Decent Cash Flow and Cash on Cash but negative 50% rule?

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Hello BP,

I am going to put a offer on this property after Thanks Giving weekend.

Details: Foreclosure. On market for 108 days. Price dropped from 243k to 230k. Rental Estimate 1,795 Zillow, Rent-0-Meter. 10k for fixes. Need laminate, paint, fixtures, and furnace, and toilet.

This will be primary residence and housed hacked first year. Asking 40k below. What are your guys thoughts buy and hold. Potential equity as well after fix up around 260k.

Does the 50% rule rule over cash flow and 14% Cash on Cash?

Ryan

Joe Villeneuve · Answer

The 50% Rules rules over nothing...especially here.

Let me ask you a similar question:  "If something was marked one size smaller than the size you usually would wear, but when you tried it on, it fit perfectly, would you buy it"?

Joe Villeneuve · Answer

CoC Returns have nothing to do with property value.

Cristian Aviles-Morales · Answer

@Ryan Rogers Out of curiosity, why are you assuming such low CapEx and Repair rates (both only 2%)? Repair should be minimum 5% (in my opinion) with rockstar tenants and Capex should be (in my opinion) 10% especially for a 11 year old roof. If you increase those, and still cash flow (which I think you will just not AS MUCH).. it can potentially be a viable deal. Not rock star but it's something! Have you already checked Zillow for Rent filters to see the rents in the area AND rentometer.com to see rentals nearby? Make sure your asking rent price is avg. If the property needs work, make sure the below avg is still going to cash flow for you.If all that is addressed, then I think you're on your way closer to knowing if it is a good deal for you or not. If you bought it tomorrow, do you have a method to place tenants as quick as possible? Screening method planned out and criteria determined? Your own lease ready for them to sign that is iron-clad and covers you? If yes, then you're even closer to making this happen. If not, definitely get to the drawing board and draft stuff up!

Oh and, is this a MLS deal? I ask because the ask price suggests $250k but you are assuming you're going to get the property for 60k less than that. Is this a property that you already negotiated a discount for? If so, and if the numbers don't make sense for you, don't just give up the property and that huge discount. Turn around and wholesale that to someone who CAN make those numbers work.

Account Closed · Answer

This is great! If I posted deals I’ve made on here, someone would’ve tried to talk me out of every one of them. If the deal @Ryan Rogers works for you I say go for it!

Actually pulling the trigger is half the battle around here. Having this mentality mixed with good insight has lead me to my current portfolio of 55 units up in Everett. We are cash flowing hard and I love it. Alot of people have been telling me I’m crazy all along the way but now those same people are telling me I’m “lucky”.

Jaysen Medhurst · Answer

@Ryan Rogers, even if you're self-managing you have to figure in the costs for two reasons:

• You should be paying yourself a management fee if you're doing it yourself. Your time is worth something.
• By figuring in the management now, you guarantee it will still be a good deal / cash flow once you move to professional management.

Thomas S. · Answer

"CoC Returns have nothing to do with property value."

It sure as hell does in my world. Maybe you just don't call it CoC returns.  Equity in a property is my money. Ignoring equity is why CoC is a useless metric after the first year of ownership. If you only calculate your return on your initial DP out of your pocket as cash and not any mortgage paydown or appreciation your numbers are useless.  I guess that is why so many investors have such pronominal CoC returns year over year. They chose to ignore most of their cash in a property.

Personally my CoC calculations are all based on my full equity in a propery...it is after all my money. As dead equity accumulates due to pay down or appreciation your returns take a nose dive.

Bleu T. · Answer

Hello, everyone.

Congratulations on looking for deals.

My perspective can't help but be effected by my experiences. In my case, I grew up helping build custom houses.

I want my investments to be hardy, and be easy to repair.  I'd have a hard time feeling good about buying a manufactured home in a wet climate for a quarter million.

If I'm off target, set me straight ;)

Thomas S. · Answer

You pull the trigger on good deals, mediocre deals maybe if cash flow is not important. You shoot yourself in the head on bad deals.

Based on a rent under $1800 for a property worth $2600K you will Ultimatly have negative cash flow. I would not be paying a dime over 200K and even that is stretching it beyond my comfort range.

I also suggest you re-calculate your cash on cash returns as well. CoC calculations need to be base on  the property value at 260K.

Ryan Rogers · Answer

Hi @Jaysen Medhurst,

I updated some of that on my newest post. No management as I will landlord it for my few investment properties. Utilities tenant will take care of.

Thanks for your input

Ryan

Jaysen Medhurst · Answer

Hi @Ryan Rogers, few things about your numbers:

• CapEx and Repairs are too low. I figure 7.5% for each
• What about management? 8-10% is standard
• Any utilities that you'll be responsible for?
• Vacancy might be a little low, but that's super local.

Personally, numbers are not good enough for me.

Decent Cash Flow and Cash on Cash but negative 50% rule?

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