Matthews, NC · Member since 2018 · 50 posts · 24 votes
Hi all, I have a few questions. I'm very new to real estate investing, and have just spent the past 2 weeks exploring my area (Charlotte NC). Granted, I've only been looking on the MLS...which leads me to my first question. I'm primarily interested in SFRs between 80-120K , and because we don't have cash our plan was to use a HELOC for the downpayment and mortgage the rest. The trouble I'm having is this: it doesn't seem like rent ratios are working out in terms of cash flow. I do know that we are disadvantaged in having to 100% finance, especially in terms of cash flow. But even when I'm doing the math and not including our HELOC (just to see), it isn't leaving much cf. I also know that because most of what we are finding are older ranch style homes, and because we are new at this, I'm being quite conservative in running my numbers. I'm starting to wonder if it would be smarter to do a flip first, and then have cash to put into a rental. Every time we go look at properties, my realtor tells me I will have to offer way over asking to compete with other investors - regardless of the home's condition. So for example, just the other day there was a house for 100K that he said would likely go for closer to 125K. If that's the case, how are other investors making these deals work? I understand they might be all cash, but that doesn't excuse bad math. Here's a run down of how I calculated our costs on a potential offer last week...perhaps you can shed some light if my math is incorrect, or if its just that cash investors don't care they are over-paying for property:
4 BD 1.5 BA - asking 100K, assuming it closes at 125K and rents at 1200.
Annual breakdown:
Mortgage: 6800
Taxes: 1160
Insurance: 1000
Management (8%): 1152
Vacancy (8%): 1152
Repairs (8%): 1152
Cap Ex: 1800
TOTAL EXPENSES - 14,216
TOTAL RENT - 14,400
Even if I bump the rent to 1250, the monthly cash flow is 65 compared to 15. So, are my numbers too conservative or are they correct? Would love your feedback. I have run this same formula on even lower priced properties that need much more work, and never end up with good cash flow. Is the ONLY way to do this buying foreclosures? My realtor said we shouldn't even consider auctions unless we have all cash. Any and all feedback/advice welcomed!!
Investor · USA · Member since 2015 · 325 posts · 447 votes
8y
@Kelly Carter I really can not speak to your market but in Seattle people are really paying way way too much for an "investment". I have a news flash for those people IF YOU MAKE ZERO MONEY OR LOSE MONEY it is not a GOOD investment. I see that all the time out here. People will buy a duplex for 400-500k and it will rent for $2,500 a month total. Those people are paying for experience. They will hold the property for a few years, lose money every month, and then try and sell it to another sucker who sees it as an "investment".
I think if you are patient and really study the market you will find something good. You will be able to recognize it for what it is. If you do 10 deals and make 10K each or do one great deal and make 100K, which one is worth it? I would rather sit on the sidelines most of the time and do the one.
Investor · Portsmouth, VA · Member since 2015 · 2 posts · 3 votes
8y
You have to think about the condition the house is in when the 1% rule is applied. If you have a nicely rehabbed house, with a new roof, kitchen, bath, HVAC system, you will have lower repairs, and CapX. You will also have a lower vacancy because your property will look nicer than the competition. This cash flow will allow you to build your portfolio.
If you buy an old, dated house for $125k that rents for $1200, you should count on negative cash flow for the first few years while you improve the property.
Hi all, I have a few questions. I'm very new to real estate investing, and have just spent the past 2 weeks exploring my area (Charlotte NC). Granted, I've only been looking on the MLS...which leads me to my first question. I'm primarily interested in SFRs between 80-120K , and because we don't have cash our plan was to use a HELOC for the downpayment and mortgage the rest. The trouble I'm having is this: it doesn't seem like rent ratios are working out in terms of cash flow. I do know that we are disadvantaged in having to 100% finance, especially in terms of cash flow. But even when I'm doing the math and not including our HELOC (just to see), it isn't leaving much cf. I also know that because most of what we are finding are older ranch style homes, and because we are new at this, I'm being quite conservative in running my numbers. I'm starting to wonder if it would be smarter to do a flip first, and then have cash to put into a rental. Every time we go look at properties, my realtor tells me I will have to offer way over asking to compete with other investors - regardless of the home's condition. So for example, just the other day there was a house for 100K that he said would likely go for closer to 125K. If that's the case, how are other investors making these deals work? I understand they might be all cash, but that doesn't excuse bad math. Here's a run down of how I calculated our costs on a potential offer last week...perhaps you can shed some light if my math is incorrect, or if its just that cash investors don't care they are over-paying for property:
4 BD 1.5 BA - asking 100K, assuming it closes at 125K and rents at 1200.
Annual breakdown:
Mortgage: 6800
Taxes: 1160
Insurance: 1000
Management (8%): 1152
Vacancy (8%): 1152
Repairs (8%): 1152
Cap Ex: 1800
TOTAL EXPENSES - 14,216
TOTAL RENT - 14,400
Even if I bump the rent to 1250, the monthly cash flow is 65 compared to 15. So, are my numbers too conservative or are they correct? Would love your feedback. I have run this same formula on even lower priced properties that need much more work, and never end up with good cash flow. Is the ONLY way to do this buying foreclosures? My realtor said we shouldn't even consider auctions unless we have all cash. Any and all feedback/advice welcomed!!
A couple of things, for your first deal (assuming you have little to no rehab/construction experience), don't try and do anything more complicated than maybe paint, change door handles and MAYBE new flooring. IMO you will be much better off just buying something that it essentially move in ready as your first rental)
The conventional wisdom is that there is this vast array of off market and wholesale deals out there. Yes there are some, but for the most part the experienced flippers are working with the best wholesalers. Most of what you see out there are mediocre to poor deals being advertised as off market. I cant tell you how many times I see a deal listed as being a wholesale deal and the actual property is listed for less on the MLS, or FSBO on Zillow.
IF you get a good investor friendly real estate agent, just have them set you up with some MLS searches. Those can be profitable. But it might take viewing several hundred, or maybe even a thousand or more properties to find one that works.
The best thing imo you can do is drive a few up and coming neighborhoods, maybe 1x1 mile or at the most 2x2 mile square neighborhoods, and just get to know everything that comes on the market, and everything that gets sold. To the point that you immediately know what the price should be, and what you would be willing to pay for it.
I will say this, our best deals have come from houses we paid at or over asking on the first day the property came on the market. And our focus has been in transitional neighborhoods that are up an coming in the path of progress. IE where is the trendy coffee shop or artists moving to?
Honestly on a SFH, with 100% leverage, you will have a tough time finding anything that really "cash flows". The question is does it break even, and if it was an 80% loan would I have decent cash flow?
Maybe you self manage the property and use that "management fee" to pay down the HELOC, and now all of a sudden the property cash flows. I get it that you want to model your deals as though they are managed by an outside company (and I agree with that), but early on we personally had our realtor help with showing and screening tenants. Then we manage the property once the lease is signed.
You will save a lot of money doing your own property management, and I early on that extra cash flow is really helpful to getting your first property or two under management.
Stick with it, my wife and I have outside W-2 income, so we have decided to just remain patient until something comes our way, we had hoped to be up to doing 3-4/deals or more a year. We are about 7 months in since we found the last deal we liked, our longest drought in several years. don't get discouraged at 2 weeks, and don't do a deal just to do a deal.
Stay patient and pile up cash for your deal, and best of luck to you.
Maybe you self manage the property and use that "management fee" to pay down the HELOC, and now all of a sudden the property cash flows. I get it that you want to model your deals as though they are managed by an outside company (and I agree with that), but early on we personally had our realtor help with showing and screening tenants. Then we manage the property once the lease is signed.
You will save a lot of money doing your own property management, and I early on that extra cash flow is really helpful to getting your first property or two under management.
...
A good suggestion there to self manage at first, to get to keep the management fees to apply to paying off the HELOC financing.
But I am not as keen on the suggestion to use an agent to find tenants when you self manage. Especially if the property is in a better and more desirable area. The agent who just finds tenants gets paid a fixed commission based on the rent involved. So that agent has no incentive to evaluate many potential tenants; in fact, the agent becomes more productive (and spends less time for the same compensation amount) by minimizing the number of potential tenants evaluated. To the point where the tenant screening can be poor or incomplete, thus letting an unqualified tenant in; and there are too many examples where that has actually happened to be comfortable ignoring that. So better to learn how to do the tenant selection yourself when you have decided to self manage.
Rental Property Investor · Southern NH · Member since 2017 · 87 posts · 100 votes
8y
My business partner and I are taking the same route. Prices are silly up here in the northeast as they are everywhere else. We're not turning away multi listings from realtors but we're thinking the same thing in terms of flipping a few homes first to generate some extra cash. That has presented similar challenges when you look at what a property will sell for and what it's ARV is potentially against repair costs.
Against that, I've started driving for dollars after work and sending out letters. It's fun picking out which homes could flip well because you get a first hand look at the neighborhood condition as a whole compared to the neglected ones. I'm hopeful we can land a deal or two this way because the MLS simply isn't cutting it. Let's hope the pending correction happens sooner than later because it's like a desert out there for deals!
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
I used to know that real estate investing was all about deal flow until I joined BP and they tried to convince me that it was about analysis, management, and capital. In this market, you either need a mature deal flow pipeline (with lots of opportunities) or to invest with people who have one. I am doing the latter.
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
8y
A few thoughts:
1. Not every market is well-suited for buying rental properties at all times. And with a relatively hot RE market nationwide, even though all RE is local I think you're seeing a lot of bleed-over as investors who cannot find anything local pour money into other markets.
2. When you are first starting out you usually trade some sweat equity for cash flow, unless you have built a huge amount of cash. That's where self-managing comes in; that's also where leverage comes in, as you don't have enough of your own cash to 'buy' the cash flow. When you are buying in a hot market, it's unreasonable to expect that any property with significant leverage is going to have strong (if any) cash flow. Still, even using your numbers, there's equity in there: if you don't have a vacancy every year, that's cash flow. If you don't use up all your repair & capex funds, that's cash flow. The principal pay-down is cash flow. The tax benefits are cash flow. What you have to figure out is if the returns make sense for the risk involved. As @Russell Brazil noted, you're almost guaranteed to make money at B or above, even if it looks like you're breaking even on paper.
3. I'm not sure that flipping makes more sense in a hot market. You'll have more holding costs and tax hits and will be buying already-inflated properties and then trying to position them above the market. By the time a market is hot enough that everyone is talking about flipping properties the ship in that market has already sailed.
Bottom line is you'll probably just have to spend a lot of time analyzing deals and be ready to pounce on something when you see it open. We are seeing the same thing in my market so it's not just your market, it's more or less everywhere right now.
Maybe you self manage the property and use that "management fee" to pay down the HELOC, and now all of a sudden the property cash flows. I get it that you want to model your deals as though they are managed by an outside company (and I agree with that), but early on we personally had our realtor help with showing and screening tenants. Then we manage the property once the lease is signed.
You will save a lot of money doing your own property management, and I early on that extra cash flow is really helpful to getting your first property or two under management.
...
A good suggestion there to self manage at first, to get to keep the management fees to apply to paying off the HELOC financing.
But I am not as keen on the suggestion to use an agent to find tenants when you self manage. Especially if the property is in a better and more desirable area. The agent who just finds tenants gets paid a fixed commission based on the rent involved. So that agent has no incentive to evaluate many potential tenants; in fact, the agent becomes more productive (and spends less time for the same compensation amount) by minimizing the number of potential tenants evaluated. To the point where the tenant screening can be poor or incomplete, thus letting an unqualified tenant in; and there are too many examples where that has actually happened to be comfortable ignoring that. So better to learn how to do the tenant selection yourself when you have decided to self manage.
Steve, I probably should have been a little more clear. We have (actually had since she is getting out of real estate), a relationship with a realtor who is also an investor. And she would both help us find tenants AND helped us find new properties. So she actually had incentive to find us great tenants because we would buy the next property thru her.
Basically our real estate agent would do the marketing, schedule the showings, take the application/applications, run the background and credit and provide a recommendation on whether we should or shouldnt accept a tenant.
We then actually had the final say on whether to take the tenant but it was worth it to us to use the TAR lease, to make sure we didnt run afoul of the fair housing act etc.
I think your main point is correct, and that is to make sure those you work with have incentives aligned with yours. In our case our agent knew that they would get repeat business both on the rental and buy/sell side if things went well.
@JD Martin thanks so much! Something I’ve been wanting to clarify - when you say B property, are you referring to the location or the house?
Location. You can virtually make any house an "A" house but you can't change the neighborhood, unless you have so much money you can buy the neighborhood - and even then you might have structural problems that can't be solved: sewage plant; prison; projects; etc.
My strategy is always to buy a C-D house in a B neighborhood. It's provided very good returns for me.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
My min cf requirement for b to b- sfr is much lower than I require for multis. There are so many more exit strategies and OO buyers get emotionally excited about their purchase, driving your IRR at exit. Your buyer pool for multis is an investor without emotion most likely.
A b- 1%er is a unicorn in my area anymore. If taxes and insurance rates aren't high there, it should cf well with 10% down. But the important metric is IRR, not cf, especially with nothing out of your pocket. Cut back on other things if you need to. I will eat pb&j and drive a beater in order to buy another house. Wait, that's what I do do! (Or did for years anyway)
My sfrs have appreciated more than my multis %-wise, staying out of c- areas and below. I'd happily put 25% down on a dozen 1%ers in my area if I could find them. Pull the trigger on a good one when you're ready!
Take a look at this homegrown article for good info on Class A, B, C, D real estate. You probably don't need it, but it always bears reposting in a thread with so much alphabet soup being tossed around.
Rental Property Investor · Cleveland, OH · Member since 2016 · 653 posts · 769 votes
8y
Be patient as well. You might analyze hundreds of deals before finally finding one worth jumping on, but by doing that you'll know exactly what to look for and when to pull the trigger.
One of the best ways to spot a good deal is to know what's a bad deal and you've just got to see tons of deals to get there.
Not that I'd encourage going for a bad deal, but if you don't hit your goal 100% on your first deal, you'll at least have started and will learn A TON. Take that knowledge and use the momentum. But one of the biggest challenges is just starting. So you should analyze more deals, but don't wait for the perfect one to come along either :)
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
8y
Kelly Carter you need to save some cash.
100% leverage is just generally a bad idea in my opinion. There’s a reason the banks ask for at least 20% on most investment properties.
Figure out how you can set aside some cash first and then start looking for deals.
@Bart H. great info! are all your investments in the DFW area?
All but one. And that is a unique situation, we have a college rental in the midwest (near where my wife and I grew up). My step daughter lives in the rental, so its more of a cost avoidance/house have since we have to pay for her housing.
We might do something up there again on a limited basis if we find a good deal in our target area (near campus), but we have physically walked thru 20-25 properties near campus, we have a real estate agent we have worked with, a somewhat reluctant boots on the ground who can physically walk the properties (our daughter), and I think we are getting to know the neighborhood.
Thanks for sharing. I grew up in Fort Worth and relocated to Houston about 5 years ago when I got married. New to the investing game and am thinking about investing in both Fort Worth AND Houston. My main goal is not to have major cash flow on a monthly basis...more so just wanting some properties that make sense and that I can hand off to my daughter when the time comes.
College rentals are high on my radar, havent done much research on it yet but it is certainly on my list. My nephew will be attending college in about 18 months, a niece will follow in a few years then my daughter...seems like something worth looking into!
Rental Property Investor · Pickens, SC · Member since 2015 · 38 posts · 11 votes
8y
If your realtor is telling you, you have to offer 25% more than asking price I would find a new realtor. It sounds to me that your real estate agent is very uneducated in real estate investing because if they are saying “other investors” are offering that much on a property that is only netting $65 cash flow a month, you either have awful investors in your area or you have a realtor that just want to get a bigger pay check. Down here in Greenville the same “sellers market” is happening as well but there are still really good deals.
@Bart H. great info! are all your investments in the DFW area?
All but one. And that is a unique situation, we have a college rental in the midwest (near where my wife and I grew up). My step daughter lives in the rental, so its more of a cost avoidance/house have since we have to pay for her housing.
We might do something up there again on a limited basis if we find a good deal in our target area (near campus), but we have physically walked thru 20-25 properties near campus, we have a real estate agent we have worked with, a somewhat reluctant boots on the ground who can physically walk the properties (our daughter), and I think we are getting to know the neighborhood.
It's also a safety valve to prevent ever having to re-house your children in your own home for whatever reason (divorce, job downsizing, whatever)! Not that we don't love our kids, but hey, who wants adult children moving back in?
Matthews, NC · Member since 2018 · 50 posts · 24 votes
8y
@Baylus D. Nicholson agreed. This is why my first order of business will be following up on the sold prices for every property I’ve been tracking. Next I need a new realtor - mine turned out to be an alcoholic (not kidding, had to open the lockbox for him last time) so that’s already a big enough reason to move on.
Hi all, I have a few questions. I'm very new to real estate investing, and have just spent the past 2 weeks exploring my area (Charlotte NC). Granted, I've only been looking on the MLS...which leads me to my first question. I'm primarily interested in SFRs between 80-120K , and because we don't have cash our plan was to use a HELOC for the downpayment and mortgage the rest. The trouble I'm having is this: it doesn't seem like rent ratios are working out in terms of cash flow. I do know that we are disadvantaged in having to 100% finance, especially in terms of cash flow. But even when I'm doing the math and not including our HELOC (just to see), it isn't leaving much cf. I also know that because most of what we are finding are older ranch style homes, and because we are new at this, I'm being quite conservative in running my numbers. I'm starting to wonder if it would be smarter to do a flip first, and then have cash to put into a rental. Every time we go look at properties, my realtor tells me I will have to offer way over asking to compete with other investors - regardless of the home's condition. So for example, just the other day there was a house for 100K that he said would likely go for closer to 125K. If that's the case, how are other investors making these deals work? I understand they might be all cash, but that doesn't excuse bad math. Here's a run down of how I calculated our costs on a potential offer last week...perhaps you can shed some light if my math is incorrect, or if its just that cash investors don't care they are over-paying for property:
4 BD 1.5 BA - asking 100K, assuming it closes at 125K and rents at 1200.
Annual breakdown:
Mortgage: 6800
Taxes: 1160
Insurance: 1000
Management (8%): 1152
Vacancy (8%): 1152
Repairs (8%): 1152
Cap Ex: 1800
TOTAL EXPENSES - 14,216
TOTAL RENT - 14,400
Even if I bump the rent to 1250, the monthly cash flow is 65 compared to 15. So, are my numbers too conservative or are they correct? Would love your feedback. I have run this same formula on even lower priced properties that need much more work, and never end up with good cash flow. Is the ONLY way to do this buying foreclosures? My realtor said we shouldn't even consider auctions unless we have all cash. Any and all feedback/advice welcomed!!
Kelly, one other thing to mention. You might need to be a little careful about the HELOC for the last 20%. lenders get squeamish if say you are taking out a loan to pay the down payment, I dont know the actual lending laws on it, but I would say have the money for the down payment in your account well before you go for the loan.. You will have to document large deposits into your account right before closing. AND they will put the HELOC (or any other credit line) into your D/I ratio.
We have had some luck with using 401K loans to help cover closing costs back when we were first starting out. There are risks, but they came in handy for us.
capex seems high and couldn't you manage it yourself?
Funny I was thinking cap expense seemed way too low. Will, I question how you derived your cap expense numbers. I have used two different methods. I have looked at average cap expense published by the American apartment association surveys. They are higher than the number used by OP and they have the benefit of large unit volumes. I have also created a spreadsheet that listed all significant maintenance/cap expense items along with their expected life range and their current replacement costs. It showed, in my smaller unit count properties, I cannot come close to those depicted in the apartment surveys. For example, my spreadsheet shows that a water heater has a cap expense number of $8/month if I use a plumber to do the work and over $6/month if I use a handyman. Plumber cost is $1200 with life range 10 to 15 years so 12.5 years (150 months). $1200 / 150 months = $8/month. Do the math on a new roof. Asphalt shingle with maybe an expected 30 year life (depending on location of property). So my spreadsheet shows a much higher number than depicted by the OP.
I would like to hope that my cap ex estimates are too high and that my cash flow is greater than my estimates but I have done enough rehabs to know that the cost of rehab has always been greater than I estimated. I will stick with my cap expense/maintenance estimates that some think are too high.
Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes
8y
@Dan H. I suppose totally dependant on your time horizon, and cost of stuff. I can get water heaters replaced for for about a third of your #,s and I have bought held and sold many properties without touching the roof.
Obviously everything is less expensive here, but I don't get to enjoy the advantages of living in cali!
capex seems high and couldn't you manage it yourself?
Funny I was thinking cap expense seemed way too low.
I was thinking these 2 would avg (higher cap ex and high vacancy estimates) because her PM fees are half what they will be in real life.
1st yr PM where they place the tenant will be at least 16%. And that's if there are NO repairs. If there are, then the Maytag Man comes out + overrides. The stove repair I did on a unit Friday that costed me $0 and 15 minutes becomes a 10 day out $300 PITA with a PM. Whoops, $330. Forgot the 10% override.
It costs 8.25% just to place a tenant (1/12). Double the PM estimate and make your best guess on cap ex depending on age and condition. Hopefully 5% will do it.
Kelly, I just saw your 1/2 month placement fee. If you figure your PM cost at 12% you will still be low. Stove repair example stands.
