Portland, OR · Member since 2013 · 48 posts · 14 votes
I bought a duplex a couple of months ago. Here are the numbers:
Purchase price $85,000 (I put 25% down)
Monthly payment including taxes and insurance is $585/month
Total rent for both sides is $1,550/month
Property Management charges 7% ($108.50/month)
Tenants pay all utilizes (including water, garbage, electricity, ect..)
If I use the 50% rule, as Bigger Pockets and others who are experienced in rentals over the long term use. Then total rent $1,550 minus management fee's of $108.50 equals $1,441.5 divided by 2 for the 50% rule equals $720.75 minus my mortgage/insurance/tax payment of $585 equals a positive cash flow of $135.75/month
Is this correct? If so, how do rentals make people money? Do people just hope for appreciation, and think about how they are paying down the mortgage over time? How do people claim to live just off of rental income, by owning 30+ properties? I would think if you had the money to buy 30 properties, with the 50% rule you would have made more of investing in an IRA, stocks or something to that effect?
This was my first buy and hold rental property and if these numbers are correct I am not sure I made a good decision buying it. Maybe I should have used the down payment to try a real estate flip or invest it in an IRA/stock market (smart stocks though like Nike, Apple ect....).
I guess I am lucky that I really searched hard for a property that would return this kind of gross rent compared to the purchase price/mortgage payment just to basically break even. I see a lot of first time rental property investors buy a rental property that rents for $1,000/month and have a mortgage payment of $800/month. So I assume they will lose money over the long term and may decide to sell early when they run out of money to throw at it?
Any thoughts from experienced rental property investors?
Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
12y
Just to be clear, the rule/guidelines says that cash flow is ---> gross potential rent * 50%, minus P&I (not the full mortgage payment with escrows). Yes, the 50% expense allotment covers vacancies, operating expenses, AND capital reserves.
So in this case, assume P&I = $340/mth, so
1550*50%-$340 = $435/mth of cash flow.
Your investment is probably around $23k w/ closing costs, so your cash on cash return = 435*12 divided by 23k = 22.7%. Damn good!
My computer locked up before I could finish my post but others have already answered.
I will say there are a lot of landlords only making $1200-20000 a year per property. With high leverage on average deals that cash flow can be pretty low. That doesn't work for me but 20 years from now those properties will be free and clear. With inflation of both values and rents they will look like geniuses.
In your profile you stated:
"Buy and hold properties. Partners for buy and hold properties. My business has exploded since I started to work with partners."
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
12y
Hey @Seth B. I just wanted to pop in also and offer some thoughts. First, as others have said, it looks like your potential cash flow is more than $400 per month, which is more than $200 per unit, per month. AWESOME.
So, if you want to know how people use this logic to build wealth, check out this post. It's just a "model" but it shows the power of combining all the aspects of REI into one, and using exponential growth to really make it big.
As @David Beard pointed out, your cash flow is producing over 20% cash on cash return. I'd like to see anyone use the Stock market to consistently get that. Yes, they may get one "hero stock" that does it, but over the long run, it'll never happen, ever. And even more, you bought in a down market that's going up. Which means you hopefully will make much more money on the appreciation (though don't bet on it.) And there are the tax benefits. So all in all, you'll probably be doing 3-5x better than you'd ever get in the stock market.
Furthermore, the more you learn about REI and the more familiar you get with this game, the more ways you'll learn to do this without any of your own money. And you'll learn how to scale it up (Imagine buying a 24 unit property that cash flows at $200 per month, per unit... with almost no money down. That's what I did.) This is why we love this game. For those willing to work at it, it can provide some amazing returns and allow you freedom you'd never otherwise get until you've retired at 65.
"Buy and hold properties. Partners for buy and hold properties. My business has exploded since I started to work with partners."
Can you please elaborate on this?
My current partner and I started with only a couple of $thousand each and have built a pretty solid and growing business. He got me out of the doldrums and gave me a kick in the butt when I needed it.
My main expertise is tax lien investing. I have partnered with several investors to invest in tax liens. This has lead to getting a lot of properties and profits. The profits and confidence in me has lead some of these to be come lenders on some of our buy and hold properties. Right now I have three deals i am partnering on that just came to me because of my reputation, in part my reputation here on BP. - Ned
Hey @Seth B. I just wanted to pop in also and offer some thoughts. First, as others have said, it looks like your potential cash flow is more than $400 per month, which is more than $200 per unit, per month. AWESOME.
So, if you want to know how people use this logic to build wealth, check out this post. It's just a "model" but it shows the power of combining all the aspects of REI into one, and using exponential growth to really make it big.
As @David Beard pointed out, your cash flow is producing over 20% cash on cash return. I'd like to see anyone use the Stock market to consistently get that. Yes, they may get one "hero stock" that does it, but over the long run, it'll never happen, ever. And even more, you bought in a down market that's going up. Which means you hopefully will make much more money on the appreciation (though don't bet on it.) And there are the tax benefits. So all in all, you'll probably be doing 3-5x better than you'd ever get in the stock market.
Furthermore, the more you learn about REI and the more familiar you get with this game, the more ways you'll learn to do this without any of your own money. And you'll learn how to scale it up (Imagine buying a 24 unit property that cash flows at $200 per month, per unit... with almost no money down. That's what I did.) This is why we love this game. For those willing to work at it, it can provide some amazing returns and allow you freedom you'd never otherwise get until you've retired at 65.
Best of luck!
Thanks for the link to the article. Looks like my first year purchase fits the numbers/strategy outlined in the article except the fact it's a duplex and not a fourplex.... so I have 2 less doors bringing in $200/each for the first purchase.
After reading the article maybe I should change my strategy, which was to put $300/month from the cash flow each month towards the principle of the loan. If I did that I would have the 30 year loan paid off in 10 years. But that would also make it more difficult to save for the down payment on my next rental property.
The strategy in the article does seem to come with some risk of becoming over leveraged. But how many people become a millionaire without being heavily leveraged at some point....
It is a motivating article and gives me something to think about.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
I think you are stressing too much @Seth B.. If you just bought a property and it is positive cash-flowing, you did everything right! And remember, the cash flow each month isn't the only financial benefit to rental properties. Wait until you see how it nicely impacts your tax return. You'll love that.
Your cash flow per month, your actual cash flow rather than projected cash flow based off a guideline, is right in line with what a good cash flow today is going to look like. A couple years ago it would have been a lot higher when the prices all over were still pretty tanked. Everything has come up now and it looks like you got a fine deal compared to other deals out there. You can get a better deal next time as there are some out there, but that doesn't mean this one was a bad one. And I'll tell you what, if this is your first investment ever, you are miles ahead of most of us! I know my first property was extremely stupid of a purchase and I'm in the negative every month. I think a lot of other investors can say the same. So you're way ahead of the curve. So smile, be proud of yourself, learn from it, and get ready for the next buy!
I personally hate the 50% rule. It is an okay guideline, but I think it does more damage than good. It's fairly pointless in my opinion. There is very little you can't get actual numbers on when calculating profit (or loss) on a rental property. Even if you are still shopping, you can still get actuals rather than use a generic ballpark estimate like 50%. Why use an estimate if you can use actuals? I see it's worth if you are just quickly perusing properties and want to evaluate quickly and simply if a property is worth considering, but that is it. That's all it's good for and unfortunately while it is good for that at least, I think it does more damage because it tricks new investors into focusing in the wrong direction. That is more of a generic rant than anything against you. For your case, throw any "rules" out the window and use actuals numbers for your expenses.
As far as how do rentals make anyone rich only bringing in that much per month, a few people have said it but to reemphasize, passive income building is a slow and steady process. It's not meant to happen overnight. I wrote an article a few weeks about it, not sure if it will help-
You seem to have gone a little over conservative. I plugged your numbers into my basic spread sheet and this is what I came up with:
Purchase $85,000
Down payment $21,250
Closing costs $2,550
Interest rate 5.00% (just a guess on my part)
Term 360 months (30 year)
Rent $1550
Net rent (50%) $775 (includes taxes, insurance and management)
Principal/int pmt $342.22
Net monthly cash flow $409.94 or $204.97 per door
Cash on cash return 20.67%
All in all I'd say you're doing awesome especially on a first purchase. And with a 20% return I'd bet your beating any stock/mutual fund return out there.
Also your numbers may be better considering that your management is only 7% and I project 12% (10% per month and 1 month lease up fee). This also doesn't take into consideration your principal paydown and deductions. I personally don't include those and consider them icing on the cake.
As was mentioned earlier if you chose a shorter amortization on the loan that may short your cash flow but you'll build equity quicker so it may be something you evaluate for your analysis since it will definitely impact your cash flow today, but that is all dependent on what your goals are.
Before I got to your post, I was just about to say, I would take this deal ALL DAY LONG!!! Your doing great, like Matt says, don't forget that every month you are gaining equity. When you do get to a point with enough cash reserves for maintenance and vacancy, you can start to pay down the mortgage faster or save up and buy another like this. Take your time and invest smart!
Did you buy a duplex in Portland or somewhere else as an out of state investor? Another reason to pat yourself on the back if it was in Portland...our fair city isn't exactly 50%/2% rule friendly. I don't see many (read: any) duplexes for sale here for 85K that cash flow and don't need A TON of work off the bat. Either way, nicely done!
Denver, CO · Member since 2013 · 409 posts · 105 votes
12y
I think what most are missing is that the duplex was built in 2007, which means to me that maintenance is going to be much lower than the average rental. I'd ball park cash flow at $600/month if he were managing himself, $400/month with a property manager. Not clear to me why he is not managing himself, maybe I missed something.
You may want to consider investing in Deeds of Trust instead of owning assets and all the risk's that go along with them... Especially here in PDX there are some very very good hard money lenders that place funds for clients on rock solid PDX properties and you could get 12 to 14% cash on cash very easily.
Most of the Out of state cash flow properties will never go up in value or if they do your repair costs to own them and keep them will mitigate any so called increase in value. In my mind these types of cash flow rentals to make sense you need a bunch of them like you eluded to and they need to get paid off quickly.. When they are paid for then that's another kettle of fish entirely.
Portland, OR · Member since 2013 · 48 posts · 14 votes
11y
I decided to update everyone on the duplex I bought since it has been over a year since my last post. I had a rough start after buying my first rental property out of state as you can see from my older posts.
I am happy to say things have gotten better over time…
About 1 month after purchasing the property ( I purchased it on 9/20/2013) I found that one of the existing tenants never put down a deposit when they moved in. So I figured I would tell my property manager to ask that tenant to pay a deposit. This I feel was a mistake (for a new rental property owner getting his feet wet) because the tenant put in their 30 day notice instead of paying the deposit. So I was hit right off the bat with a 1 month vacancy and around $1,800.00 in repairs (the tenant had lived there for 6.5 years). The tenant smoked in the unit (even though their original lease said no smoking), so it had to be repainted and several other smaller items needed repair. The old tenant was paying $650/month in rent. The new tenant signed a lease for $800/month rent, so at least I received a rent increase.
Since the property was a duplex I assume there was a good chance that this tenant told the other tenant about the "new owner" asking for a deposit. This may have made the other tenant worry that the new owner was going to ask for additional deposits or possible raise the rent. So a couple months later the other tenant put in their 30 day notice. This time it took 1.5 months to find another tenant which signed a lease for $765/month.
During the second vacancy, the unit was broken into by a person who had been causing a lot of problems in the neighborhood. The tenant on the other side of the duplex heard some noises one night and called the property manager. The property manager came over to the unit and came face to face with the burglar. The manager chased the burglar (ya not real smart) for a few blocks and they just happened to run right past a parked police car. The burglar was arrested and has a lengthy record so he will be looking at some real jail time. I sent the police report to my insurance company and they covered all but $800 (my deductible) of the damage caused.
Now that I have had two new tenants for around a year, things have went much smoother. My total rents each month is $1,565/month. My property management company charges 7% which comes to $109.55/month. That leaves me with $1,455.45/month. I bought the duplex for $85,000 and put 25% down. My monthly mortgage payment which includes taxes and insurance is $585.00/month. This would leave me with $870.45 each month for the last year. But after some small maintenance items that have come up over the last year I estimate I clear about $820/month on the duplex.
Since purchasing the duplex 1.5 years ago it has appreciated also. I estimate it to be worth about $110,000 right now. So since I purchased it for $85,000 (which was about $8,000 under what it was worth at the time) it is worth $25,000 more than I purchased it for.
As for the $820/month I am clearing I just deposit into a dedicated bank account each month and don't touch it. Because I understand that some day the roof will need to be replaced, possible AC Unit, furnace ect…
After I file my taxes in the next few weeks, it will be the second year of tax returns that I will have the rental duplex included on. So the banks should then be willing to count the rental income against the mortgage payment, which helps against ones income to debt ratio when wanting to buy another rental property.
So my plan now is to buy my second rental property in the next few months. If things continue to go well I will continue to buy rental properties until the bank tells me I am at my limit. Then I may work on paying off the mortgages or look into an umbrella loan from a credit union, and continue to buy more rentals.
I will say that the $820/month feels pretty good, the account I deposit it into each month has grown from $0 to about $9,000 in just 11months. not to mention the $25,000 in equity.
Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
11y
@Seth B. Thanks for the update. Great story of ups and downs and ultimately making some progress. I can understand why many RE investors jump out of the game after a few bad experiences. You obviously had good reason to be discouraged after the first 6 to 12 months. But you stuck with it and things have leveled out and are moving ahead. Well done!
Within the first month of buying my first fourplex, there was a gas leak and one of the tenants called the gas company. The gas company came out and shut off the gas to all four units after finding a couple leaks. Unfortunately, it was about 8:00 pm on the night before Thanksgiving and it was freezing cold. One of my tenants literally had a half-cooked turkey in the gas oven. So I'm driving an hour to the property and taking my tenants gift cards and electric heaters at 10:00 pm on the night before Thanksgiving. I was month into my first multi-family purchase and I was about done with Real Estate investing.
18 months later, we have rode out some of the rough patches and are starting to make some money. Moral of the story. Stick with it.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
11y
Just caught up with this thread. @Seth B. , looks like the 50% 'rule' was not too far out, hey? (Any extra netted %, including appreciation, can be treated as a bonus).
@Michael W., Your story also shows why REI is not for the feint hearted, but IS for the endurers. Cheers...
I will say that the $820/month feels pretty good, the account I deposit it into each month has grown from $0 to about $9,000 in just 11months. not to mention the $25,000 in equity.
Hang in there, one day you may have 30+ & the cash flow will be very satisfying, & your 'OMG Landlord experiences' will become humorous anecdotes you can share with the members of your local REI club.
By then, as Jay mentioned, you may see the advantages of delving into hard money lending !!!!
Just caught up with this thread. @Seth B. , looks like the 50% 'rule' was not too far out, hey? (Any extra netted %, including appreciation, can be treated as a bonus).
@Michael W., Your story also shows why REI is not for the feint hearted, but IS for the endurers. Cheers...
Maybe, maybe not.... If I never asked for that deposit right off the bat, my expenses might have been very minimal over the first 1.5 years. But it might have played out the same way even if I didn't ask for the deposit, so who knows.
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Seth B. - you are right. With small rentals, there will not be much CF in the long run. The problem is management - you really can't afford it on small rentals. Buying small rentals is self-employment. This is not wrong, but it is what it is. BP sells you a bag of goodies telling you that you are an investor when buying small stuff - no, you are not.
Again - this doesn't mean you don't get ahead buying a duplex like you did, just not in a way you're doing it. Management and CapEx over 7 years will put you in the negative - guaranteed!
Here's a way to look at this. There is a difference between investing in real estate and building a business in real estate. If you want to invest, meaning you want to be hands off, then either buy an apartment building which is large enough to support management and pay roll, or if you can't pull that off, put money into a syndicate, though even that will set you back $50,000 if you go with anything I do for instance. Otherwise, don't kid yourself that anything will be passive, in which case you're not an investor - you are in business, just like the rest of us.
Dump the management today and do it yourself, and to be sure that there are economies of scale relative to your time, buy a bunch more. If not, sell it and put the money into apple :)
Real Estate Investor · Honey Brook, PA · Member since 2011 · 33 posts · 6 votes
11y
I'm used to buying properties for between $5k and $30 and renting for $600 to $1100 a month, so I wouldn't pay more than 30k unless the potential rent is higher. I'm just spoiled. I'd rather just rehab and flip, or just flip w/o any work. Some of my best flips were to investors, but I didn't plan it that way. I've always had a knack for finding the deals...
Real Estate Investor · Honey Brook, PA · Member since 2011 · 33 posts · 6 votes
11y
I agree with Ben on managing yourself. It's a hassle, which is why I got out for a while after selling everything and cashing in back in 2006. Perfect timing!
@Seth B. - you are right. With small rentals, there will not be much CF in the long run. The problem is management - you really can't afford it on small rentals. Buying small rentals is self-employment. This is not wrong, but it is what it is. BP sells you a bag of goodies telling you that you are an investor when buying small stuff - no, you are not.
Again - this doesn't mean you don't get ahead buying a duplex like you did, just not in a way you're doing it. Management and CapEx over 7 years will put you in the negative - guaranteed!
Here's a way to look at this. There is a difference between investing in real estate and building a business in real estate. If you want to invest, meaning you want to be hands off, then either buy an apartment building which is large enough to support management and pay roll, or if you can't pull that off, put money into a syndicate, though even that will set you back $50,000 if you go with anything I do for instance. Otherwise, don't kid yourself that anything will be passive, in which case you're not an investor - you are in business, just like the rest of us.
Dump the management today and do it yourself, and to be sure that there are economies of scale relative to your time, buy a bunch more. If not, sell it and put the money into apple :)
The property is in a different state. So there is no way to manage it myself. I think over 7 years I wil come out ahead, when you factor in mortgage pay down and appreciation. By putting another $200.00 a month toward the principle it would be paid off in 15 years. So let's say that management and CapEx over 7 years made it so instead of cash flowing the $820/month I had to spend it on maintenance ect... Plus I lost another $200.00 in negative cash flow. $200/month times 12 equals $2,400 a year times 15 years is $36,000. But it would most likely still sell for $110,000 or more with appreciation. That would leave me $74,000 to do a 1030 exchange with on a larger property. Let's say I am able to buy 4 of them that would be $296,000 in 15 years. But I don't think it will negative cash flow over the long term, but only time will tell.
We all have to start somewhere. I am not rich now, so I have to start somewhere with what I have.
Apple stock is not looking as good as Oil stock is right now. I am fighting urge to buy $20,000 worth of WTI (West Texas Intermediate) as we speak. ;)
Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
11y
The numbers are wasted on Ben. He's convinced his way is the 'right' way, and all other ways are the 'wrong' way, which is misguided, but whatever works. :)
Cleveland, OH · Member since 2011 · 400 posts · 223 votes
11y
Small rentals can be cash cows if you do it right and take advantage of some peculiarities in the market. I like to buy rehabs at bargain basement prices and have the taxes revalued at the purchase price. I bought a duplex for $27k, rehabbed it with about $30k, then had the taxes revalued at purchase price for a grand total of $1000/year in taxes. The property recently appraised at $91k, so I'm happy as a clam and I'm going to hold this thing until the county does its triennial revaluation. :)
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
11y
The more obvious reasons to look for a new management company are: Leasing without collecting a security deposit (really bad idea for ANY landlord, but even worse here because supposedly a "pro" was hired); not raising rents in 4+ years (gradual increases are needed to keep you collecting close to market rents).
There might be other things where the PM is performing, but it's quite possible for the PM to be neglecting other things as well.
RE Fund Managing Partner · Chevy Chase, MD · Member since 2015 · 14 posts · 5 votes
11y
Very interesting thread and some really good nuggets of truth in here.
Small multifamily and single homes do sound like a great investment (in the US at least) if you can spruce them up and then rent that for 10+% yields (and eventually double or triple the property value). My dad actually did that in the Midwest and doubled his money on the exit 3x (sort of like what poster Christian did).
I'm still a property virgin and am thinking of buying some 1-2 bedroom apartments in the downtown or outerlying commuting areas of major cities in the US & Europe. Ideally I would not have to live in the area and can diversify my properties amount different areas.
Trouble is, doesn't the management fees usually eat a lot into your profits when you do this ? If Seth (original OP) is really is getting 10+% on his investment in a duplex annually (and managing the property himself) that's pretty good - all the returns I'm seeing in the apt/condor world where I'm looking are anywhere from 3-7% (!). Seems kinda low if it's 3-4%. I guess most of these places have on-site management where you really are investing and not managing (i.e. you don't need to go fix the toilet when it overflows, or constantly refurbish the place, repair the roof etc.) so many times these management and maintenance fees are on the high side. But I don't want to have to actually manage the property like Ben.
To Seth - do you feel like it's just a question of time before something big breaks (i.e. HVAC, plumbing leak, etc.) and if so how do you handle managing the property from so far away? And are you expecting a decent return on the sale of the property?
