Financial Advisor · Baltimore, MD · Member since 2020 · 19 posts · 28 votes
I would love some insight to this as I am a new investor (don’t have a home yet). I know most don’t recommend using a PM but I see myself long term with 60+ units one day and would eventually use one anyway.
Ok with that out of the way how do you all make money with a PM? Am I being too conservative? I'm in the Baltimore area looking at homes that would rent for 1500-1800/month. When I make assumptions for vacancy (assuming it rents on avg 11/months a year with 1 months rent taken away from the PM), maintenance and cap ex around 250-300/month abs property management around 8-10%. With all that out the way I maybe walk away with 200/month and that puts me around 6-7% COC which is not great. That also doesn't assume the cost of tenant turnover which would wipe me out.
Am I doing something wrong here? I’ve heard of people getting 10-15% with a PM but I can’t make the numbers work. I would love at least 10%
With 250/month per door but it’s not looking great. Any advice would be helpful. Thanks.
@Devin Monroe Quit analyzing every single detail and buy a freaking property. I own 3 duplexes and have a property manager. She has all the contacts for construction and maintenance and gets that stuff done cheaper than I can. Property management companies are professionals and know their markets so they will get you top dollar. It's well worth the price.
@Devin Monroe Am I correct that far and away your biggest monthly expense is financing? I would suggest House Hacking first and the move up to SFH or skip MLS entirely and focus on deep discount off-market deal (lot more legwork, driving and networking) but you'll need to really drive down purchase price to lower mortgage. Good luck!
Hi Andrew it’s not so much the mortgage. Let me give you an example of what i mean of a house in Baltimore county and not even the city where taxes are higher.
145k home with 20% down Is 29,000 and another 8700 of estimated closing costs.
Rent - 1500 (meets 1% rule)
Mortgage - 735
Vacancy - 150 (covers leasing fee and 1 month mortgage assuming house rents 11 months out of the year)
PM - 150
Maintenance - 200
Cap ex - 75
Cash flow - 190 which is roughly 6% COC
This actually meets both the 1% rule and 50% rule (almost) but hardly makes any money with a PM. Is there something I am doing wrong here?
Great question! I am trying to aim for 3k in maintenance and cap ex. I talked to a real estate investor who told me his properties usually averaged around 200/month. I have my own townhome and over the last 5 years including all repairs I’ve prob averaged that myself. Now with larger things being done already (roof hvac and water heater) in the future it could be lower but I’d like to set my expectations there for my rental as to be conservative.
bear with me, one more question: how did you calculate mortgage payment. I'm sleepy, but i couldn't get an online mortgage calculator to come back with as high a number as you have. Sorry, probably missing something. Mortgage eats up half your rent, so shop a dozen lenders and get your rate down regardless.
@Devin Monroe Quit analyzing every single detail and buy a freaking property. I own 3 duplexes and have a property manager. She has all the contacts for construction and maintenance and gets that stuff done cheaper than I can. Property management companies are professionals and know their markets so they will get you top dollar. It's well worth the price.
I wish I could be more like you and just jump in. I’m very cautious but know I’ll feel better after the first one. My numbers may be high but I’d rather that than be too low. But the 6% return is killing me cause that’s not very exciting. Hopefully it ends up better but if the house doesn’t rent for what I think it should go for the numbers could look worse. Just doesn’t seem like I have much wiggle room.
@Devin Monroe get your mortgage down to $600/month and COC jumps to 10%. ran online calculator at 4% with the lowest credit score on a 30 year term on $125k (purchase + closing - less down payment) - montly came in at about $600. How did you calculate $735/month?
The actual loan is 550. Property taxes and insurance are about another 185. 735 total and it actually could be slightly more but those were the first numbers I pulled.
@Devin Monroe No apologies required, wishing you good luck. Smarter/more seasoned investors hopefully will jump on and give you better feedback. I'm really surprised that a 1% rule scenario doesn't play out better.
@Devin Monroe. I think your definitely on the right track. The maintenance and cap ex combined may be a bit high, but you're wise to be cautious in that way. You're definitely not doing anything wrong. Actually, you're doing the math right...it's just not a good deal. Not sure about your area, but locally prices have risen 10-20% in just the last 5 months. Inventory is sparse, and when something does come up that cash flows well, it's receiving multiple offers in the first 2 days--with the winning bid over asking. These list prices are crushing cash on cash.
Stick with your modeling, but keep searching. I think someone else mentioned looking for off market deals through networking or canvassing. Depending on your market, that may be the only way to find something that models to your desired cash on cash ROI. Be patient, a lot of people think this overpricing is a temporary environment, but only time will tell.
I would love some insight to this as I am a new investor (don’t have a home yet). I know most don’t recommend using a PM but I see myself long term with 60+ units one day and would eventually use one anyway.
Ok with that out of the way how do you all make money with a PM? Am I being too conservative? I'm in the Baltimore area looking at homes that would rent for 1500-1800/month. When I make assumptions for vacancy (assuming it rents on avg 11/months a year with 1 months rent taken away from the PM), maintenance and cap ex around 250-300/month abs property management around 8-10%. With all that out the way I maybe walk away with 200/month and that puts me around 6-7% COC which is not great. That also doesn't assume the cost of tenant turnover which would wipe me out.
Am I doing something wrong here? I’ve heard of people getting 10-15% with a PM but I can’t make the numbers work. I would love at least 10%
With 250/month per door but it’s not looking great. Any advice would be helpful. Thanks.
Your numbers look right to me, on the conservative side, which is reasonable.
There is simply a real estate bubble all over, in the US and abroad, fueled by insanely low interest rates, so unless you find a killer deal on an off market property or are able to rent short term for top dollar, numbers will not be much better than what you found.
Actually in Europe numbers do not even come close to those yields. After all you are renting a property worth 145k for 1.500 dollars. In most of Europe that would be like a dream investment. You will be putting down just 20%. If you used 100% cash, the gross yield is exceeding 10%, on a cash purchase.
you have in your numbers $150 / month vacancy or $1800 for the year, will it really cost you $1800 to fill a vacancy? how long does it take to fill a vacancy? you have to look into and Negotiate a PM's contract, I do think your numbers are right on. I have properties that do about the same but I do not worry about it, one way to look at it is that your costs are being covered by rent, with a little extra, you cant quit your job on it but the Tenants are putting Equity in your pocket for future use. As long as you are not loosing money your in good shape. your CAPEX is $75 / month, nice to figure that in, but what will that repair? when figuring costs like you did its good to figure that, but I do not not use that to determine if a property makes money, what I do is bank any additional money in the account, if your able to save enough in the account to cover your most expensive repair on the property, then the rest is yours ( usually replacing your roof would be your most expensive repair)so 10K roof with $275/m profit(200 + 75 for capex) will take you a little over 3 years to build up to pay for, without taking a loan out. in that same 3 years the tenants have built up about $7200 in equity in the property
Most people recommend you don´t use a PM? I don´t really get that. However, there is not really a cookie cutter approach here. There are tons of varirables that manipulate the numbers. If you get the property for the right price and it is managed effectively there can be a very wide range of return you get. You have to buy right, know your numbers and understand your area. You must make sure you acquire something where the mortgage and expenses are low enough to accomplish what you want which requires you to understand your numbers before you buy it.
For an investor looking to own 60+ units in the future, I agree that having a PM is going to be a necessity. We all have different goals and I'm not sure what part of the wealth building stage you're in, but this could very well be the part where you don't focus on the cashflow necessarily. Of course it's nice to have, but taking advantage of the tax benefits and having a property where the equity is being built up, could be seen as your mini reward on the way to larger rewards on the back end. At the end of the day, time is money and having a PM deal with the day to day nuisances is worth it when your time can be used in finding more deals instead of fixing a light fixtures. Keep posting and asking questions, you'll do great!
It's true, if you read through these boards you'll see lots of posts from people who self manage. That being said, I'd argue that you see even MORE posts from people who self manage and are in a serious pickle and have no idea how to handle it, what their rights are and what their liabilities and responsibilities are. It's possibly to successfully self manage, but the ironic thing is that it's much more likely that you'd be good at it after you have lots of investing experience, which is when you probably can afford to just pay a PM.
In my opinion (and with 20 years experience) paying a good PM is probably the best cost and liability limiting thing you can do as an investor.
Devin, the key here is you buy the right property at the right price with the cheapest money possible which means you need to use a conventional lender that can give you around a 2 percent interest rate. The difference for 100k houses is around 100 bucks monthly just from the interest. Don't just buy any homes.
That’s a good way to look at it. But you are assuming nothing else goes wrong in the house when you need the roof. I may need to retool my numbers to be more accurate about cap ex.
The vacancy at 1800 includes the PM leasing fee (75% of first months rent) and one mortgage payment. So it’s right around 1860/year. That assumes my place rents 11 months out of the year and takes one month to fill. It doesn’t even take into consideration tenant turnover that could cost me a lot to repaint or change carpet etc. that’s why I’m a little worried about cash flow as swapping tenants every year I’d break even essentially.
Thanks for the tip! Glad to know that the numbers are being run somewhat accurately at least. All the off market deals that I see require 100% cash but I guess I could purchase and refinance it with a bank? I’ll keep looking though but I surely thought the 1% rule would have worked here without lowering my criteria. Thanks again.
A 1% property and 50% expense ratio gives you a 6% ROI. If your cost of money is equal to 6% you get a 6% COC leveraged return. If your cost of money is 3% and you have 80/20 leverage then 80% of your money is earning 6% while costing 3%. So you are getting an extra 3% on 80% or another 2.4% for a total COC of 8.4% leveraged. Thats about the best you are going to do on a 1% property.
@Devin Monroe based on the assumptions you made, You have to understand the overall benefits of real estate investing. It's not likely that you will spend the $250-$300 in repairs every month. Secondly, you should not have a vacancy every year, this is an assumption and just in case clause. Lastly, depending on the area, 6% COC is great for some investors combined with the other benefits you are getting such as loan pay down, tax benefits and appreciation.
I've recently allowed a PM to stay on a new acquisition after self-managing for 18 years.
I allowed them to stay because I get a volume discount and 60 day termination so the risk was low.
Here are a few things I've noticed that cost a lot of dollars but I had to be involved to correct.
Snow removal cost was off the charts. Installed gutters and heat tape so the walkways weren't a constant ice sheet anymore. I had to wire the 3 GFCI recepts to save $1200.
Moved lawn mowing to bi-weekly from weekly. Set sprinklers to run on odd days vs every day. Duh.
HVAC and plumbing repair fees were in the stratosphere. These have wall units only. WTH. Call me first before a licensee. All the sudden their handyman can handle a flapper or fill valve and clean a wall heater vs replace with an electrician.
Triage service calls. Ask a couple more questions before sending someone out. Old way was get a call, site visit, call someone else to do the work. Most of mine are handled via text so why the huge ordeal with a PM?
PMs have very little incentive to save you money. If purchasing a managed property or community, look closely at high dollar expenses and make changes. Let them know you are aware of them. I did and don't even get charged placement or renewal fees like most.
I think to totally be hands-off one day, I will have to divest from RE entirely. Let someone else be charged $150 every time a tenant calls about anything.