Hi all,
I'm practicing by running numbers on a diversity of potential properties. When I run my numbers on SFHs with rents >= $900/month my cashflow ends up >$100/month, but when I go down to around $700/month the numbers don't work anymore. I'm trying to get at least $100/month cashflow after expenses.
Here is an example of a property, with my numbers:
Purchase price: $70,000
Rehab: no (turnkey)
Down payment: 20% ($14,000)
Closing costs: $3,500
Mortgage interest rate 5%; loan term 30 years amortizing; monthly payment: $304
Rental income: $700/month (in line with 1% rule)
Property taxes: $96/month (1.65%)
Homeowner's insurance: $50/month
HOA: no
PM: $70/month (10%)
Maintenance: $35/month (5%)
CapEx: $35/month (5%)
Vacancy rate: $56/month (8%)
PM vacancy renewal: $29/month (50% of one month rent)
Total cashflow: $25/month
What am I doing wrong? Or is the 2% really needed for properties of $70k and lower to make it work?
Thank you,
Martin
The math works...the property doesn't. Why would you expect a property with a very low rent (income) to cash flow any higher? Logic tells us it can't. The problem isn't the math. The math tells all. The problem is the property. The math is telling you NOT to buy that property...period.
...and throw away the 2% rule.
The math works...the property doesn't. Why would you expect a property with a very low rent (income) to cash flow any higher? Logic tells us it can't. The problem isn't the math. The math tells all. The problem is the property. The math is telling you NOT to buy that property...period.
...and throw away the 2% rule.
Thank you @Joe Villeneuve, I understand that a low rent income won't cashflow higher. My question is: should I adjust anything in the numbers I am presenting? Am I being too conservative with some of these numbers? There are plenty of properties that rent for $700/month, so none of those are cash flowing?
Thank you @Joe Villeneuve, I understand that a low rent income won't cashflow higher. My question is: should I adjust anything in the numbers I am presenting? Am I being too conservative with some of these numbers? There are plenty of properties that rent for $700/month, so none of those are cash flowing?
Throw out the %'s for CAPEX and Vacancy and look at their resulting $$$ amounts...the only numbers that matter. What do the %'s do for you there...nothing...nothing of value. When you have a CAPEX come up, like a new roof, it will cost you out of pocket around $5k. If you are retaining $35/month (or $420/yr), will you have enough money..., check that, WHEN will you have enough money to cover the roof based on this "holdback" of funds? The answer is, long after you've sold the property.
Percentages don't work...for anything. They lie to you. They make you think they are serving a purpose, and this case proves it doesn't. Just eliminate these two % retentions from you analysis (all analysis) all together, and figure out a different way to cover the cost of that new roof when you need it. Something that will actually cover it.
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
Actual numbers instead of lazy shortcuts. What a concept...LOL
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
Thank you for your response. It will indeed take a very long time before I'd be able to replace a roof with only $35/m Capex. So I will focus more on properties with (potentially) higher rents.
Actual numbers instead of lazy shortcuts. What a concept...LOL
I appreciate that you take the time to respond to my questions. I'm a newbie and trying to learn here and definitely not trying to be lazy...
@Martin W.
Adjust anything? Yes, you should adjust the idea that $100 monthly is “cashflow” when you’re only using 5% as repairs and 5% as cap-ex. $35 monthly for repairs? That’s literally 1/3 the cost to get a licensed _____ in the door let alone parts/ materials to fix the actual problem.
Use minimum 10% for these regardless of what has been done to make this “turnkey”.
@Martin W.
Adjust anything? Yes, you should adjust the idea that $100 monthly is “cashflow” when you’re only using 5% as repairs and 5% as cap-ex. $35 monthly for repairs? That’s literally 1/3 the cost to get a licensed _____ in the door let alone parts/ materials to fix the actual problem.
Use minimum 10% for these regardless of what has been done to make this “turnkey”.
Thank you! Yes, the problem is that with $35/month repairs and $35/month Capex (and all other numbers quoted above) there is only a $25/month cashflow left. Since these maintenance and Capex numbers are too low, increasing them to 10% as you suggest will result in a negative cashflow. So it seems like it will not be possible to have a $100/month positive cashflow on a $700/month rental income when taking into account all other costs of a property with mortgage.
@Martin W.
Correct, it is highly likely,... as in 99% likely that this will not cashflow over a long term (5+ year) hold. Good on you for asking the question as if you sift through the last 6 months of posts you’ll find hundreds of “help, my AC quit and my property has only profited $600 the last 6 months I can’t afford to fix it!” posts from people who don’t realize that a business plan doesn’t fit into an acronym or instagram story.
@Martin W.
Correct, it is highly likely,... as in 99% likely that this will not cashflow over a long term (5+ year) hold. Good on you for asking the question as if you sift through the last 6 months of posts you’ll find hundreds of “help, my AC quit and my property has only profited $600 the last 6 months I can’t afford to fix it!” posts from people who don’t realize that a business plan doesn’t fit into an acronym or instagram story.
Okay thanks, this is very helpful. I will focus on properties with higher rental income.
Actual numbers instead of lazy shortcuts. What a concept...LOL
I appreciate that you take the time to respond to my questions. I'm a newbie and trying to learn here and definitely not trying to be lazy...
Didn't mean you were lazy. The method is lazy...and it is unfortunately used all the time.
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
Thank you for your response. It will indeed take a very long time before I'd be able to replace a roof with only $35/m Capex. So I will focus more on properties with (potentially) higher rents.
Higher rent won't help. The problem is trying to use a percentage of a moving target to supply needed cash that is very specific. The solution starts with NOT using a percentage of the rent to cover CAPEX. Use the actual dollars needed, and figure out a way to build that required dollar amount using a different method...such as setting up an LOC that you don't touch unless you need it...like for a CAPEX.
@Joe Villeneuve
Would it be wise to get a slightly high loan and use some money to replace some big expenses, like a new roof or new water heater? I feel like this would then give you a better understanding of when they will break and help estimate capex?
@Joe Villeneuve
Would it be wise to get a slightly high loan and use some money to replace some big expenses, like a new roof or new water heater? I feel like this would then give you a better understanding of when they will break and help estimate capex?
I think I'm following, but remember, the loan you get to buy the property is to buy the property...not to do rehab. That would be a different loan.
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
Thank you for your response. It will indeed take a very long time before I'd be able to replace a roof with only $35/m Capex. So I will focus more on properties with (potentially) higher rents.
Higher rent won't help. The problem is trying to use a percentage of a moving target to supply needed cash that is very specific. The solution starts with NOT using a percentage of the rent to cover CAPEX. Use the actual dollars needed, and figure out a way to build that required dollar amount using a different method...such as setting up an LOC that you don't touch unless you need it...like for a CAPEX.
If you are trying to find actual numbers for your expenses like CAPEX and repairs, would you need to call contractors to get estimates on things like the roof, floors, etc?
(Also a newbie), *activates fire shield*
In general your going to have difficulty financing a property with a mortgage around 50K. Many lenders will not loan less then 100K. Small local banks you can probably get by with 75K-100K. When your calculating rents make sure your using your local market rent. Use multiple sources to confirm the average market rent. Your numbers conceptually are accurate. When it comes to Capex look at the condition of the major appliances or improvements. If your roof has 10 years left in it and as @Joe Villeneuve mentioned a new roof is $5000 then you have 120 months to generate 5000 or 41.67 per month. Same as a furnace at $2000 and there is 10 years left 16.67 Per month. I like actual numbers when you can apply them.
I would move up in price to and see if the rent numbers will correlate higher. You might find when you look at a 3/1 or 3/2 of 1000-1500 square feet the rents will jump to 1200-1500 which makes your numbers cash flow much better.
Thank you for your response. It will indeed take a very long time before I'd be able to replace a roof with only $35/m Capex. So I will focus more on properties with (potentially) higher rents.
Higher rent won't help. The problem is trying to use a percentage of a moving target to supply needed cash that is very specific. The solution starts with NOT using a percentage of the rent to cover CAPEX. Use the actual dollars needed, and figure out a way to build that required dollar amount using a different method...such as setting up an LOC that you don't touch unless you need it...like for a CAPEX.
If you are trying to find actual numbers for your expenses like CAPEX and repairs, would you need to call contractors to get estimates on things like the roof, floors, etc?
(Also a newbie), *activates fire shield*
Yes
@Martin W. Hi Martin, I saw you asked "There are plenty of properties that rent for $700/month, so none of those are cash flowing?" It could just be that people bought the properties a while ago for a significantly lower purchase price so $700 does cash flow for them. Or another explanation is that people aren't running the numbers properly (or don't know to run the numbers) and consider the rent just covering the mortgage as good. I hear this a lot from people.
There's a lot of discussion in this thread around the roof. Roofs are often covered by insurance. You will need to pay the deductible and also potentially cover any depreciation so that should absolutely be factored into cap ex. But I'm calling this out as it is a good thing to ask about when looking into a homeowners insurance policy.
@Martin W.
I wanted to comment on a couple things.
I rent out houses for $700/month and cash flow just fine. I have some that rent for $600 and are some of my best properties. But I didn't pay $70k for them. I paid $25k-$50k depending on condition. So as someone else pointed out, its not the rent amount or the percentages that are wrong. Its the purchase price. Are you buying on the retail market? Ive bought move-in ready off the MLS but not very often. Usually its an off-market deal or a fixer upper that gets me the cash flow I want, which is way more than $100 a month.
Second. Banks. WILL lend on small loans. I don't get why people are saying they wont. Just because it hasn't been true for some doesn't mean its a fact. Make calls, ask! Get with a community bank or credit union.
@Martin W. This is exactly the reason I don't even bother with properties that rent for less than $1,000. Sure they meet the "1% rule" and all that but when you break down the numbers as @Joe Villeneuve did you'll find that they just don't work. Not unless you're getting something crazy like $800 rent on a $35,000 place. The absolute minimum I personally use is a flat $100 for maint and $100/m capex but typically I like to go a little higher on the capex, especially if it's an older home.
@Martin W. You need to get them for much cheaper. 2 years ago I paid 35k for a property spend 4K in rehab and got 850 in rent.
That’s more rent for half the price you’re paying In this example
@Martin W.
I wanted to comment on a couple things.
I rent out houses for $700/month and cash flow just fine. I have some that rent for $600 and are some of my best properties. But I didn't pay $70k for them. I paid $25k-$50k depending on condition. So as someone else pointed out, its not the rent amount or the percentages that are wrong. Its the purchase price. Are you buying on the retail market? Ive bought move-in ready off the MLS but not very often. Usually its an off-market deal or a fixer upper that gets me the cash flow I want, which is way more than $100 a month.
Second. Banks. WILL lend on small loans. I don't get why people are saying they wont. Just because it hasn't been true for some doesn't mean its a fact. Make calls, ask! Get with a community bank or credit union.
> I rent out houses for $700/month and cash flow just fine. I have some that rent for $600 and are some of my best properties.
I do not see it, but maybe it is the definition of “fine” or maybe you have not done this long. At that rent point, the 50% rule is too aggressive. Therefore, the expenses other than mortgage on $600 rental will exceed $300 and I suspect by quite a bit. It does not leave much for cash flow.
@Martin W. Hi Martin, I saw you asked "There are plenty of properties that rent for $700/month, so none of those are cash flowing?" It could just be that people bought the properties a while ago for a significantly lower purchase price so $700 does cash flow for them. Or another explanation is that people aren't running the numbers properly (or don't know to run the numbers) and consider the rent just covering the mortgage as good. I hear this a lot from people.
There's a lot of discussion in this thread around the roof. Roofs are often covered by insurance. You will need to pay the deductible and also potentially cover any depreciation so that should absolutely be factored into cap ex. But I'm calling this out as it is a good thing to ask about when looking into a homeowners insurance policy.
Nailed it! I'm seeing lots of small multis that say "Calling all investors! Cashflow from day one!" But they're priced way too high to possibly cashflow. Sometimes I even run the numbers if one looks close, and it still loses $150/mo when all is said and done. So how can they say it's cashflowing, aside from an outright lie? The answer is usually that they bought it 20 years ago for half the price and it cash flowed for them. But now they're asking much more, because prices have gone up. The problem is that rents haven't.
It's the same reason a friend of mine found an amazing furnished 1b/1ba in a very popular neighborhood and the rent was peanuts. The owners were in their 80s and had bought it 30-40 years ago. They didn't raise rents because they're making a comfortable amount for their retirement, but if they sell, I'm sure the price will be outrageous.
@Dan Heuschele.
I am not new. I have been an investor for close to 5 years and have over 20 SFH's. Market matters. My $600/mo homes cash flow over $300 per month each after mortgage, taxes, insurance and maintenance. I do self manage because there isnt a management company in my town but what would that be, another $60? And due to a variation on the BRRR method im into them with nearly no cash.
It can work.