The math just isn't working :(

Kelly Carter · 2018-05-28T15:00:49-07:00

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: 6800Taxes: 1160Insurance: 1000Management (8%): 1152 Vacancy (8%): 1152Repairs (8%): 1152Cap Ex: 1800TOTAL EXPENSES - 14,216TOTAL RENT - 14,400Even 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!!

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

@Kelly Carter

Finding out who's late in back taxes is part of the "getting to know your local court systems" that I talked about earlier. If your county has a free computerized records search available, it usually allows you to do a date search looking for specific filings by type. This will lead you to case numbers, where you will be able to read the whole case starting from the initial filings. This will probably all be very familiar to you from your background in social work.

1 Reply

Dean I.

Tucson, AZ · Member since 2016 · 120 posts · 127 votes

8y

@Kelly Carter

It's hard to speak on CapEx because I don't know how much money you are putting into the renovations and what the lifespan of the rest of the main components are. That and I am still trying to figure out this bit myself. That being said, the rest looks about right.

I would suggest flipping a few houses first in order to get some capital. In fact, I personally would flip a couple houses, buy a rental, flip a couple more, buy another rental. As long as you are making enough profit from the flips to keep the flips going and buy rentals, this might be the way to go. Speaking as a house flipper, not all house flippers are the same and you don't have to be like the dishonest ones that @Jim K. is speaking of. You can be honest and still make great money.

As for offers, offer whatever amount works with the numbers, even if that means offering significantly less. You wont get every property you bid on, you wont even get most of them, if you do it right, you will only get a few.

Also, you will have a hard time finding properties that will cash flow at 100% financing, unless you can buy the house at 75-80% of the value or less. This means you will have to buy distressed properties, but that is where the good deals are and that is where you are going to get your equity and cashflow.

Don't cut property management out of the equation. You never know what the future may hold and if you can continue to self manage.

Finally, you may just have to look in a different market.

2 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

@Dean I.

More than fair enough!

0 Reply

Phil Hartten

Naples, FL · Member since 2017 · 30 posts · 6 votes

8y

Find pre foreclosures easily online.....there are services that will send you all the info you need for your area. The bank send owners who are behind and you find out that way.....try it and see. Works if you work it often. Easier than junkers and big rehabs that you may find far more things wrong than you expected...like roofs, furnaces, ac, broken down porches and so much more. Do it the easier way....not like i started out learning these mistakes and painfully working through them...which meant sell asap to the next dope who wants junkers and think they are cheap. Make your profit when you buys was the best advice I got.

0 Reply

Troy Whitney

Contractor · Seattle, WA · Member since 2014 · 137 posts · 44 votes

8y

Kelly - I live in the Seattle, WA area where $600k houses rent for maybe $2,500/month, which obviously doesn't pencil out at all. I got frustrated with this market and in 2014 started looking elsewhere. I bought some smaller deals in Philly and am now branching out to multi's elsewhere. In general, I look for 8 caps or better. Definitely doable in some markets. In others this is impossible. With mf deals you can and will likely want to hire a property manager. With singles, it's often tough to make the numbers work, as you end up giving almost all of your profit (or more sometimes) to the manager.

Happy to discuss more if you like, just drop me a message.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

if you going with 100% leverage you need to be uber cautious one bad buy could put you in the poor house.

I dont get why anyone would buy rentals if they did not have cash in hand.... and plenty of reserves..

and maybe you have plenty of reserves.. but this is how we all got in trouble last go around..

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Rachel Luoto

Lake Oswego, OR · Member since 2015 · 174 posts · 115 votes

8y

How did you come up with $1200 in rents? Looking at the 2018 HUD fair market rents, there’s a big range between zips for a 4 bed but it’s more than $1200. You may know that’s right for the condition/area, but I figured I’d offer this rental valuation source I often see people overlook :) Otherwise I agree with everyone here, be patient for the right deal and consider sourcing off-market

0 Reply

Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

Hi @Jay Hinrichs, I lived in Portland for 12 years :) We do have plenty of reserves, but all of our research suggested a HELOC can be a good tool for new investors - including Brandon Turners book. All cash would be really limiting for most new investors - even if we bought a foreclosure that needed work it would likely be 80k or more and I can't imagine many new investors have that kind of cash. I'm also aware that all cash will affect our ROI negatively. Anyway, our plan was to either a) buy a lower priced reo in need of rehab with just our HELOC, and then refinance into a conventional loan after a bit, or b) buy something with a conventional mortgage and use the HELOC as our down payment - which would likely only be about 15% of our HELOC limit anyway. And the properties we are considering are inexpensive enough that we can cover the payments if need be. I get the cash only mentality, but that would exclude all but a few from being able to invest. This would be a temporary way for us to get started and be able to pay back the heloc in short order.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Kelly Carter:

Hi @Jay Hinrichs, I lived in Portland for 12 years :) We do have plenty of reserves, but all of our research suggested a HELOC can be a good tool for new investors - including Brandon Turners book. All cash would be really limiting for most new investors - even if we bought a foreclosure that needed work it would likely be 80k or more. I'm also aware that all cash will definitely affect our ROI negatively. Anyway, our plan was to either a) buy a lower priced reo in need of rehab with just our HELOC, and then refinance into a conventional loan after a bit, or b) buy something with a conventional mortgaged and use the HELOC as our down payment - which would lo likely only be about 15% of our HELOC limit any anyway. And the properties we are considering are inexpensive enough that we can cover the payments if need be. I get the cash only mentality, but that would exclude all but a few from being able to invest. This would be a temporary way for us to get started and be able to pay back the heloc in short order.

I did not mean cash only I meant to create equity either forced.. I really like the BRRR in certain markets with certain folks.. and or use your cash for a down payment. to 100% finance just to buy rental were is that going to get U I would think if your going to borrow your equity you may want to start a business or something that will actually pay you some money instead of Max debt and 1000 or 2 a YEAR in cash flow.. just sayin.... use 100k heloc and buy into a business or team with great contractor on flips you should make 20k or 30k a year not 2 to 3k...

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Dean I.

Tucson, AZ · Member since 2016 · 120 posts · 127 votes

8y

Originally posted by @Jay Hinrichs:

Originally posted by @Kelly Carter:

Hi @Jay Hinrichs, I lived in Portland for 12 years :) We do have plenty of reserves, but all of our research suggested a HELOC can be a good tool for new investors - including Brandon Turners book. All cash would be really limiting for most new investors - even if we bought a foreclosure that needed work it would likely be 80k or more. I'm also aware that all cash will definitely affect our ROI negatively. Anyway, our plan was to either a) buy a lower priced reo in need of rehab with just our HELOC, and then refinance into a conventional loan after a bit, or b) buy something with a conventional mortgaged and use the HELOC as our down payment - which would lo likely only be about 15% of our HELOC limit any anyway. And the properties we are considering are inexpensive enough that we can cover the payments if need be. I get the cash only mentality, but that would exclude all but a few from being able to invest. This would be a temporary way for us to get started and be able to pay back the heloc in short order.

I did not mean cash only I meant to create equity either forced.. I really like the BRRR in certain markets with certain folks.. and or use your cash for a down payment. to 100% finance just to buy rental were is that going to get U I would think if your going to borrow your equity you may want to start a business or something that will actually pay you some money instead of Max debt and 1000 or 2 a YEAR in cash flow.. just sayin.... use 100k heloc and buy into a business or team with great contractor on flips you should make 20k or 30k a year not 2 to 3k...

This is a good point. You can take your HELOC and use it as a down payment towards a rental and maybe get a little cash flow from it each month, or you can take that HELOC and use it towards a flip and make another 10k to 20k profit. Do that a few times and you can easily fund you rentals as I was saying before. But to Jay's point, you are basically creating a new business that will bring you a lot more income. This is only our second year of flipping houses and we are already set to break 100k in profit so far this year and it is only May. Personally, I love the idea of creating a business that generates lots of revenue (flipping houses) and also gives me the ability to invest in passive income (rentals).

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Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

@Jay Hinrichs and @Dean I. thank you both so much - I think you've helped put into words what I was trying to ask, in terms of flipping vs. renting. If I'm going to be financing that much, makes far more sense to get bigger profit margins from flipping and then re-invest that into rentals. It seemed like I was receiving lots of advice to avoid flips since I'm new to investing - but I actually think that might be my best strategy!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Kelly Carter:

@Jay Hinrichs and @Dean I. thank you both so much - I think you've helped put into words what I was trying to ask, in terms of flipping vs. renting. If I'm going to be financing that much, makes far more sense to get bigger profit margins from flipping and then re-invest that into rentals. It seemed like I was receiving lots of advice to avoid flips since I'm new to investing - but I actually think that might be my best strategy!

it could be any number of small business's.. I have friends that knock it dead with subway sandwhich shops .. and one with a bunch of papa murphys take an bake... 100k will buy you a store and will make you at least 50k net a year.. why tie up 100k to make 2k. ?

flipping // small business its all risk... landlording is least risk in the right areas and class of property. but its SLOOOOW wealth generation. which is OK for many who have high paying jobs and no time to do anything else and want to diversify a tad..

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Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

@Jay Hinrichs where would I look for businesses to invest in, if I want to explore that option?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Kelly Carter:

@Jay Hinrichs where would I look for businesses to invest in, if I want to explore that option?

go to the book store or library and grab the franchisor magazine most active franchises are offered there.

Merry maids... janitorial .... In home health care... you name it there is a small business or franchise model.

and of course you can with bigger bucks open up a Mickey D s or one like that.

one that is popular out aur way is black rock coffee stands.. those do very well.. little drive through coffee stands in parking lots.

etc etc etc..

but this is not passive of course.. you running a business but for sheer income and use of equity in your home and if you have the time worth exploring I would imagine..

and Custard everyone loves real Wisconsin Custard I know I do..

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Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

8y

Jay Hinrichs ever had culver’s? That’s some real american custard right there

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Caleb Heimsoth:

Jay Hinrichs ever had culver’s? That’s some real american custard right there

its OK.. the best is in Milwaukee WI suburbs out on blue Mound road in Brookfield the name escapes me but its awesome and I am sure that owner simply prints money.. would make anything in real estate pale :) .. Kind of like In and Out burger.

you can come to a 4 corner intersection.. Mc D one wendys on one sonic on another and then In and Out.. at In and out the parking lot will be full and the line will be out into the street while at the others there might be 2 or 3 cars in the drive up.. anyway getting off topic which I am known to do ..

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Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

@Jay Hinrichs Kopp's?

2 Reply

David S.

Investor · Prairieville, LA · Member since 2015 · 311 posts · 424 votes

8y

There is a lot of great advice here from some heavy hitters aka successful investors. I believe your best bet is to study the MLS just to get a feel of what is "retail" so that you know your market by heart. However, off market deals is where the real money is made. I have acquired a ton of great deals from tired landlords like some folks here. I started by simply networking with as many as I could, although at the time I wouldn't call it networking, just simple conversations. I used to keep a notebook and took detailed notes of EVERYTHING, every property, every conversation with RE investors, etc. That is probably something that I need to get back to.... There are a bunch of other ways to buy off market deals, direct mail, signs, placing Craigslist ads, responding to wholesaler's Craigslist ads, calling for rent signs, tax delinquents, code violations, driving for dollars, putting together a bird dog network, RE investor meetups, etc. Like folks have said, this is a marathon, not a sprint. I have went through years long drought of not buying properties and then I have had periods where 5 excellent deals drop in my lap at one time and I am then scrambling to get them under contract and close them. One last piece of advice. I always carry a blank standard purchase agreement form in every one of my vehicles. If you come across a great deal, PUT IT UNDER CONTRACT ASAP. This is a competitive market. By the time you scramble looking for a contract, the deal will be gone. You don't have a deal unless you have it under contract. Good Luck and Happy Investing!

3 Reply

Calvin Lipscomb

Brooklyn, NY · Member since 2016 · 316 posts · 130 votes

8y

Originally posted by @Kelly Carter:

@Jim K. Haha, yep. Exactly. Thank for the action items, I will really dig in and see what I come up with. I've spoken to a few property managers to focus on certain zip codes, but that's it. That is excellent advice to get referrals from tradesmen. You are also 100% correct about buying real estate at low cost almost always means dealing in human misery - this is something I'm struggling with (cut me some slack, former social worker here!) and I keep trying to find a niche that might be more comfortable for me in that regard. When you are talking about flips working hand in hand, are you talking more or less about BRRRR?

@Will G. - I factored my CapEx at 10% based on a 5%-12% scale, knowing this particular property is older and will likely need some big ticket items. Yes, I could probably manage it myself and if we can stay local that would cut our cost significantly - but as we own more it will become an issue I think. But in order to get our foot in the door so to speak, it might be a necessary cost to eliminate. If I reduce capex and self manage it likely would be closer to $150-200/ mo return, but many say that's not enough either :/

@Andrew Johnson So any suggestions on re-vamping my strategy? I assume of I want cash flow I need to look off market for now and consider foreclosures, etc?

"Human misery", thank goodness someone in the industry has those thoughts and feelings like you. The skinny, those in financial misery need an investor like you. Many other investors, for right or wrong, will squeeze the home seller for every dollar to put in the investor's pocket. While you, who is concerned about the person and need to make a profit, will find a way to accomplish both goals as best as you can. Give that some consideration.

1 Reply

Mia Istalian

Milwaukee, WI · Member since 2018 · 11 posts · 4 votes

8y

hello,

As many wise men have said – Money is made on the buy in real estate plus location, location, location.

With this said you have a plan, the numbers would make sense when you find the right deal. In spring and summer the prices are just higher by 2-3%compared to winter and fall just because of seasons. Also being new it would be a lot of headache to invest out of state. You have to get comfortable managing the property and managing the tenants. Using your equity exposes you to higher risk. You need a good cushion for “when life happens”. Do you have a contractor lined up? Can you upkeep yourself? Factor in the worst case scenarios. Run the numbers of the mechanics of the house. If hot water heater needed replacement, AC, plumber, electrician labor and parts x$. this is how you will be able to sleep at night by having a plan.

If you want to prosper in real estate you need reserves and a good deal. Be patient, have your money ready to make an offer when the hidden gem comes on the surface and you have your reserves and game plan ready then you strike.

When I bought my first property I closed on Aug 31st by 10:30 am and was handing the keys to a tenant at noon. I used my realtor for access had great pictures and had narrowed down my tenant pool to 2 potential tenants that I liked. I also offered lower rent for the area which gave me a greater pool of tenants that I picked not the other way around.

Your first property would allow you to snow ball in real estate but it could also make you miserable. If you wait for the right time you would do great. Similar to buying a car look at as many ads models colors MPG as you can, we all spent months researching – do the same with the house.

Look at your renter pool - who are they young middle age what is nearby? What do they value? Quiet vs access to downtown or shopping or bus line or school. This is just my two cents. Good luck.

1 Reply

Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

@Calvin Lipscomb I agree. I plan to keep that as a priority, and because my background is social work I would never be able to take advantage. I believe there is a way to make profit while also helping the seller, and am willing to accept whatever concessions that means on my part.

1 Reply

Kelly Carter

OP

Matthews, NC · Member since 2018 · 50 posts · 24 votes

8y

@Mia Istalian how is the market in Milwaukee? Thanks for the advice. Do you recommend looking in the fall/winter? That’s actually something I hadn’t considered because I figured I might have a harder time getting a tenant. Will I be competing with other investors even more strongly at that time?

0 Reply

David Campbell

Investor · San Diego, CA · Member since 2017 · 190 posts · 117 votes

8y

@Kelly Carter Stepping back a bit, you mentioned possibly wanting to try a flip first. I would recommend having a set path you want to pursue (wholesale, SFH, MFH, commercial, flip, etc) before you proceed. It will then become easier to research a particular specialty instead of toiling in many. Just a suggestion!

1 Reply

Calvin Lipscomb

Brooklyn, NY · Member since 2016 · 316 posts · 130 votes

8y

Originally posted by @Kelly Carter:

@Calvin Lipscomb I agree. I plan to keep that as a priority, and because my background is social work I would never be able to take advantage. I believe there is a way to make profit while also helping the seller, and am willing to accept whatever concessions that means on my part.

Then when it is known that you are fair and considerate buyer/investor it will make things easier to find appropriate deals.

1 Reply

John FranczykPro Member

Wholesaler · Racine, WI · Member since 2015 · 143 posts · 84 votes

8y

A few random thoughts on the issues raised in this thread.

1. Kopp's Custard/Milwaukee. 3 locations, Brookfield, Greenfield, and Glendale. I like Glendale because of the array of nearly-identical cow sculptures in the parking lot.

2. Franchise math. If you qualify to buy a McD's franchise, your upfront fee is somewhere in the range of $1.5MM. You spend 6 - 12 months at "Hamburger University" before McD's corporate launches you into the world. Then you work 80 - 100 hours a week for an annual profit/salary of about $100,000. That math never made a lot of sense to me, but then someone explained that the really successful franchisees own multiple stores, and that they develop business systems and processes to manage them with economies of scale. If you put the time and effort into it over a period of years, you can make good money. The same logic probably applies to other successful franchisees.

3. Real Estate. It's taken me a few years, but I'm developing my own business systems that are beginning to bear fruit. I don't see a rapid road to wealth here, but it does offer strong opportunities for people who treat it like a business and follow a business plan.

1 Reply

The math just isn't working :(

The math just isn't working :(

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