Advice with business model please? Keep renting or Sell

Advice with business model please? Keep renting or Sell

Joshua D.Pro Member
Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes

my wife and I got into real estate investing about two years ago. I am going to put below the RE deals that we have made, thus far. We are both 28 and looking to really create a good business model and i think we have and will let everyone be the judge of that.

1. Duplex- have 21k into-Worth 35k- Generating $1,280/month in rent

2. SFH- have 30k into-Worth 75k- Generating $925/month in rent

3. SFH- have 39k into-worth 75k- Generating $1250/month in rent

4-5 SFH's- have 55k into both homes on same property- Worth 90k- generating $1747/month in rent

6. SFH- have 50k into- Worth 100k- generating $950/month in rent

7. SFH- have 50k into -Worth 100k- generaing $1250/month in rent

8. SFH Just purchased for $23,500, will have maybe $50k into it- will generate $900-$1200 rent or I'm thinking of selling for maybe 100k-130k. What determines if i should rent or sell?

NOW, granted, these numbers don't include our utilities costs/lines of credit costs, etc.

(However, we are in $138,500 debt total with the properties above .)

With us growing, we get nervous every now and again that we are doing the right thing. Sure, we've gained tons in equity, but then you get nervous wondering, "well what if i couldn't sell it?" I honestly put the properties worth lower then what i think they could sell for to play it save. Any realtor would list for a lot more.

Do you ever get nervous about sinking so much money into real estate? Do you think that it's 100% worth it? Feeling victorious but a little fearful, is it jusitified? Is it normal to ever feel apprehensive at times, hoping and praying that you're doing the right thing? The main question is property number 8 should i rent or sell. What determines that? Please help with advice. We have not sold a property yet we just rent should we sell anything?

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Rental Property Investor · Spartanburg, SC · Member since 2013 · 253 posts · 56 votes
9y

I would keep going, again my goals are different, but if I was in the position you're in and cashflowing well, than I would be ecstatic!

If selling would ease your nerves though, I suggest doing that.

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  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Bill Goodland thank you so much bill that really makes me feel at ease and such a great response from you. Really good info and feedback I really appreciate it
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Bill Goodland what do you base the property values off of? Would the appraisals from banks when I get lines of credit be legit?
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Because if I use property value the cap rate will be lower. As with roi I would use purchase and rehab cost and that is so much better. Because I purchase way under market value and fix up super cheap. If that makes any sense?
  • Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    9y

    Yes, a bank appraisal would be perfect for finding out the value and thus your equity in the property. If you don't want to pay for one, I'm sure networking with a local agent would be able to find you pretty good comps to give you a better idea of the value for your estimates. 

    @Joshua D. I would recommend you check out this BP article on the calculation on a rental property. https://www.biggerpockets.com/renewsblog/2013/01/1...

    and this for ROI http://www.investopedia.com/articles/investing/062... as it probably explains it better than I can. Exact ROI can be tricky to calculate I believe because RE ROI incorporates a variety of factors such as purchase price, rehab, loan pay down, appreciation, cash flow, exit strategy etc.  

    Like I said, cap rate is really only used for commercial investing when a cap rate is essentially set in stone based on the type of investment. What I think you're really referring to is a COC(cash on cash) return. Cap rate is essentially a COC return of a property if you paid cash. By leveraging(not paying cash, but using a mortgage) you can maximize your COC return. For example, paying 100k cash for a property that cash flows $550/month or 6.6k a year is a 6.6% COC return. Or by leveraging that 100k between 5 100k properties at 80% LTV(20k down on each), cashflow $200/month/unit is 12k a year or 12% overall COC return. Plus depreciation, mortgage interest deduction, and other deductions between multiple properties that increase your deductible expenses, decrease your taxable income and thus tax burden. Not to mention, if that area appreciates 5% so every house is now worth 105k in a year you now have 25k equity(20k down+5k appreciation, ignoring amortization) that is a 25% extra return on cash spread between 5 investments instead of 5% bonus return on cash if your 100k down increased to 105k. I wouldn't stress, just take educated action and buy till you die.

  • Rental Property Investor · Pasadena, CA · Member since 2016 · 164 posts · 149 votes
    9y

    u should have nothing to worry about. Youve got to be making a killing with these rent rates vs what u invested in each property, seems like good roi as long as your maintenance and repair costs are low. Sure u could worry about the market falling and losing equity, but that doesnt really matter because its all on paper until you sell. What i suggest is using that equity via a HELOC or cash out refinance and buying more cash flow properties like the above to make even more monthly cash flow.

  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    9y

    A partner and I bought a portfolio of properties in the oil patch of Texas, at about $80k per house in 2012.  They hit oil (of course they did!) and our properties' values went up to about $160k.  We were aiming for a linear market, and for cash flow, so we didn't sell.  Politics changed the oil situation (of course it did!) and house prices dropped back down.  This was not a problem, as equity untapped is a vapor.  

    So far, so good, right?

    This is what was unexpected:  soon after the oil price dropped, oil patch workers were laid off, and could not pay rent.  Dropping the rents didn't help, as many of our tenants had no income.  This is the reason that we want reserves.  Equity comes and equity goes.  It is immaterial to me as a landlord, outside of the ability to borrow as we'd like.  Cash flow and reserves are incredibly important to me.  Also important to me is diversification in local employment.  Jobs!  

    Losing equity is no problem.  It comes back, loans can be paid down.  Losing cash flow is a big problem.  

  • Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joshua D.:

    I believe your wrong noi should already have the mortgage payment deducted from it which I did. Or in my case line of credit payment which I overpay to pay the balances off. Can someone help us with roi and cap rate? Because I accounted for everything. Seems everyone has different ways of doing it all so I'm not to sure

    It is a common misconception. The NOI is not a tool for measuring the soundness of financing decisions. There are countless ways to finance a property and financing decisions alone can mask the intrinsic profitability of the property.

    The NOI attempts to address that by piercing through such mask and focusing on operating expenses and not financing expenses.

    If you are familiar with the anatomy of the income statement, the Operating Income = EBIT; EBIT = Earnings Before Interest and Taxes. The goal is to measure the performance or profit potential of the investment 'regardless' of how it is financed.

    Without complicating the issue, perhaps you can peruse these sites to get some more insights into the topic? 

    http://bit.ly/2qCy0ne
    http://bit.ly/2r7TSuB
    http://bit.ly/1RbJ2LO

  • Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    9y
    Joshua D. No, I would not just go "use up" your $300k LOC asap. I'm sorry if I in someway implied you should do that. I'd actually do the opposite, and be very conservative about what you buy right now. The market is frothy, people are over paying for things, and it's not a good time to just go buying up properties to use up an LOC. I'd keep looking for deals like you've been doing and keep chugging along. Regarding the 80/20, the best explanation is in podcast 217 with Perry Marshall. It will blow your mind. Simply put though, if you own 100 properties, you would earn 80% of all your income, from just 20 of those properties. And the other 80 properties would only account for 20% of your income. Then inside of those 20 that are producing, there's another 80/20 rule. You'll earn 80% of 80%, or 64% of you income from just 4 properties. It's confusing, and mind boggling, yet freakishly accurate. It's proven to be true in almost all areas of life, you should really either google the Pareto principal, also known as the 80/20, or better yet listen to podcast 217. The point I was trying to make though was tracking your numbers on each property is so important. And according to this economic theory you can make much more money by working less by getting rid of the 80% of properties that's only produce 20% of the results. You can also use it to answer your question about whether to sell or hold. Isn't it going to be in the 80% or 20%? One other quick question, are all Of your properties local to your home town? Just curious what market your in. I'm north of Philadelphia, but have family in the Pittsburgh area. Best of luck.
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    All within 30 min of me. Is 30 min to far?
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Most 15 min away
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y

    Is this a good property to hold? First time using rental property calculator on here just got the plus membership. So have some questions, Whats the difference between pro forma cap rate and purchase cap rate? My pro forma cap rate is 7.05% and purchase cap rate is 37.09%. Also the cash on cash ROI is 13.82% and monthly cashflow is $587.25. also the gross rent multiplier is 1.67 and income expense ratio is 1.86%(2%rule) This is the lowest return property i have. Are these good numbers?

  • Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    9y
    I don't think 30min is too far. Then again you'll need to answer that question. Can you find closer deals? Do you mind driving that far? Regarding the numbers...they look decent on paper, but I have no context to compare them to. What class is the neighborhood? Are you accounting for capex and vacancy, management....and everything else? Are you able to take a screen shot of the spreadsheet to share so everyone can see the inputs? The outputs are only as good as the numbers going in. 13% cash on cash is good, as long as its real. Lastly, how much would this home sell for if you listed it when complete? How much do you have into it. I might be able to tell whether it's a better flip than hold with most of the information I just asked for.
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