Can't make the numbers work

17 Replies

So I've been analyzing properties for more than a week. I've built an impressive spreadsheet that accounts for just about everything, and it's remarkable how accurate the 50% rule is in general. Bottom line is this. I have to put 20% down on something, possibly do some initial repairs and rent it for $100/door NOI. It leaves my cash on cash returns in the single digits almost all the time. My question is this - Is it worth it? Spend $20K to pocket $100-$200/month? Is this as good as it gets?

I feel like I may be missing an important point - I know there are tax benefits, depreciation, appreciation potential, etc.  Do I just take the small return and be patient?

Thanks in advance for your patience. 

@Don Nelson you're talking about buying a house for less than I paid for my truck. It is what it is. What are market rents? Where are you getting your expense numbers? How many bedrooms? 

show me all the math. can't answer your questionwithout out it

@Rob Beland , @Joe Villeneuve il-- $20K is the down payment on $100K house. Wish I upload the spreadsheet. Here's my math. Leaves about $125/m NOI.

Purchase Price $100000.00
Property Value $100000.00
Loan Rate 6.375%
Loan Amount $80000.00
Loan Points & Fees $1800.00
Closing Costs/Title Ins/Commissions $2000.00
P&I Payment  $500.00
Reserves to set aside (emergency - 4 months) $5098.33
Repairs Needed $0.00 MONTHLY ANNUAL
Down Payment (20%) $20000.00
Gross Operating Income $1400.00 $16800.00
Taxes $118.92 $1427.00
Insurance $208.33 $2500.00
Expenses
Headache Factor % of GOI for evictions, turnover, in C, D, F areas 0%
Management (accounts for placing 1 tenant/year) % of GOI 13% $182.00 $2184.00
CAPEX % of GOI 5% $70.00 $840.00
General Maintenance % of value 1% $83.33 $1000.00
Utilities 0 0
HOA Fees 0 0
Flood Insurance 0 0
Vacancy (1 m/year) 8% $112.00 $1344.00
Expenses Percentage of GOI (50% Rule) 55%

@Don Nelson

First, I wouldn't touch this one simply because you are buying it for what it is worth...AP = PA. I want to get deals where the cost is at worst 75% of the ARV.

Second, you need better terms on your mortgage. I can get a refi at 75% of the ARV at 4.5% for 30 years fixed. That alone would increase your CF $100/month.

Third, even if you would be getting the higher CF from a different funding source (see #2 above), and your CF was about $200/month, ($2400/yr), that means it would take you (if there were no problems), 100 months to get all your down payment back.

Fourth, well...after #3, why bother with a number 4?...but here it is anyway.

Fourth, your "fudge factor expenses are fictional at best"...as in they are giving you false negatives on your deal, and worse, false security on your deal.  Here's why:

A)  5100 = cash reserve to cover 4 months  (wrong...it's over 5 months worth).  You're assuming it covers 4 months of rent...but you don't pay the rent (1400 x 4 = 5200), you pay the expenses (1010 x 5 = 5050).

B)  265/month for misc hold backs.  Why?  Look at the number.  What is it going to hope to cover?  Not what it is supposed to cover, so don't bother taking cash out of your cash flow, to cover something it has no hope of covering in the first place.  This is your false negative, and your false security.  I'm not saying you don't have to have these potential problems covered...just not this way.

C)  Actually "C" is just a repeat of #2...you have to get better terms on your leveraged funds than that.

D) ...and we're back to the real problem here...you're hamstrung when you pay 100% of the ARV for anything. If the best deal you can get is no deal...then walk away.

@Don Nelson , @Joe Villeneuve said it best.  Especially about getting a better rate.  I suggest shopping around with local small banks, but if that doesn't come up with anything check out sebonic financial.  I used them last year when my local lender fell through last minute.  Good luck  

Normally a $1400/mo rent will more than support a $100k house, in my area anyway.  In addition to the obviously high borrowing rate of over 6%, what is up with the insurance costs?   A landlord's policy of hazard insurance would be closer to $650 for me annually, not $2500.  You're not in a flood plain or hurricane zone in CO, are you @Don Nelson ?

Ditto on the insurance policy. Very high.

Gents,

Thanks so much for your comments.  I am using the insurance quoted in the pro forma from the listing agent - actual numbers, so maybe there's a problem with area and/or condition I don't know about. Regarding a loan, I am looking at a property based loan (don't have the taxable income to qualify for an investment loan), so B2R Lending (advertiser on this site) quoted me that, with no income/credit qualifications.  But I will certainly make some calls.

@Joe Villeneuve - 4 mo's reserves are taxes, ins., management, capex, general maintenance, utilities, hoa fees, flood insurance, and vacancy allowance.  Not quite following what you're saying on this - sorry.  Also don't know what you mean by $265 for misc. hold backs?  Can you reference the actual titles I used, so I can fix this?

Thanks to all!

Rent  $1400/month covers these items (as in your tenant)
P&I Payment $500.00 
Repairs Needed $0.00
Taxes $118.92
Insurance $208.33
Management $182.00
TOTAL ~ $1010/month x 5 = $5050

Reserves to set aside (emergency - covers 5 months) $5098.33

Expenses Headache Factor=0%
CAPEX $70.00
General Maintenance  $83.33
Utilities 0 0
HOA Fees 0 0
Flood Insurance 0 0
Vacancy  $112.00
TOTAL ~ $265/month of useless compensation (using this method) ~ $3200/year 

Seriously, if you have vacancy due to a repair issue (like a roof problem).  What practical use will $8200 be in trying to fix the roof, cover monthly expenses, and lost income?  The answer is none...so why bother doing it this way.  There are much better ways to cover for these "problem" expenses than bleeding your cash flow uselessly.

Take that $265/month and add it to your already low $100/month and you're finally making money...but you still have the two big problems that trumps all others...the financing terms and the fact that with a 20% down payment (and no equity) you are really behind until you pay back the cash for that down payment (now to be payed back with no issues in just over 5 years).

Never argue with the numbers...you lose every time.

you are getting good advice here.

@Joe Villeneuve - Thank you so much for taking the time to help me iron out my numbers. You're a good man.

Sounds good, but many others on BP posts advise reserving those funds to cover the cost of those events. So, If I'm just pocketing the cash flow, what happens when a roof needs to be replaced? Or 3 roofs in the same quarter? You didn't really address that. If I don't compensate for those CAPEX type issues, I'm going to be in trouble when they come - Unless you're assuming I have other reserves. I don't, and am therefore trying to buy a property that "pays for itself."

Regarding your warnings about buying too high, I get it.  I won't do that.  But these issues still remain.

You said "There are much better ways to cover for these "problem" expenses than bleeding your cash flow uselessly." - Just want to know what those ways are...Thanks @Joe Villeneuve !

Actually, by not buying at 100% ARV, you can solve all problems. The small amount of cash you store in reserve is useless. It won't be enough to cover what you need to cover, if you have the problems you mentioned.

I have mentioned the solutions to these problems in many other posts.  It involves buying with the ability to do a cash out refi, or Line/Loan of credit, or a source for non-lien able debt.  These are all lump some options that are larger than the slow bleed form your cash flow could ever hope to cover, but they are paid for in the loans...at a much smaller amount than what you are taking out now.  

Let's compare:  

1 - Right now you are taking out $265/month which translates to $265/month less in cash flow.  This will only give you about $3200/year...but that total comes at the end of the year.  If something happened in 3 months, you'd have less than $800 to cover it.  WOW...that will help a lot won't it.  This method is a "feel good" fictional solution.

2 - If you financed it from a refinancing (this is why you can't buy at 100% ARV...not the only reason though), and added $5,000 right out of the gate, at 4.5% for 30 years, would only add $28/month to your mortgage...and only decrease your CF by that same $28/month.

Let's see now.  $265/month gets you $3200 at the END of the year, vs., $28/month gets your $5,000 immediately.  Which would you rather have?

@Joe Villeneuve - Thanks so much for the wisdom in strategy. I had not encountered this idea previously. Though you may have made many posts, this is my first encounter with you or this strategy. It sounds great assuming lending works out. I will work in all that we talked about (into the spreadsheet) and start being more optimistic :). Again, thanks for your help. I wish this strategy was talked about more in the podcasts, etc. for off-setting CAPEX. They actually talk about it in terms of cash flow.

Oh - one last question for all.  If so much of our strategy depends on buying with good margins and doing a cash out refi, I need to properly understand income based appraisals and what to expect on the value/project a correct value prior to purchasing.  Since appraisals can vary wildly, any suggestions on how to do this?  And how to properly anticipate appraisal values?

Originally posted by @Don Nelson :

Oh - one last question for all.  If so much of our strategy depends on buying with good margins and doing a cash out refi, I need to properly understand income based appraisals and what to expect on the value/project a correct value prior to purchasing.  Since appraisals can vary wildly, any suggestions on how to do this?  And how to properly anticipate appraisal values?

 As far as appraisals are concerned, you have mentioned one of the "fun" obstacles we all encounter.  Fear not.  Learning your market is the secret.

There are three types of analysis, and they are listed below in the order you have to approach them:

1 - Market.  Know your market inside and out.  This does not mean go pick a market (like your backyard) and invest there.  You don't pick your market, your market will pick you based on the numbers...not the location in relation to your location.

2 - Rehab.  Know what to rehab, what not to rehab (as in if you have to rehab it...don't buy the house), and what it will actually cost (not just % guesses)...then who will do it...but the who will give you the how much.

3 - Property.  Use actual numbers with "$" in front...ignore numbers with "%" in front.  I've never paid for anything with %'s...just $'s.

The answers to all your questions grasshopper can be found in analysis.  Go forth and prosper.

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