When do your rentals typically start making money/making sense?
Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes
When do your rentals typically start making money/making sense?
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesRentals should start making money, as in profit, from the day you buy them...or don't buy them. Why else would you buy a rental property if you're losing money every month? Equity is great, but it is undefined, and untouchable (useless) until you sell the property, so you can't count that as profit until you can count it as money (cash).
Riddle me this Batman: How many properties can a REI sustain at one time, if they are paying for the tenants to live there?
49 Replies
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Scott Goulet:
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them.This is the problem. You bought a discount property, so it cash flows on paper but not in reality due to the deferred maintenance.
Question: is the property manager authorizing any maintenance that is unnecessary? If the sewer line is clogged with tree roots, you have to clean it. If the fridge starts freezing food, you have to repair it. If the doorknob falls off and the tenant can't latch the door to keep the weather out, you have to replace it. The only solution is to fix them as they happen or go through the entire property and try to fix everything at once.
It's a common mistake to spend your last dime purchasing the property and then having no money available to maintain it. I have to wonder if you are even calculating cash flow properly. Do you collect the rent, set aside approximately 50% for expenses (PM, taxes, insurance, maintenance, capex), pay the mortgage, and THEN whatever's left is cash flow? Or is cash flow everything left over after paying PITI?
Best practice: have a reserve to cover unexpected maintenance costs when you first purchase. I've bought a lot of discount properties and - despite my inspections - something major always seems to pop up within the first year. I also don't spend any of the income. It's set aside for additional maintenance, upgrades, or as a reserve. Once the reserve is solid enough to handle some major issues like roof or furnace or six months of vacancy, then I use the extra cash to purchase the next property.
The DIY Landlord Book4.7248 Reviews - 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Talk to your PM. Some will do whatever the tenant wants and others will do what is needed. It is often easiest to manage it yourself, but that isn't always possible. When you have the next turnover, go through the unit and get everything fixed that needs to be repaired or that might give you problems in the next year or two. If there are repairs every month just under the $300 limit, your PM is up to something. I'd look for a new one.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes5y
Normally a property should produce a stable cash flow when you buy it. But that maxim doesn't work usually in practice. Historically, I have bought mostly properties that need work. But within six months, they are producing a cash flow. I am a cash flow investor.
Yet recently I bought a single unit property in an expensive growth market. So far it breaks even. If a major repair comes up, it will lose money. I still like the deal as I am a long term investor and I am going to make a small bet for appreciation on this one.
To purchase properties in pricey places like California in the last decade, you forgo cash flow for appreciation. In time rents grow. But eventually it may become a cash flow positive property.
- Member since 2020 · 117 posts · 84 votes5y
you should make money from day one. as long as your not counting your downpayment and closing cost. if you live close enough to manage them i would manage them 8 units is easy to handle. i would suggest managing them until you grow alot more. every one has there lucky number mine is going to be 16-24 before i let someone manage my properties. i get its not passive but the goals is to get to the passive. also then you can manage the repairs to your liking. one more suggestion on repaire. do them the right way. i see so many landlords take short cuts thinking they saved a buck only to have to make that repaire 1000 times over. do it right once and dont worry about it any more. or atleast manage them take that 10% you would pay property manager and fix everything you need to fix the first year or 2 then hand it back to property manager after
- 5ySteve RozenbergPro MemberSpecialist · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
l I think you need to remember that rental properties make money five different ways
1. cash flow2. equity capture
3 is debt paid out
4 depreciation
5. appreciation
These are all strategies to help you achieve your goal property is not cash flowing and not making money I think is a mistake because you have a tenant paying down your debt you have captured equity and more importantly the properties are going up in value the appreciation appreciation will always beat any of these other strategies however you have to make sure that this strategy is what you want to achieve your goal.
Many new investors Focus only on cash flow thinking that is the reason they buy do not buy or sell a property I think that is a mistake if you do not factor in the other five pieces of the puzzle.
I'm not saying that it is not important but I am saying that you need to factor everything in.
From someone who's owned a property management company in the past I would say that you want to remember that there are rights rules regulations and laws that the property management company has to abide by because if not there could be some very harsh fair housing lawsuits coming down on them which means they come down on you.
If for some reason you are not happy with the services of a property management company I would go out and understood what is their role what do they take care of Maintenance wise and how do they help you to achieve your goal.
If you did not do that on the initial conversation you do not really understand how they run their business model but expecting it to align with yours seems almost impossible don't you think?The best thing you could do is have a conversation with them to find out and understand because there is What's called the property code there's tenant rights as well as the difference between cosmetic and habitability.
If you're not comfortable with them then I would say get a new one but have an expectation meeting in the beginning before you actually hired them.Below are some questions I would suggest you ask a company prior to hiring them
It is very important that you make sure you take the time to interview and have candid conversations with a PM company. Let them know your strategy, your goals and what your business plan is to ensure that your business plan aligns with theirs and you can both work towards the same goal. If they are not aligned then simply keep looking till you find one that is.
I used to own a company that managed almost 1,000 single family homes before I sold it.
Below are some questions I would think would be a good starting point for you to see who really treats their company like a business or a hobby.
Questions to Ask prospective management companies- What are your average days on market for vacant homes?
- What is your average rent amount for all properties managed?
- What is your average work order cost for the owner?
- What is your average make ready cost for the owner?
- Are all my invoices uploaded to my owner portal?
- How do you advertise your vacant units?
- Do I receive video of my pre and post make ready?
- Do you have a setup fee?
- Do you upcharge on maintenance?
- When do you make owner payments? How often?
- Are you a Certified Property Manager?
- Are you a member of NARPM?
- What is your Guarantee?
- Do you provide move in and move out reports
- How many pictures do you take of the property prior to tenant moves in and after the tenant moves out
- Do you get weekly reports when the property is vacant what prospective tenants are saying about your home
- Do you provide monthly newsletters to your tenants
- Do you hold investor education classes to help me become a better investor
- Do you have single point portfolio based management services?
- How many properties do the owners actually own themselves?
- What do you do to ensure that the tenant is responsible for security deposit disputes since that is the largest reason for owner lawsuits
- How familiar are you with the newly changed laws that can affect you the owner if they are not used correctly?
- Rental Property Investor · Newark, NJ · Member since 2017 · 88 posts · 75 votes5y
Your answer is in your question. If you're buying properties at a discount due to deferred maintenance and you don't have the money to fix the property how do you expect a management company to do their job adequately if issues keep arising and tenants are continuously calling them? We've all been there, investing is tough in the beginning because funds can be tight. At some point we all realize that its sooooo much better to spend the money up front because if you don't, you'll wind up spending much more money over time with maintenance calls and tenant turnover. I am of the opinion everyone should manage their own properties for a little while to see how tough it is, you'll appreciate your PM so much more when you hire them. Sorry for the tough love but its the truth. To answer your question directly, you start making money after you go through the cycle 2 or 3 times. After you do the refinance on your 3rd property the cash flow starts looking real nice but it can take some time and a lot of learning along the way. Good luck
- 5yMartin NealPro MemberRental Property Investor · Chicago, IL · Member since 2017 · 293 posts · 383 votes
@Scott Goulet the answer is two-fold. First, you should have your management company check with you before approving repairs if it’s not an emergency. Second, it’s not all about the cash flow. You still get the benefit of equity pay down, appreciation and tax benefits. I would definitely start with managing the manager first. Good luck.
- Rental Property Investor · Port Saint Lucie, FL · Member since 2015 · 107 posts · 44 votes5y
You All are rockstars. I have been using the biggerpockets for square method for evaluating my deals. I also created my own rental property calculator. I do believe it is partly my PM and partly my property. Certainly it does need a little bit of work, but overall it's just a basic triplex. What are the typical %'s you use for vacancy, and capex? I know this varies by market, but just as a rule of thumb?
- 5yJustin HillPro MemberWholesaler · Lansing, MI · Member since 2017 · 39 posts · 12 votes
@Joe Villeneuve straight shooter. I like it.
- Member since 2019 · 448 posts · 306 votes5y
@Scott Goulet
It sounds like you have the 8 properties but only the 1 is causing you trouble. Is this correct? If so i would do 1 of 2 things....
1. Fire the manager. Manage it yourself for a period of time and see if things work better that way. You can always get a new PM later. If i were managing a property with constant maintenance i would take a few days and go in there and give the house a check up and tune everything up to get it back in good shape. Then see how it performs.
2. Sell that place and go in a different direction.
- Denver, CO · Member since 2020 · 112 posts · 95 votes5y
You are wiser than you probably realize by spotting early on that a few hundred bucks a month in cashflow is not going to make you rich ... so many newbies dream of stacking up 50 units at $200/mo cashflow and think that that is how they will strike it rich ... even if that works, sounds like an incredible PIA to me. You are MUCH better off getting 10 units that have total returns of $1000/mo ... quality over quantity. You can do this by understanding and exploiting ALL the profit centers in REI. You already mentioned cash flow, and the only thing I'd add is that if you buy in a highly desirable area, then your cash flow on day one may be low, but with consistent rent increases over time could end up high ... this is VS buying in a bad area with high cash flow on day one, but those rents rarely go up to even keep up with inflation so your cash flow diminishes over time.
Then there is appreciation. There is forced appreciation (the way flippers make money, but buy& hold investors can too) and market appreciation. Both are good, you want to try to get both if you can.
Then there is ammortization, or mortgage pay down ... if your tenants are paying your mortgage for you and it is not an interest only loan, that means that every month part of that mortgage payment goes towards principal pay down ... the amount owed gets smaller and smaller until one day (if you don't cash out refinance) you own the property free and clear.
Figure out how to analyze and manage all of these ... books can and have been written on it, but that should point you in the right direction. IMO the analytical framework for bringing all of these elements together to calculate your returns is IRR (can google it) ... running some scenarios through IRR calculations will help you see how things can pan out in the long haul. Anyway you slice it, though, Real Estate is a get rich slow but steady type gig, and it's not easy or for everyone, but it does work for those willing and able to work it. Good luck.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Scott Goulet:
You All are rockstars. I have been using the biggerpockets for square method for evaluating my deals. I also created my own rental property calculator. I do believe it is partly my PM and partly my property. Certainly it does need a little bit of work, but overall it's just a basic triplex. What are the typical %'s you use for vacancy, and capex? I know this varies by market, but just as a rule of thumb?
This varies by market. The general rule-of-thumb is to anticipate 10% for each. But if it's a brand-new home, you won't need 10% for capex. If it's a hot rental market like mine and you have good processes for renting quickly, vacancy rates may be less than 5%. You have to consider your personal situation, crunch the numbers, and come up with a plan.
For most investments, I think it's fairly accurate to assume 50% of all rent income for expenses. Then you pay the mortgage and interest. Then whatever remains is your cash flow.
Despite this, you should still have a reserve because maintenance won't wait 16 months for you to build a reserve. I bought my first investment with $6,700 down and in the first three months I got hit with almost $10,000 due to a clogged sewer line that had to be replaced and an HOA special assessment that my REALTOR failed to tell me about. Fortunately, I had some savings to carry me through and insurance covered about half of the sewer replacement. I've always maintained a reserve since then and I have ALWAYS had unforeseen expenses when I bought a property.
One of my latest investments was a fully renovated home, so I thought I was on easy street for a while. About ten months later the Master shower developed a leak, despite being a brand new, beautiful tile walk-in shower. The seller didn't use the correct shower pan and tried to hide the mistake with a tube (or two) of caulk. The caulk eventually failed and I will have to spend $5,000 + to completely tear out and replace the shower. My point is, you should always be prepared for unforeseen expenses from day one.
The DIY Landlord Book4.7248 Reviews - 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Steve Vaughan:
Originally posted by @Scott Goulet:
Hi everyone! I'd like to say in a fairly experienced investor, still a newbie at heart though. I have 8 doors over 3 properties.
1 specific property, I purchased in 2019 and in 2019 I took a net $9k loss, and in 2020 I finally cashed flowed, but over the course of the entire year after financing expense on cash flowed $1500. This is a triplex and gross income is about $2k, but the actual income is so irregular. I swear every month there is something the property management company is fixing.. plumbing, oven not working, something leaking, etc.
My wife just wants us to start managing ourselves, but in my mind yes well make more, but then it wouldnt be passive.
My question is: at what point do rentals that need work, start cash flowing steadily?
I feel like my management company says yes to every single little thing my tenants ask for.. my managment company made more thsn I did in 2020, even though the tenants are paying on time everytime, but these maintenance requests are killing me.
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them. Just as some background.
With a PM I'd be surprised if you truly cash--flow in 5 years. CF is tough to gauge in that deal as 1 bad tenant or over-priced repair will claw back cf from previous periods. Add on to that risk the fact you don't have the capital to bring the property up to snuff after purchase.
If your rentals are in your back yard you need to self-manage especially if newer and can't afford the general raking you will receive.
My PM (retained on one community purchased last year) must inform me prior to sending out a licensed tradesman (after reviewing the high repair costs the previous owner experienced)
Yesterday they wanted an electrician to replace the balast of a crappy 4ft fluorescent light. Quote? $150. Who repairs that crap? I grabbed a new $25 50,000 hr modern LED fixture to swap. PMs just don't get it.
Speaking as a self-manager on rental homes purchased in the past 5 years in an expensive market, the cf goes positive in about month 25. That means replaces fix-up costs but not DP. That also doesn't count equity captured or forced. True cash-flow only.
In equity / expensive markets though, the cf is just the lunch money. Equity is college. COC may not be great, but IRR is.
another Steve Pearl... cash flow is lunch money... Amen.. Equity and appreciation are Collage education and retirement..
- Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes5y
@Scott Goulet
I generally do a pretty substantial rehab right after purchasing so I am not saddled with the ongoing maintenance you’re describing.
If units are occupied I will do the rehab when those tenants move out.
Either way I don’t consider the property to be stabilized until it’s condition is up to my standard and the tenants are ones that I’ve placed. At that point it should be making good money. Otherwise not worth it.
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes5y
Honestly, with these smaller properties get your wife to read one of the BP books on managing rentals and you guys can manage these things yourself.
Yes, there is always something especially with the really old buildings but when you buy the next one do an extensive rehab on it, and you will realize things will work for the most part for about 5 years so no need to have a PM on the smaller assets, I mean right now is the best time to self manage since everyone is social distancing, so you never need to go over to the properties.
All I do is post a job on Thumbtack, then I get the technician to call the tenant and book the time. The contractor tells me the price I negotiate it (always, the PM will never negotiate), and the work is done.
Passive at the expense of cashflow isn't sustainable.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Nathan Gesner:
Originally posted by @Scott Goulet:
You All are rockstars. I have been using the biggerpockets for square method for evaluating my deals. I also created my own rental property calculator. I do believe it is partly my PM and partly my property. Certainly it does need a little bit of work, but overall it's just a basic triplex. What are the typical %'s you use for vacancy, and capex? I know this varies by market, but just as a rule of thumb?
This varies by market. The general rule-of-thumb is to anticipate 10% for each. But if it's a brand-new home, you won't need 10% for capex. If it's a hot rental market like mine and you have good processes for renting quickly, vacancy rates may be less than 5%. You have to consider your personal situation, crunch the numbers, and come up with a plan.
For most investments, I think it's fairly accurate to assume 50% of all rent income for expenses. Then you pay the mortgage and interest. Then whatever remains is your cash flow.
Despite this, you should still have a reserve because maintenance won't wait 16 months for you to build a reserve. I bought my first investment with $6,700 down and in the first three months I got hit with almost $10,000 due to a clogged sewer line that had to be replaced and an HOA special assessment that my REALTOR failed to tell me about. Fortunately, I had some savings to carry me through and insurance covered about half of the sewer replacement. I've always maintained a reserve since then and I have ALWAYS had unforeseen expenses when I bought a property.
One of my latest investments was a fully renovated home, so I thought I was on easy street for a while. About ten months later the Master shower developed a leak, despite being a brand new, beautiful tile walk-in shower. The seller didn't use the correct shower pan and tried to hide the mistake with a tube (or two) of caulk. The caulk eventually failed and I will have to spend $5,000 + to completely tear out and replace the shower. My point is, you should always be prepared for unforeseen expenses from day one.
good point rentals are pretty easy.. and napkin math should be used to figure out if you want to delve in deeper dont see the need for some major calculator.. expenses run 40 to 60% 95% of the time for 99% of rentals over a long haul.. thats all you need to know.. I mean what difference does it make if your off by a few % your cash flow went from 200 to 189.00 etc.. I think folks get way too wound up on these numbers without realizing that the value of owning rentals is in Equity appreciation and then moving that equity and appreciation up to bigger better buys.. in my mind to simply run the math at 200 a month and think you need 20 doors to get your 4k a month net.. well then what.. ??? its not like many folks do this for a lifetime.. this is why IRR is the true measure again in my mind.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:
Originally posted by @Scott Goulet:
Hi everyone! I'd like to say in a fairly experienced investor, still a newbie at heart though. I have 8 doors over 3 properties.
1 specific property, I purchased in 2019 and in 2019 I took a net $9k loss, and in 2020 I finally cashed flowed, but over the course of the entire year after financing expense on cash flowed $1500. This is a triplex and gross income is about $2k, but the actual income is so irregular. I swear every month there is something the property management company is fixing.. plumbing, oven not working, something leaking, etc.
My wife just wants us to start managing ourselves, but in my mind yes well make more, but then it wouldnt be passive.
My question is: at what point do rentals that need work, start cash flowing steadily?
I feel like my management company says yes to every single little thing my tenants ask for.. my managment company made more thsn I did in 2020, even though the tenants are paying on time everytime, but these maintenance requests are killing me.
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them. Just as some background.
With a PM I'd be surprised if you truly cash--flow in 5 years. CF is tough to gauge in that deal as 1 bad tenant or over-priced repair will claw back cf from previous periods. Add on to that risk the fact you don't have the capital to bring the property up to snuff after purchase.
If your rentals are in your back yard you need to self-manage especially if newer and can't afford the general raking you will receive.
My PM (retained on one community purchased last year) must inform me prior to sending out a licensed tradesman (after reviewing the high repair costs the previous owner experienced)
Yesterday they wanted an electrician to replace the balast of a crappy 4ft fluorescent light. Quote? $150. Who repairs that crap? I grabbed a new $25 50,000 hr modern LED fixture to swap. PMs just don't get it.
Speaking as a self-manager on rental homes purchased in the past 5 years in an expensive market, the cf goes positive in about month 25. That means replaces fix-up costs but not DP. That also doesn't count equity captured or forced. True cash-flow only.
In equity / expensive markets though, the cf is just the lunch money. Equity is college. COC may not be great, but IRR is.
another Steve Pearl... cash flow is lunch money... Amen.. Equity and appreciation are Collage education and retirement..
Why is it always one without the other? To me, one without the other is a useless property.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Pure gold!
I used to spend a lot of time pouring over data, analyzing an investment and second-guessing everything. Now I'm much more relaxed and literally analyze a property in my head, then run it through the BP calculator just to cross check for mistakes. I don't spend a lot of time speculating on 5-year returns and such. Real estate is a pretty forgiving investment vehicle and I know any small calculating errors will be erased with time.
I did make an exception recently. I'm negotiating an offer on a property with three residential units and 170 storage units. They have a 45% vacancy rate, about 25% of their storage units are delinquent, the rent rates are 15 to 30% below market, and two of the residential rentals are three months behind and being evicted. There are a lot of variables involved so I created a monstrous spreadsheet with almost 30 columns and over 200 rows of data and formulas. It's very satisfying to adjust a variable and quickly analyze the difference between current performance, projected performance after I stop the bleeding, and projected performance after I've given it my Midas touch.
The DIY Landlord Book4.7248 Reviews - 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Villeneuve:
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:
Originally posted by @Scott Goulet:
Hi everyone! I'd like to say in a fairly experienced investor, still a newbie at heart though. I have 8 doors over 3 properties.
1 specific property, I purchased in 2019 and in 2019 I took a net $9k loss, and in 2020 I finally cashed flowed, but over the course of the entire year after financing expense on cash flowed $1500. This is a triplex and gross income is about $2k, but the actual income is so irregular. I swear every month there is something the property management company is fixing.. plumbing, oven not working, something leaking, etc.
My wife just wants us to start managing ourselves, but in my mind yes well make more, but then it wouldnt be passive.
My question is: at what point do rentals that need work, start cash flowing steadily?
I feel like my management company says yes to every single little thing my tenants ask for.. my managment company made more thsn I did in 2020, even though the tenants are paying on time everytime, but these maintenance requests are killing me.
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them. Just as some background.
With a PM I'd be surprised if you truly cash--flow in 5 years. CF is tough to gauge in that deal as 1 bad tenant or over-priced repair will claw back cf from previous periods. Add on to that risk the fact you don't have the capital to bring the property up to snuff after purchase.
If your rentals are in your back yard you need to self-manage especially if newer and can't afford the general raking you will receive.
My PM (retained on one community purchased last year) must inform me prior to sending out a licensed tradesman (after reviewing the high repair costs the previous owner experienced)
Yesterday they wanted an electrician to replace the balast of a crappy 4ft fluorescent light. Quote? $150. Who repairs that crap? I grabbed a new $25 50,000 hr modern LED fixture to swap. PMs just don't get it.
Speaking as a self-manager on rental homes purchased in the past 5 years in an expensive market, the cf goes positive in about month 25. That means replaces fix-up costs but not DP. That also doesn't count equity captured or forced. True cash-flow only.
In equity / expensive markets though, the cf is just the lunch money. Equity is college. COC may not be great, but IRR is.
another Steve Pearl... cash flow is lunch money... Amen.. Equity and appreciation are Collage education and retirement..
Why is it always one without the other? To me, one without the other is a useless property.
I get it and its fun to debate both sides of this argument and i realize BP is definitely slanted to cash flow and the thought of appreciation is compared to gambling.
however in my mind its highly regional.. If one is going to do a deep dive into the numbers then to me its historic values.. replacement costs Schools jobs quality of life.. tenant base etc etc.. when those things align in a positive way you will have values rise more than a few % A year I mean 3% appreciation on 100k houses does not really do much for the investor other than make their spread sheet look good.
So to me you play the cards your dealt.. in some markets were the rise in values is suspect at best.. then for sure you need cash flow and a lot of it to make any sense of going through the landlord experience..
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Nathan Gesner:
Pure gold!
I used to spend a lot of time pouring over data, analyzing an investment and second-guessing everything. Now I'm much more relaxed and literally analyze a property in my head, then run it through the BP calculator just to cross check for mistakes. I don't spend a lot of time speculating on 5-year returns and such. Real estate is a pretty forgiving investment vehicle and I know any small calculating errors will be erased with time.
I did make an exception recently. I'm negotiating an offer on a property with three residential units and 170 storage units. They have a 45% vacancy rate, about 25% of their storage units are delinquent, the rent rates are 15 to 30% below market, and two of the residential rentals are three months behind and being evicted. There are a lot of variables involved so I created a monstrous spreadsheet with almost 30 columns and over 200 rows of data and formulas. It's very satisfying to adjust a variable and quickly analyze the difference between current performance, projected performance after I stop the bleeding, and projected performance after I've given it my Midas touch.
Ya that deal is not apples to apples to buying a 1 to 4 unit rental.. there is a ton of moving parts there.. Just like when i am looking at land to create a community on.. it takes a year or more of work and lots of money with experts.. can do basic math in my head.
Like say the land cost is 60k per paper lot I know putting in utls and every thing is 50k ( round number) soft costs 200 to 500k then just add it all up and see what the retail value of the lots are so you can get a quick look.. in other areas were density of lots is basically assured and you know the other costs then you can look at price per acre.. if U know a good deal is 300k and acre and they are asking 500k an acre then you know right off the top not to spend much time on it.. but if you can get it for 200k an acre then your really going for it.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:
Originally posted by @Scott Goulet:
Hi everyone! I'd like to say in a fairly experienced investor, still a newbie at heart though. I have 8 doors over 3 properties.
1 specific property, I purchased in 2019 and in 2019 I took a net $9k loss, and in 2020 I finally cashed flowed, but over the course of the entire year after financing expense on cash flowed $1500. This is a triplex and gross income is about $2k, but the actual income is so irregular. I swear every month there is something the property management company is fixing.. plumbing, oven not working, something leaking, etc.
My wife just wants us to start managing ourselves, but in my mind yes well make more, but then it wouldnt be passive.
My question is: at what point do rentals that need work, start cash flowing steadily?
I feel like my management company says yes to every single little thing my tenants ask for.. my managment company made more thsn I did in 2020, even though the tenants are paying on time everytime, but these maintenance requests are killing me.
When I purchase my units, I buy them at a discount, so obviously there is some deferred maintenance, but I dont have the money to fix everything right when I buy them. Just as some background.
With a PM I'd be surprised if you truly cash--flow in 5 years. CF is tough to gauge in that deal as 1 bad tenant or over-priced repair will claw back cf from previous periods. Add on to that risk the fact you don't have the capital to bring the property up to snuff after purchase.
If your rentals are in your back yard you need to self-manage especially if newer and can't afford the general raking you will receive.
My PM (retained on one community purchased last year) must inform me prior to sending out a licensed tradesman (after reviewing the high repair costs the previous owner experienced)
Yesterday they wanted an electrician to replace the balast of a crappy 4ft fluorescent light. Quote? $150. Who repairs that crap? I grabbed a new $25 50,000 hr modern LED fixture to swap. PMs just don't get it.
Speaking as a self-manager on rental homes purchased in the past 5 years in an expensive market, the cf goes positive in about month 25. That means replaces fix-up costs but not DP. That also doesn't count equity captured or forced. True cash-flow only.
In equity / expensive markets though, the cf is just the lunch money. Equity is college. COC may not be great, but IRR is.
another Steve Pearl... cash flow is lunch money... Amen.. Equity and appreciation are Collage education and retirement..
Why is it always one without the other? To me, one without the other is a useless property.
I get it and its fun to debate both sides of this argument and i realize BP is definitely slanted to cash flow and the thought of appreciation is compared to gambling.
however in my mind its highly regional.. If one is going to do a deep dive into the numbers then to me its historic values.. replacement costs Schools jobs quality of life.. tenant base etc etc.. when those things align in a positive way you will have values rise more than a few % A year I mean 3% appreciation on 100k houses does not really do much for the investor other than make their spread sheet look good.
So to me you play the cards your dealt.. in some markets were the rise in values is suspect at best.. then for sure you need cash flow and a lot of it to make any sense of going through the landlord experience..
It is most assured to be regional. I still wouldn't invest for one without the other.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes5y
What was your purchase price? A near 1% in a linear market that rents for $650 with 3rd party management will not be profitable. This may not be your fact pattern...not sure. I own units in this rental range and use 3rd party management but they have a high rent to price ratio, had a big value add, and we use our own contractors for heavier-lift unit turns.
- las vegas, NV · Member since 2016 · 14 posts · 7 votes5y
Originally posted by @Joe Villeneuve:
Rentals should start making money, as in profit, from the day you buy them...or don't buy them. Why else would you buy a rental property if you're losing money every month? Equity is great, but it is undefined, and untouchable (useless) until you sell the property, so you can't count that as profit until you can count it as money (cash).
Riddle me this Batman: How many properties can a REI sustain at one time, if they are paying for the tenants to live there?
Bingo!
Although many like to argue the contrary, cash flow beats equity. Equity "rich"/cash poor status is not very attractive.
Finance 101: No cash flow = no viable asset/business.
- Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes5y
@Scott Goulet if your PM is making more than you then you are working for them. You should listen to your wife and manage your own Propertirs. Doesn't mean you have to do the work just that you need a team of people to fix problems. I manage six properties myself that are a 6 hour drive. I hardly ever need to go onsite, just make a phone call and everything is taken care of. I get first rate response because I am a return customer that they can count on, it's all about developing a relationship built on trust. I don't think you can trust your PM
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