All Forum Posts by: Will Barnard

Give me a break Mike. Again with your foolish stupid attacks. Have I created new investors - YES. Has anyone who has never bought a RE investment before, purchased from me - YES.
Do I pretend some expenses do not exist - NO.
I explained in great detail how I figure those out. Perhaps a tutor to assist you in reading the thread can explain that to you. I do not pass off $6 maintenance fees - you are acting ridiculous!
The reserve account does not magically appear nor is it created out of thin air. Again a foolish and ridiculous comment. If I need to explain to you how you obtain a reserve account, then you are in big trouble Mike.
Not everyone is talking ONLY about the RENTAL PROPERTY BUSINESS, and the only way to make $ in the rental business is not cash flow. There are several income sources from owning RE. Just because you personally rely only on cash flow, does not mean everyone else has to or needs to. It does not mean that you are the only one in the rental business. Just more ridiculous comments. You really need to tone down your approach, it is not useful here.
I do not intend to argue with you on this point as it is futile and a waste of my time.
For those who want to look at a very narrow vision of one person's rental property business, they can go with your thought Mike. Not everyone must operate a RE business in the fashion that you do. Just another wonderful aspect of RE, we can all make $ in a variety of differnt vehicles, methods, strategies, etc.

Originally posted by Jon Holdman:

I really see the 50% rule as a warning. If you assume that rent - PITI = cash flow, and go with a rental that only makes you $50 a month, or is break even, you're going to be in world of hurt if you have a long vacancy, a nasty eviction, or need a new roof. With enough properties and enough time, you will have those items, so you have to budget for them. If you get lucky, you have good tenants for the long term, and cash flow is close to rent - PITI. Or, you get unlucky and can't get a tenant or have a major expense and you get foreclosed.

Jon, neither I, Rich, or Taz are saying that you do not account for these expenses, simply that averaging or guessing a percentage ratio for expenses is not very accurate or feasable.
I also do not think your blanket statement is fair. For instance, someone could have only $50 monthly cash flow, or even negative and in 5 years sell for $50,000 profit. Did they make a bad decision or choice? No, of course not. I realize we are discussing a landlord business, but it does not have to rely only on cash flow for profit or to pay for capital expenses, vacancies, evictions, etc.

I can appreciate that Taz, and THANK YOU Rich. That is what I have been saying for months and months here!!!
I was referring to Mike's comment about having everyone use a 50% rule for the end all be all.
Here is a quote from Mike:
"We've had many people on the forum that have claimed that their expenses were lower than this, many times ridiculously low. However, when the real expenses were added up, IN EVERY CASE, their expenses were in or very close to this range."
I will assume I am one of the people he is referring to as he has accused me of this several times before.
I realize not everyone fully understands accounting methods and processes, but here it is in a nut shell.
Over a year period, you take all the rental income and minus all the actual expenses (interest, taxes, insurance, prop. management, any actual repairs, accounting, advertising, etc.) What is left is your net income (pre-tax) also known as cash flow. You then get a depreciation deduction and if the cash flow is then positive, you are taxed on that income. Using Mike's 50% rule, he claims to use a portion of the expense ratio for future unknown capital expenses and future possible, but unknown operating expenses like vacancies, etc. For arguments sake, lets assume that 35% is the actual fixed expenses each year. That means that 15% is left over or carried over for possible expenses next year. Unfortunately, the IRS does not allow you to deduct expenses that have not occurred and therefore, you will be taxed on that income. This is one reason why I state that capital expenses and future possible/probable operting expenses need to come from a reserve account, not the monthly cash flow. I do not pretend that expenses do not exist, I merely pay for these expenses when the time comes from a reserve account.
I hope I have made this point clearly enough to understand.

That is very true Jason. The odds are all in their favor. When prices shoot up, more people are buying and thus new higher tax rates are assessed. When prices drop, the taxes do not until the property is reassessed.
Kind of like Vegas, even when they lose, they win.

Taz reiterates my point. Large capital expenses could easily raise your expense ration above and beyond 50% which is exactly why these expenses need to come from reserve accounts and not rely on cash flow.
Why guess or estimate?
Why not equate all the expenses that occur monthly, and the balance is your pre-taxable cash flow. Then, whne the capital expenses occur, you pull form the reserves. What is so difficult to see here.
Everyone wants to use a 50% guess rule, rather than lock in actuals with reserves.

Anyone can speak with their taxing authority and have the property reassessed, to lower the property taxes, but keep in mind that when the prices go back up, your property will be one of the first to be reassessed again to raise it back. That is a direct comment ffrom the taxing authority on one of my properties, and I chose to leave it alone, in that particular case.

Jon,

YOu misspoke when you said probably!
Here in CA, where we had the largest rapid level of appreciation in RE, the state received huge amounts of unexpected revenue from prop taxes, and today, are screaming that they are out of money. Go figure!

That would be correct Bob, assuming your expenses were 50%. But what if they were 55%? Then your $100 cash flow is no more. The point of this rule is simply to do a quick evaluation of a property, not as the end all, be all of yoiur expense ratios..
Ultimately, you need to dig deep into the particular investment and accurately figure the expenses. Obviously, expenses that do not occur on a monthly basis and may or may not occur can only be averaged or guesstimated.
For that very reason, along with a few others, I personally do not use this rule.
I have a reserve account set aside for capital expenses and possible future vacancies. This way, I do not rely on the cash flow alone to support these items when they occur. Also, from an accounting perspective, replacing roofs, ac units, etc. are capital expenses, not operating expenses.

???????????
Another fluff post?

Good point David. That is very true and very common.
Consider yourself lucky Ofgift.

In this market, you may be better off renting until the market in your area turns for the better, then sell.