Thoughts on Paying Market Value but Cash Flowing Well

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Thoughts on Paying Market Value but Cash Flowing Well

Perry Rosenbloom
Louisville, CO · Member since 2013 · 47 posts · 5 votes

Hi Everyone,

I'm under contract on a 4BR/2BA home. It's very clear that I'm under contract at market value price. 147,500. However, it will rent for $1,500/month and taxes are dirt cheap.

It is also entirely renovated and has many appealing features for higher end clientele in the area (exposed wood beams, gourmet kitchen, hardwood floors throughout). It is by far the nicest home in the subdivision and we are receiving an incredible amount of interest via Craigslist for the home at $1,500/month. I have no concerns about it achieving that rent.

My question is this: Clearly, we are paying market value. However, it flows cash... and should flow very nicely. It is the epitome of a turn-key rental, which is very important for my wife and I at this stage in our lives as I run an Internet Marketing business and we have a 9 week old son.

The home is located in an area that historically does not appreciate well.

What are your thoughts on this as a first investment? I know you make money when you buy, but the market is making this more and more challenging to do in my area. If you find a deal that cash flows, even if it's priced at market value, are you shooting yourself in the foot? I'm estimating a COC of about 21-23%.

My thoughts were, at these interest rates (we are locked in at 4.5% for 30 years), it is OK to buy at market value because you are essentially getting loaned money at below market value.

About me and my strategy:

I'm 28 years old. My strategy is to be acquiring 1 home every 1-1.5 years with 20% down until I hit 4 properties. Taking their cash flow, paying off one home at a time and once one home is paid off, acquiring a new one and continuing that process until I'm in a position to either pay cash for a home, or pay it off within 3-4 years. My plan is to execute that over the course of 20+ years to eventually own 10+ homes.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y

I have to make a few guesses to complete my analysis. I'm assuming you're going to put 20% down when you buy this house. You say "It is the epitome of a turn-key rental", so I'm going to also assume you will use a property manager.

My analysis gives this a cash flow of $152 a month and a cash on cash return of 6.2%. Here my complete analysis:

Purchase price: $147,500
Rehab cost: $0
Rent: $1,500
Exp, vacancy, capital %: 50%
Loan rate: 4.50%
Loan term: 30
Down payment %: 20%

Down payment: $29,500
Loan amount: $118,000
P&I payment: $597.89
Expenses, vacancy, capital: $750
Net Operating Income: $750
monthly cash flow: $152.11
annual cash flow: $1,825.34
total investment: $29,500
Cash on cash return: 6.19%

I think you're making a couple of invalid assumptions. One is that because its new and nicely renovated you won't have much maintenance or capital expenses. Most of the small maintenance is caused by tenants. New or not so new, stuff gets broken and damaged. Even a brand new furnace will need replacement 20 years from now, so you have to budget 1/20th of the cost every year.

High end finishes will need more maintenance going forward. Lots of discussion about bullet proofing rentals and what flooring holds up best (hint: the IRS assumes flooring lasts five years, I've been told judges here in CO assume carpet lasts three, so if the place has carpet, plan on replacing it every few years.)

I think you're thinking that because its a nicer rental that you will have less issues with tenants. I'm not sure there's any strong correlation.

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    13y

    Hey Perry -

    Good questions and it looks like you are getting active on the site. It is a great place to connect and network with other investors and ask these kinds of questions on strategy.

    Are you going to be the landlord on the property or are you having a management company? I don't think it really matters for your original question I was just wondering after you mentioned this was a turn-key situation for investing. Your question was bout this being a good investment and the only person that can answer that is you. If it produces the income you are looking for in an investment then it really comes down to your comfort. If you are comfortable with the property and the income as well as the time you will have to put in, then do it.

    I'm impressed that you have a clear plan and have thought it out. I encourage you to stick with your plan - don't get diverted or rush. A 10 property portfolio owned free and clear will be a very powerful income generator.

    ONe more thing - I checked out your website. SEO Sherpas is a really good name. Very unique. Not sure if it is your company or not, but if you do not already have a Pro account I would get one so you display your logo and brand a little better. There are a lot of people on this site that could use your services.

    Good luck with the investment property. I used to live in Highlands Ranch, CO. for a few years and l coached competitive travel soccer clubs. We used to go to the Louisville area for games and tournaments. I loved that area -

    Chris

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  • Mike M.
    Longview, TX · Member since 2012 · 368 posts · 131 votes
    13y

    Congratulations on being under contract with your first property!

    To me, if it meets your investment objectives (and 20% COC would meet mine), it's a good deal.

    You make money when you sell. If you buy right, you'll capture the gain then, assuming external forces don't wreck it. What is your exit strategy? It sounds like it's buy and hold forever. I would make sure your cash flow will be reliable enough in the future to support holding a rental forever.

    In my market, at that price, I'd be satisfied with a 1+% rent-to-price ratio, assuming that key infrastructure (roof, structure, HVAC, etc) was on the front end of its life.

    I'm about to send over an offer of $57,500 on a $750/mo property. Renovated in 2011, new everything. What tempers my excitement a bit is the location, the fact it's a 2/1, and the neighbors.

    Best of luck!

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    I have to make a few guesses to complete my analysis. I'm assuming you're going to put 20% down when you buy this house. You say "It is the epitome of a turn-key rental", so I'm going to also assume you will use a property manager.

    My analysis gives this a cash flow of $152 a month and a cash on cash return of 6.2%. Here my complete analysis:

    Purchase price: $147,500
    Rehab cost: $0
    Rent: $1,500
    Exp, vacancy, capital %: 50%
    Loan rate: 4.50%
    Loan term: 30
    Down payment %: 20%

    Down payment: $29,500
    Loan amount: $118,000
    P&I payment: $597.89
    Expenses, vacancy, capital: $750
    Net Operating Income: $750
    monthly cash flow: $152.11
    annual cash flow: $1,825.34
    total investment: $29,500
    Cash on cash return: 6.19%

    I think you're making a couple of invalid assumptions. One is that because its new and nicely renovated you won't have much maintenance or capital expenses. Most of the small maintenance is caused by tenants. New or not so new, stuff gets broken and damaged. Even a brand new furnace will need replacement 20 years from now, so you have to budget 1/20th of the cost every year.

    High end finishes will need more maintenance going forward. Lots of discussion about bullet proofing rentals and what flooring holds up best (hint: the IRS assumes flooring lasts five years, I've been told judges here in CO assume carpet lasts three, so if the place has carpet, plan on replacing it every few years.)

    I think you're thinking that because its a nicer rental that you will have less issues with tenants. I'm not sure there's any strong correlation.

    4Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Chris Clothier - Thank you for your insight. I plan to manage the property myself, at least initially. I feel it's important to understand how to effectively manage tenants so that I can effectively manage my property managers.

    I am comfortable with my projections... Hopefully they're accurate :-) And thank you for the encouragement on the plan. It's taken some time to educate myself on REI so that I could come up with an effective plan. Although the best laid plans of mice and men... :-)

    Mike M. Thank you! My objectives are 20%+ COC. I don't imagine it will stay that way forever... Just initially as everything is renovated and fairly new. HVAC is newish and has been serviced every 6 months for the last 2 years. Hot water heater is 2 years old. Roof is older.

    I don't really have an exit strategy. But I do have a 20 year strategy. According to my projections, this first home should be paid off in year 8. After that, things begin picking up steam in terms of principal paydown for other homes. Cash still flows at 10% drop in rental prices... but not great.

    Good luck on your offer, Mike!

    0Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Jon Holdman

    I will not be using a Property Management company initially. What I meant by turnkey is no rehab work.

    Maybe I'm naive and foolish (probably), but I know my home has not required anywhere near 1,000 in repairs and maintenance every month. My family that owns property throughout Florida and Atlanta have not had anything near 40-50% in terms of expenses. And local investors I've spoken with outside of this message board disagree with that rule as well.

    We'll see how naive and foolish I am, but I would imagine renting to higher quality tenants with higher quality finishings results in lower expenses.

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  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Oh, and yes, Chris Clothier, SEOSherpas is my business. I wasn't aware the benefits of a Pro subscription... Might have to jump on that :-)

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  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    13y

    Perry Rosenbloom I know you doubt the 50% rule that Jon used to come up with a return but as someone who has a ton of rentals I've found it to be generally true (and lower income rentals can be an even higher percentage). If you're going to manage it yourself you can knock that down to 40%. Tenants will break things, you will have vacancy, things will wear out faster in a rental than your own home, you have to pay taxes and insurance. Even if everything is updated you still have to budget for replacement as everything in a home only has a limited lifespan.

    The biggest mistake I see people make in this business is to buy a rental assuming that their only expense will be PITI and calculating their return on that. It's important to properly analyze all of your expenses prior to buying so you don't get yourself into a bad investment.

    1Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    13y

    Even if you don't use property management you should still allocate 10% of gross rent as an expense because you will be spending your own personal time managing it. This way your analysis will be accurate if/when you hire out to a PM in the future.

    Your home may not have the same expenses because you have pride of ownership. People DO NOT treat things the same when they don't own them!

    Have you factored in turnover rehab, CPA/attorney fees, Evictions, etc into your calculations? When you start to add all these up along with the standard expenses, over the long haul, from what I've absorbed through MULTIPLE sources, you'll be looking at 40-50% gross rents. Whether you choose to heed the advice about expenses is up to you!

    3Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    If you're managing yourself, you're avoiding the cost of the PM, about 14% of gross scheduled rents. You are "buying a job" that will, once in a while, require some of your time. But, IMHO, self managing it a well-paying job. So, redoing your numbers assuming self management I get a 15% cash on cash return.

    Pretty sure I didn't claim you would spend $1000 a month on repairs. I did come up with a figure of $750 a month. With the new analysis (below), that's reduced to $540 (the $210 difference being the PM costs, which is $150 a month plus $750 once a year for a turnover.) Out of that $540 you're paying:

    Taxes
    Insurance
    Utilities (at least when vacant)
    Legal costs
    CPA costs (or, higher taxes if you try to DIY your taxes)
    Vacancy (even if just for a week or two during turnovers)
    Routine maintenance (inevitable, stuff really does break)
    Make ready costs
    Tenant damage in excess of security deposits
    Capital

    The 50% number is well supported by large data sets. In any particular year any particular property can do somewhat better (hard to avoid taxes, insurance, some routine maintenance and paying your CPA) or much worse (a $5000 roof will make a big dent the year you spend that money.) It sounds like you're in this for the long haul, so you really must account for an average number, not the best case. You really will have to buy those big ticket items over the long term. If you end up with a portfolio of 20 houses, then doing these big ticket items like roofs and evictions just becomes routine. If you just have a rental or two, its entirely to be lucky and avoid some of the big expenses. Of course, some people get unlucky, like the poster a while back who was living in her car because her crazy drug dealing tenant in the other half of her duplex scared her out of her house. But for a big portfolio over the long term, the ups and downs tend to average out. They won't average out to "cash flow = rent - PITI", though. If you build a business model based on that phony cash flow number, you're sitting yourself up for failure.

    Analysis assuming self management and expenses, capital and vacancy of 36%:
    Purchase price: $147,500
    Rehab cost: $0
    Rent: $1,500
    Exp, vacancy, capital %: 36%
    Loan rate: 4.50%
    Loan term: 30
    Down payment %: 20%

    Down payment: $29,500
    Loan amount: $118,000
    P&I payment: $597.89
    Expenses, vacancy, capital: $540
    Net Operating Income: $960
    monthly cash flow: $362.11
    annual cash flow: $4,345.34
    total investment: $29,500
    Cash on cash return: 14.73%

    0Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Patrick L. -- Thank you and that all makes perfect sense. Are you including taxes and insurance in your 40/50% rule? I know some do and some don't...

    I would imagine on a remodeled property overall expenses would be lower in the initial years, allowing me to recoup my investment faster and putting some cash into a piggy bank for the bigger ticket items.

    I'm not assuming my only expense will be PITI. 2% vacancy rate + an additional $2,100+/- in yearly expenses for the first few years. After 3-5 years, I fully expect that will begin to increase.

    Insurance at 720, taxes at 682. Leaves a cash flow of 7k/year before taxes & depreciation to stash some away for a rainy day and some for principal reduction/another property.

    Maybe in a year I'll be begging for mercy at my ignorance. But every property, location, landlord and tenants are unique.

    0Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    'Pretty sure I didn't claim you would spend $1000 a month on repairs. I did come up with a figure of $750 a month. With the new analysis (below), that's reduced to $540 (the $210 difference being the PM costs, which is $150 a month plus $750 once a year for a turnover.) Out of that $540 you're paying:'

    Jon Holdman -- Sorry. I was comparing the $1,000 to what my home would currently rent for (2k-2,200). New roof, new furnace, newer H20 heater...

    I appreciate you taking the time to do that analysis. And I agree that the second analysis seems fair long term. I am (foolishly?) hopeful that a newly remodeled property will see better returns initially and allow me to see my money come back to me more quickly.

    Regardless, even with 0% appreciation, your analysis + equity accrual is an ROI of 21%. I'm happy with that :-)

    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    13y

    Perry Rosenbloom I know you and people you've talked to/family have doubts about the 50% number. My observation has been that those that say they don't see it in their experience fall into two categories for why that isn't the case.

    1) They don't completely accounting for their expenses on a property. Meaning they're not counting things like tax preparation, court filings, vacancy, insurance ect., and some of the smaller items they're handling themselves so they're just charging material not time. You have to remember the 50% is assuming truly passive involvement or at least paying for your time if you're doing it yourself.

    2) They're "small/accidental" landlords. They have one or two properties often that they lived in at some point and they do a lot of number one which is part of it. They also bought newer properties(often because they lived there before) and don't have a large sample pool of properties so they haven't had any major expenses in 5 years. Their maintenance expenses absolutely don't hit 50%....YET.....but like Jon Holdman said they'll have a roof, a furnace a ...XXX... at some point and then their costs will exceed 50% for that year 3X over. They may sell before those items hit in which case they end up taking the discount when they go to sell.

    So not saying that the people you've talked to fall into those categories at all just giving you something to think about from what I've seen, and several larger LL's here have verified with their numbers in various regions of the country.

    As far as paying market for a good cashflow property, I'd be fine with it as long as it truly CF 20% COC or I got some awesome sort of financing that made the deal better that way.

    Either way taking action is great and you can move forward knowing you're not on the sidelines twiddling your thumbs.

    0Reply
  • Patrick L.
    Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
    13y

    Perry Rosenbloom I'm not sure how you figure a 2% vacancy rate, I would go with at least 8%. To achieve 2% your average tenant would have to stay 4 years and then you would have to get the property rent ready, marketed and find a qualified tenant that's ready to move in a month or less. The higher the rent the longer it takes to find a qualified tenant from my experience (I can rent my $500/month apartments in a day or two, but a $2k house often takes a month or two to find a tenant I am comfortable with). When these tenants move out you will have repairs/updates to make and expenses that come along with them. Often it's more than the security deposit or just items that have reached the end of their lifespan (like carpet and paint).

    You also need to budget for your long term capital expenses when you figure out your return. It may not be cash out of your pocket today but these items are depreciating. If you need to put a new roof on in 15 years for $15k (which is way more than an average roof costs today but in 15 years it may be realistic) then you'd need to budget for that. If you need a new HVAC system in 10 years then that would have to go in there. Maybe the exterior or the property has to be repainted in the next 5 years. There are many pieces to a house that have a finite life and they all have to be considered.

    In terms of the property management keep in mind that it can be a big headache to manage a rental property and if you only have one one it's often not cost effective to do it yourself. Your time may be better served at work than dealing with it. When you put it up for rent are you prepared to show it 10-15 times and deal with tons of phone calls all day? Do you have experience screening and qualifying tenants? Do you know good a good plumber/electrician/hvac company/etc? When tenants call you at midnight saying the sewer is backed up how will you handle that? I manage my rentals myself but I have 35 and counting so for me it's just part of my job, if I only had a few I would have turned them over to a property manager long ago.

    I'm not trying to criticize the property or your deal, I'm just trying to help you look at it from another angle.

    2Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Matt Devincenzo - Thank you for your thoughts. Yes, my family does fall into one of those 2 categories.

    With Insurance and Taxes rolled into the expenses, the % rule of thumb seems much more realistic, long term, in my uneducated viewpoint :-)

    And if that's the case, the COC is dropped to 14.77%. Not nearly as attractive. Does it kill me though? No... Like you said, I'd rather get off the sidelines and take advantage of these interest rates, learn, and make a better decision in 6 months - 1 year.

    I'm not the type of person to read books about taking action and forums ad nauseum. I'd rather educate myself to the point that I feel comfortable taking a risk and move forward. You need experience to learn, IMO.

    Besides... I'll still get equity accrual, which makes the ROI solid enough for me overall :-)

    1Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Patrick L. Re: Vacancy rates: That's the state of affairs in areas of Colorado right now. I agree re: time and property management. But I need to learn to manage my tenants before I can manage my manager.

    And I'll get there with qualified professionals... One thing at a time...

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Hopefully you will have good luck over the short term with your rental. But that's just a hope.

    I've had tenants completely destroy carpets after only two years. Brand new then two years later I'm throwing it in a dumpster. Same tenants left standing water in the kitchen and destroyed that floor, though the true extent of the damage didn't become apparent until the next tenant moved out. A newly installed furnace starts acting up after only three years. Three service calls and $600 later and its working again. That house was almost a complete gut rehab (everything except the bath) when I bought it in 2008.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    I understand some investors will say costs are less.

    They are often the ones in 5 to 10 years when they sell they have very outdated items or patchwork repairs. This is how they were able to achieve really good cash flow by neglecting items of regular care to a particular standard.

    So you can either price in 50% from the get go or disregard that and when you sell have a buyer pay much lower because they will be incurring the costs you have put off.

    I see this everyday where a seller owned for awhile and prices under market a few thousand and hopes they find a buyer that doesn't see all the deferred capex and maintenance hitting them right away in the first few years.

    I don't care what the seller achieved in cash flow or what they are trying to push. I care about when I put money in and buy what will I be stuck with. Sellers can't have the cake and eat it to although I see them try day in and day out.

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    Regarding the 50% rule (and note that 38% will be adequate if you entirely self manage, saving 10% PM and 2% average leasing fees), and what others you know are stating they've experienced: Unless they've really crunched the numbers, I don't think most people really know the percentages, and will guess on the low side.

    It's not as simple as going to the tax return and taking a look. For one, vacancy time is part of the 50%. Additionally, as owners incur depreciable expenses, these are capitalized and written off through the tax return over a very long period of time. When the outlay occurs, owners will often think of this as an investment in the property and not subtract it from their returns when doing their calculations. Since the total outlay doesn't show up on the tax return immediately, it's somewhat hidden from view. And you can't just look at depreciation on the tax return. For one, the depreciable time period is longer than the life of mechanicals, roofs, and many other things. Depreciation is also an "after the fact" recognition of the expense, when you SHOULD be reserving for it in advance by dividing the cost of a new roof or mechanicals by 15 years to get an annual "charge" that you are setting aside (or more if the items are already fairly old when you buy).

    Not saying those you know are fudging the numbers, but just be aware that there is an understatement bias on the part of the typical investor.

    All that said, you have <1% prop taxes and are in a high rent range in a generally good area with good tenants, so based on this I think I could rationalize 45% for vacancies/expenses, or perhaps just 30% if doing the management AND leasing. So if you thus net 7.5-8% on the property and finance 80% LTV at 4.5%, you should be in good shape, and it looks like an ideal property for an inexperienced self manager.

    And then factor in the tax benefits of the depreciation, and your true ROI should be well above 20%. Not bad, particularly since I know that things are moving off the market very quickly in any decent pocket in your area.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Perry Rosenbloom, let me make one more point here. All these projections are just that - projections. Reality will be whatever it will be, regardless of our hopes or fears. Many new buy and hold investors go into this business thinking that "rent - PITI" is a valid estimate of their returns. Unfortunately, that's the best case and they get into trouble when reality turns out not as good as the best case. We are simply trying to arm you with a more realistic view of what your returns are going to be.

    Owning rentals is gambling. Not "like gambling". It is gambling. When you walk up to a slot machine and make your bet, your most likely result is that you will lose that bet. But there's a chance you will get a win and a small chance you'll have a big win. That slot machine might be set at a 95% return, which means that over the long term (100,000's of bets) you will get back 95 cents for every dollar you bet. But over the short term, you might be a big winner or your might lose your entire bankroll.

    Rentals are the same. You can get lucky and do better than my estimates. You can get unlucky and do worse. Unlike a slot machine, where the most you can lose is your bet, real estate has a way of waking up in the middle of the night and saying "I'll take $2000 right now, please." We all do our best to bullet proof our rentals and find great tenants and still things break and tenants stop paying. If you're prepared you just shrug it off as being part of the business. If you're expecting only the best, small bumps become big disasters.

    4Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Long time, no talk stranger! How you been?

    I'd say that your evaluation of this property as a good or not-good deal needs to be solely on that cash flow, not what the market value is. Market value is a quirky bird anyway because who is to say what the value really is. You only care about value if you want to sell it. To buy it, you only need to care about cash flow. So for your question about the deal being good against market value, I'd say you're fine to buy it and it could be good. Market value doesn't need to matter quite as much (unless you are really hoping to bank on some appreciation later, then that's a different story).

    I join everyone else tho in the concern about the cash flow being as good as you think. Never rule out including repairs because even if you were to buy a brand new house with no repairs needed for say 3 years (doubtful, but as an example), you still want to allocate for repairs because as time goes on, the repairs will become more and more. So in the beginning your actual repairs might be 0% of the monthly rent, then they jump after a few years to say 5% of the monthly rent, and then the actuals eventually become 10% of the monthly rent. If you estimate 5% from the start, you are using a good average to give you a more solid idea of cash flow over the long-run, versus just month to month cash flows. See what I mean?

    I'd recommend including on here a breakdown of the actual numbers you are using on here, so we can all look at exactly what you are looking at and can tell you if you have any holes in your calculations. With not knowing what breakdown you are looking at, it's hard for us to say yay or nay without making potentially wrong assumptions.

    Hope all is well! Good to see you on here.

    0Reply
  • Mark Ferguson
    Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
    13y

    Perry, you know how I feel.
    I think your estimated rent is extremely high. If I bought a house in that neighborhood I would not try for more than$1200 no matter how nice. You are Also paying more for that house than any other house has sold for in the last 6 months in that neighborhood.

    I am in greeley where this house is and we have an extreme shortage of listings right now. I think if you are patient you can find a much better property.

    Did you have the roof checked out?

    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    13y
    Originally posted by Mark Ferguson:
    ....I would not try for more than$1200 no matter how nice. You are Also paying more for that house than any other house has sold for in the last 6 months in that neighborhood.

    Based on the new info....assuming it is true and accurate and I believe it to be since Mark Ferguson is both a realtor and landlord in the area...I say pass.

    0Reply
  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    David Beard - Thank you for that detailed analysis. It all makes sense. And I'm sure I'm estimating on the low side, too :-)

    Jon Holdman - I always hope for the best, but prepare for situations far from the best.

    Ali Boone - Hey, Ali! Been meaning to drop you a note for a while now... Just always seems to slip through the cracks. I see exactly what you mean re: percentages. I guess this conversation has steered more into a debate of the 40/50% rule as opposed to market value and cash flow (although they are intertwined).

    I know expenses over the long run will be higher. I'm more hopeful that in the short run, for this particular property, they will be lower and enable me to see my cash back sooner.

    Here's where I have a problem with these rules though... A furnace costs the same in a 1,500 SQ FT home as it does in a 2,500 SQ FT home, regardless of neighborhood. However, the 1,500 SQ FT home will naturally use the furnace less aggressively as there is less to heat. And if the 1,500 SQ FT home has newer windows it requires even less strain on the furnace.

    I just don't see how percentages can be equally applied across the board without additional analysis and estimations based on unique circumstances.

    Mark Ferguson - I've received 4 phone calls so far today, 3 yesterday and 5 on Saturday. I have around a dozen prospective families lined up to see the place on the 15th. I know you have far more experience than I do in Greeley and in real estate, but this is what I'm seeing. Everyone I speak to is extremely excited to see the property, mainly because of the unique amenities like exposed beams.

    Roof hasn't been checked out yet... Inspection is today...

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    % can never be applied equally across the board, for exactly the reasons you mention. No two anythings are the same. But the point is you want to be as conservative with your estimates as possible. If you start talking nitty gritty details like wear on a furnace, and basing decisions off the results from that analysis, you're setting yourself up to be in trouble because that's just too low-level to tell you anything that accurate.

    Think of it more like the Law of Averages. Even if this house in particular doesn't wear through a furnace as fast as another, there is inevitably something else it will wear through faster than another property.

    I am not a fan at all of the 40/40% rule percentages, but in the case of repair estimates, you have to use percentages because you don't have actual numbers to go off of. But be smart with them. A brand new house, use say 5% per month for repairs. An old beater house might be more accurately estimated at 25% per month for repairs. See what I mean?

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  • Perry Rosenbloom
    OP
    Louisville, CO · Member since 2013 · 47 posts · 5 votes
    13y

    Ali Boone Thank you! Entirely clear. Assuming that it rents at $1,500/month, which I am confident about, this property still flows decently even with the % rule applied.

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