rental house expenses

16 Replies

   Ive noticed not surprisingly that when I lower the expenses evaluating a potential rental house, its much easier to find a good deal that cashflows. In John Shaubs book "building wealth one house at a time", When he evaluates a potential rental house he only puts tax, insurance, and repairs/maintenance as a 20% of rent expense. When I lower my standards to these expenses it seams a lot easier to make a deal, but at the same time i want to be safe. What do you guys think is that enough? 

Nigel

@Nigel Ford as a quick calculation, 20% might be ok. But I always look up the taxes, base the insurance off another property (or give your local agent a call for a rough estimate). Those figures you should be able to get pretty exact.

Then repairs, capex, vacancies, I’d usually do 8-10% on each - BUT it depends on your property. If it’s a 2br place in a hot area, you might be able to assume 1/2 or 1 month vacancy. If it’s a large house with lots of land, it’ll probably be sitting a while between tenants. Same with repairs - new house with new kitchen, bath, etc... low repairs. Older house, you’re going to be fixing doors, plumbing, etc.

Long story short, the more realistic you can be with your estimates, the closer you’ll get to your real numbers once you start renting!

Hey @Nigel Ford , I think Brandon from Bigger Pockets did a great job breaking down this subject via video. It can be found on Youtube, titled, "Calculating Numbers on a Rental Property." The link to that video is attached below. Hope this helps! Please be advised that each market varies so you will want to alter expenses accordingly.  

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@Nigel Ford

since i made this thread i want your opinion on the financing i got approved for; its 5.7% interest and i have to pay 2500 to buy down the loan to that. It was a bigger pockets deal from guaranteed rate affinity. I already made an offer though so maybe i can get different financing in the escrow period.

@Nigel Ford

When I initially analyze properties, I use general assumptions on expenses that aren't easily obtained. This allows you to look at more deals and make more offers. However, before closing on any deal I verify those assumptions. Information/due diligence is essential for long term success in direct RE.

Ex. When I purchased my first duplex, I ran general assumptions on CAPEX expenses (6%). However, after purchasing the property I had to repair two hot water tanks, a furnace, and know the roof and floors need to be replaced soon. If I would have known about these expenses I would have lowered my offer as this lowered my return and averages out to more than 6% monthly.

I used this experience to my gain on the next property I purchased. After running my due diligence, I noticed there would need to be a few CAPEX repairs to have the propery rentable. I used this information to lower the purchasing price by 10k and was able to close the deal.

Always trust but verify the numbers, ignorance is not bliss in RE.

     This is a scenario im coming across often now looking for rental houses; The market is competitive so when I make offers for asking price I find out that another offer got accepted. Maybe for more than asking, or maybe with all cash or no contingencies, not sure. After factering in my expenses; tax, insurance, repairs/maintenance, and management. The net rent is just enough to cover the principle and interest and there is usually less than 100 cashflow. Is that an acceptable first deal? 

I seams like I cant offer less than asking realistically, and I have just enough cash for the conventional down payment, closing, and little things after.

I appreciate all your input on this, Thank you

@Mike McCarthy great response! Couldn't have put it better myself. 

@Nigel Ford it just sounds like you're in a competitive market. Have you ever considered looking out of state? Or, are you already looking out of state and just happen to be looking at another tough market? 

@Alyssa Dyer

I am investing out of state; Im in Cal and im looking in Indianapolis. Im under the impression now that the whole country is generally in the peak of the cycle.

There are so many things wrong with what you said here lol:

"When I lower my standards to these expenses it seams a lot easier to make a deal," 

Yes, it makes it easier to justify paying more, if you use the best-case scenario, and hope everything will go smoothly. I think it would be wise to calculate both scenarios. One where everything goes right, and what your numbers look like, and also one where lots of things go really wrong and calculate your numbers. If you are ok with the risk knowing both possible outcomes, then go ahead and pull the trigger. For instance, lets say you have a bad turnover (costing you 4k in repairs), and 2 months vacancy. Will you be able to recover and weather the storm or will this wipe you out? Make sure to have cash reserves either way. Good luck!

@Nigel Ford you're right that the country is at the top of the cycle, but some markets are still harder to snag deals than others. So when I said tough market, I was referencing it potentially just being too flooded with buyers! You might want to look to other providers or cities. 100/month cash flow isn't bad, but I typically see better in OKC. What purchase prices are you looking at? It all of course varies based on what we're factoring into our expenses! 

I would hate to switch markets because i’ve put soo much into learning and making contacts in this market already! I totally get what your saying though. 

What would you think of a house with a basement that could be rented separately, but the house would not cashflow otherwise?

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@Nigel Ford Have you tried looking at the homes that nobody else wants to buy? I guarantee that if you look on MLS, Zillow and FSBOs you will find a few properties that just need a rehab and the retail buyers are scared of it. If you haven't found a contractor in the area, start looking. They will be able to give you prices on rehab and make your offer accordingly!

I hear a lot of people say there are no good deals on the MLS...you have to make a good deal and be creative.

Are you working with a Realtor, wholesaler, feet on the ground? How are you looking for deals? 

Everyone has their own way of evaluating a property.  I look at the major ticket items like ac, furnace, roof etc.  If those need replacing in 5 to 10 years my expenses will probably be higher. I do a lot of preventive maintenance right away to limit some of the surprises. 

Originally posted by @Angie Shires :

@Nigel Ford Have you tried looking at the homes that nobody else wants to buy? I guarantee that if you look on MLS, Zillow and FSBOs you will find a few properties that just need a rehab and the retail buyers are scared of it. If you haven't found a contractor in the area, start looking. They will be able to give you prices on rehab and make your offer accordingly!

I hear a lot of people say there are no good deals on the MLS...you have to make a good deal and be creative.

Are you working with a Realtor, wholesaler, feet on the ground? How are you looking for deals? 

I am working with an agent, looking through zillow and redfin, and i’m subscribed to some wholesale lists. 

I have 2 properties lined up to make offers on, im waiting for a response from one. my agent will make offers one at a time but not multiple offers at the same time.

That was my 7th offer soo far.