The math just isn't working :(

Charlotte, North Carolina
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The math just isn't working :(

Kelly Carter
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!!

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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
8y

If you want to make real money remember you make it when you make your purchase. Have patience and wait till the right deal comes along.

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  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Steve Vaughan interesting. Here the rate for pm is 8%, with 1/2 mo rent to place a tenant. I was originally doing capex at 5%, then increased it to 10%. I do also have an additional miscellaneous 5%. 

    0Reply
  • Matt Honeyford
    Investor · Rochester, NY · Member since 2017 · 206 posts · 175 votes
    8y

    It looks to me that you're numbers are a little off. Don't use an 8% for Vacancy and repairs, use 5%'s. Also, you're management should be a 10%. Take a look below. I have a higher mortgage number than you do and the math works. 

    1Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Matt Honeyford pm’s here charge 8% - should I still charge 10% to factor in additional costs?

    0Reply
  • Matt Honeyford
    Investor · Rochester, NY · Member since 2017 · 206 posts · 175 votes
    8y
    Originally posted by @Kelly Carter:

    @Matt Honeyford pm’s here charge 8% - should I still charge 10% to factor in additional costs?

    No. Use what the going rate is. 

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y
    Originally posted by @Baylus D. Nicholson:

    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.

    I don't think you have enough information to determine the realtor is uneducated. She ran her numbers very conservative and 100% financed. I think this is more likely a case that other investors believe even at $125K, it is a good deal in this market. People get way too hung up on asking price and have the incorrect mindset that getting a good deal is buying below asking. You can pay below or above asking and get a good or bad deal. Some agents price properties below market price intentionally to spark a bidding war and sell it quickly. It is entirely possible that her agent knows the property will sell for $125K. Her numbers seem too conservative to me, so I am confident if I did  the deal my cash flow would be higher than $65 a month. I would jump at a deal like this, but I would self manage and put 25% down on the property. I would buy ten deals like this if I could find them in my market. 

    3Reply
  • Account Closed
    Earth · Member since 2017 · 297 posts · 187 votes
    8y

    I agreed.  

    One of the properties I closed escrow one week ago.  The listing agent listed it at $205k, but I found recently sold comp is $220k.  It had 20 multiple offers because the property is renovated with fresh paint, modern wood laminte floor and brand new stainless steel appliances etc. already.  I won the property at $215k.  It is $10k over the asking price, but still $5k below recently sold comp.  To me, the numbers work and it is a good deal even it is sold above the asking price.  

    1Reply
  • Baylus D. Nicholson
    Rental Property Investor · Pickens, SC · Member since 2015 · 38 posts · 11 votes
    8y
    Joe Splitrock yes I agree that asking price is not always the true value of a property. I know listing agents will list a property below market value to increase demand on it. However if her realtor is telling her that she will need to offer 25% more on different properties. That tells me that the realtor is wanting their offer accented over wanting to get a proper price on an investment. A good investment realtor will know a good purchase price for a property, but just blindly saying she needs to offer more on every property sounds uneducated to me. Plus she responded to me saying her real estate agent was a drunk and could not even open the lock box.
    0Reply
  • Terrell Garren
    Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
    8y

    @Kelly Carter - I think your initial analysis is solid. I've been buying SFHs in the same price range about 30 miles away in Concord, NC since 2010. Currently, the only way I make $ is - no financing, buy at auctions and self manage. I would recommend you consider self managing. I've found it enjoyable, profitable and handled 14 properties before retiring from my W2 job. What began as a hobby allowed me to retire early and cash flow life. Be patient, don't give up. I know you will find your way.

    1Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Terrell Garren thanks! So, is there really any way at all to be profitable *with* financing (assuming I self-manage)? If not, then is there a better way to break into the market, or is my only choice to save up and buy a property outright (and when you say no financing, you mean not just the downpayment but the whole property I assume)? I guess I'm wondering if I should even be pursuing this type of investing if we have to finance. Any advice you have for getting started would be much appreciated. My realtor (who is just so-so) did say that auctions weren't really an option without all cash. 

    0Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Baylus D. Nicholson yep, can't make this stuff up. And you are correct, he is pretty much saying that about every property we see - and when I send him my analysis on a property he says my numbers confuse him, hence my post here. There have also been a few that were priced lower to encourage multiple offers - for example one that was 102 which he said don't offer less than 125. So I decided either I'm way more conservative than your average investor, running the numbers incorrectly, or cash investors can afford to pay more than what a property is worth (because there's less of a negative affect than for someone with 100% financing, or because they love throwing money around - who knows). For example, I was looking at a property in a C+ location (being generous) for 119k the other day. It needed significant rehab, and the max it would rent for is 1100, mayyyyybe 1150. It sold within 48 hours for full asking price (so I hear, have yet to confirm with data). So that's when I started to wonder, because even if you are paying all cash, its still not a good return from a mathematical standpoint. I suppose another possibility is that some investors are ok with renting a property in that condition and don't plan to improve it unless something drastic happens, so don't factor in expenses the same way I do?

    0Reply
  • Krishna Chava
    Specialist · Carrollton, TX · Member since 2016 · 145 posts · 100 votes
    8y

    Agree with most other posters, this is a good deal as long as it's in a safe neighborhood and you don't need lot of repairs. I love units that rent around 1250. These attract solid working class people and, at this price, they don't have pay an arm and leg to afford a roof over the head.  

    1Reply
  • Terrell Garren
    Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
    8y

    @Kelly Carter Just my personal, conservative opinion and I am not the smartest cat in the room. I would save money and pay off your house as quickly as possible. Watch auction and MLS sales prices to learn what a good deal looks like and wait. As fast as auctions move and sellers demand to close, closing with a conventional loan seems really difficult. I was lucky to begin in 2010. Property was cheap, I had savings and a paid off home that I leveraged. The good news is that you are young, smart and will figure this out decades earlier than me.

    0Reply
  • Baylus D. Nicholson
    Rental Property Investor · Pickens, SC · Member since 2015 · 38 posts · 11 votes
    8y
    @Kelly Carter I 100% agree with you. If the numbers don’t work for “YOU” don’t do it. Simple as that. If other investors are able to throw all that money at a deal and they are ok with getting a negative cash flow, thats fine. I bet they won’t last long though. I would hold out for a deal that works for you. According to Mike Maloney who wrote the book “guide to investing in gold and silver” forwarded by Robert Kiyosaki, states that we are in the 3rd (probably the 2nd now) longest economic expansion in U.S. history. Which means we should have a down turn in the economy soon. Whether soon is next month or 2 years from now we will have a down turn at some point. The idea that markets always go up is what got us in trouble in 2007 and 2008. So please don’t be discouraged. A seasoned investor is patient.
    1Reply
  • William Robison
    Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
    8y

    I will concure with @Russell Brazil on the 1% rule as well as the multiple investment strategy to spread risk and reward.   I sometimes share the rule of four.  One is a bust, one does okay, one breaks even, and one is a slam dunk.  This rule is what I typically apply to the courthouse steps purchases, but can be across all investment real estate overall.

    Back to the 1% rule.  In our current economy, a solid B class property is going to yield the 1% rule and that will give off cash flow.  I also agree that you cannot look at a single spreadsheet economic to determine performance.  Sometimes we lease a house the moment it hits the market, and on a 2 year lease.  Thats two years with no vacancy cost.  Sometimes the tenants take great care of the property and we barely remember they are in our management until we check on them twice a year.  So many variables.  In the grand scheme, the industry expense metric is 40% of rents for all but debt service.  Our company runs closer to 36%.  Using a more broad, flexible expense ratio like that aids in the process.  We also view some of our capex as cost basis, and rarely exceeds the realized appreciation the market is realizing at the same time.  

    Using these ideals and experiences, it better helps you realize that the 1% rule is good.

    From Kansas City, home of the Royals, who won the World Series in 2015.  If you know much about baseball, you know that these guys did it on singles and not home runs.  For real estate, it means that getting a bunch of singles and doubles in real estate could help you beat the guy waiting and waiting on a home run.

    All the best with your investments!

    3Reply
  • Mark Hughes
    Rental Property Investor · Aurora, CO · Member since 2018 · 288 posts · 117 votes
    8y
    I have purchased most of my 3-4 unit properties from MLS but I have also been willing to offer aggressive offers that work for me and know that 80% I might get outbid on last my comfort level. Just keep practicing analyzing lots of deals. I have purchased 2 deals via auction and I wouldn’t recommend that for entry level as there’s normally bigger issues causing it to go via auction (fire, hold in roof, removed utility service, condemned, mold, etc)
    0Reply
  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    8y
    Kelly I believe your math is accurate and will apply to just about any "good" market anywhere in the country. I live in Greenville SC 90 miles from Charlotte and the Greenville market is strong too. The numbers here are similar to what you see in Charlotte. Let me provide some prospective. Let's assume you are in your 30s. One invests in real estate for the long term - 15 20 30 year horizon. One can't invest in single family homes with essentially no money down and expect any appreciable cash flow - just doesn't happen in "good" markets. My perspective would be as follows: If I can buy houses with little cash investment in good markets that will pay for themselves, I would be very happy! You buy now and get little or no cash flow. Over time, rents increase your cash flow increases. Over time, the loan gets paid down increasing equity. Over time, value goes up increasing equity. After 10 or 15 years you are creating wealth and financial security. Maybe every 2 or 3 years, you buy another rental. By the time you are ready to retire in your 60s, you have created wealth and income. The real estate race goes to the slow and steady investor who lets time create wealth. Trust me it works. Adjust your expectations from current cash flow to future capital appreciation. If you can find a decent house in a reasonable area that you can buy with little or no cash that will be break even or small positive cash flow, buy it! Hope this make sense. Good luck. Arn
    [email protected]650-575-6114
    9Reply
  • Jinal Shah
    Charlotte, NC · Member since 2017 · 5 posts · 0 votes
    8y
    Why don’t you rent out each room to each tenant rather than renting House entire house to one family?
    0Reply
  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Kelly Carter one reason you are not cash flowing is that you are basing your purchase on retail price. You need to find a deal, probably off market, that you can get below market or negotiate for a lower price off the MLS. Secondly, your price range is too high. In the $100K range, the rent will not support the mortgage, expenses, and still provide much cash flow. You should be looking in the $50,000 range. I know you probably think it is more work or that poor people are bad tenants, but that simply is not true. Run your numbers on a $50K house that needs a little updating that you pay cash from your HELOC.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @William Robison:

    I will concure with @Russell Brazil on the 1% rule as well as the multiple investment strategy to spread risk and reward.   I sometimes share the rule of four.  One is a bust, one does okay, one breaks even, and one is a slam dunk.  This rule is what I typically apply to the courthouse steps purchases, but can be across all investment real estate overall.

    Back to the 1% rule.  In our current economy, a solid B class property is going to yield the 1% rule and that will give off cash flow.  I also agree that you cannot look at a single spreadsheet economic to determine performance.  Sometimes we lease a house the moment it hits the market, and on a 2 year lease.  Thats two years with no vacancy cost.  Sometimes the tenants take great care of the property and we barely remember they are in our management until we check on them twice a year.  So many variables.  In the grand scheme, the industry expense metric is 40% of rents for all but debt service.  Our company runs closer to 36%.  Using a more broad, flexible expense ratio like that aids in the process.  We also view some of our capex as cost basis, and rarely exceeds the realized appreciation the market is realizing at the same time.  

    Using these ideals and experiences, it better helps you realize that the 1% rule is good.

    From Kansas City, home of the Royals, who won the World Series in 2015.  If you know much about baseball, you know that these guys did it on singles and not home runs.  For real estate, it means that getting a bunch of singles and doubles in real estate could help you beat the guy waiting and waiting on a home run.

    All the best with your investments!

     Hey man, I'm a Mets fan - you're breaking my heart here! :D You guys are just lucky we had a catcher that couldn't throw out the trash if he was aiming for a dumpster, much less a guy stealing second (or third) base. 

    Podcast Guest on Show #243
    Skyline Properties
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    0Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Anthony Dooley I'm not opposed to that, just don't have a system yet for finding off market properties. Around here, the least I've seen on the MLS is 80k, and they need a LOT of work and are generally in D areas. I've expanded beyond Charlotte, but still haven't had much luck finding anything below 80, and when I have and factor in the rehab I will be making as much as I would if I bought it ready to rent at 100k. So - what are the strategies that have worked best for you in finding off mls properties? Wholesalers? A better agent than mine (this would be easy to do at the moment)? Should I look in another part of the country?

    Also - I had considered doing that with the HELOC, and then just refinancing into a conventional loan once it's rehabbed. Just can't seem to find the property, and we are limited to 90k on a HELOC.

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    8y

    One month of vacancy is 8%. Run your numbers using at least 8% for vacancy. If you get a tenant in place before hand, then you just have better numbers. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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  • Phil Hartten
    Naples, FL · Member since 2017 · 30 posts · 6 votes
    8y

    I'd say watch the preforeclosures in your immediate area.  don't buy houses far away...to much trouble driving back and forth....think carefully about that.

    Then the people way behind on RE taxes and mortgage payments NEED HELP FAST. So you can be the good guy with a bail out method...just figure out when they bought...how much they paid....reverse engineer payments and determine amount owed to bank and make offer about $5K over what is owed and submit to owner...see what they say.  If they answer..then back and forth till you come up with a number.....and close fast as you can.  Do your due diligence fast with a title search and appraisal and complete personal inspection.

    That's easy and skip any junker monsters...there are tons of deals out there no matter what they say...it is easy to find from you desk top computer at home.  Just be diligent and don't give up.  My friend did 51 in the past year with a net profit of $25K...fast in and out..easy smeasy.  Hope this helps  Phil

    0Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    8y

    @Kelly Carter

    You're going to get a shotgun in your face knocking doors for short sales. Sooner or later, it's bound to happen. People about to lose their homes are under immense strain and don't look at anyone who comes to the door to profit from their misery as a friend. Just thought I'd add this information here. I have never been shot at in this business. I have come close once, by someone at the end of his rope, and because I made a silly mistake. I don't at all recommend the experience.

    0Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Jim K. I agree, especially because I would most often be going on my own! Maybe a personal letter, but that’s as far as I would go. Capitalizing on misery but with respect - slippery slope. 

    1Reply
  • Kelly Carter
    OP
    Matthews, NC · Member since 2018 · 50 posts · 24 votes
    8y

    @Phil Hartten where does one find out who is late on taxes? Is that available on the county tax page?

    0Reply
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