have the same problem) property taxes were very high, so after analyzing hundreds of properties over the course of several months, I came to learn that any property had to far exceed the "1%" rule to even consider. It simply allowed me to quickly eliminate properties that I knew had no possibility to meet my goal. You have to know your market before you can think about applying these "rules", but once you do, they can be effective.
@Franky Juwana , l suggest you look for a different lender if the lender you are currently working with doesn’t accept 20% down payment. A lot of lenders accept 20% down payment for SFH. Check Quicken Loans and Bank of Internet. Good luck on your first deal.

Thank you all for  the input and suggestions, I know that I will get my first deal soon, i can feel it, just need to be a little patience and calculate the numbers right. 

I don't want to be paralysis analysis but i'm not rushing either, i wanna be smart in making decision, that's why I have my people in biggerpockets supporting each other. I thank God for @Brandon Turner and @Joshua Dorkin who makes podcast and forum available for us to benefit. 

I'll keep you up to date on my deal and cant wait to share my story later.