All Forum Posts by: Issac Droblyn

Hey there,

I'm happy to hear that you've been able to successfully house-hack the duplex. Hearing that you will also be able to purchase an additional rental property with CASH is also exciting.

Personally, I'm a bit lower on the risk tolerance spectrum. From the way you're writing, I imagine you are as well. If I were in your shoes, I would keep close to the fundamentals and focus on properties with strong Free & Clear cash flow in good areas. I don't think there's anything wrong with the "All-Cash" approach. I very much question the statement that you "should" use leverage to "maximize" investment returns. Don't forget that utilizing leverage means that the loan principal counts against your net worth. The boosted (leveraged) Cash on Cash return you get by absorbing debt is created by taking on investment risk. This particular community has a very high tolerance for risk, and that doesn't necessarily translate well for everyone's specific financial plan and goals.

You're only 29 years old. If you keep the course, pay cash for your next property, and roll the profits into the next one, etc. You should still be retiring with a portfolio of Free-and-Clear cash-flowing properties that net a solid income.

Cheers, and Happy New Year.

I am in the Dallas/East Texas market, and am interested in getting involved in real estate as a long-term investment strategy. Because my aims are long-term, I am comparing potential Real Estate Investments with the long-term performance of the S&P 500, among other investment types. I'm currently trying to understand the math on Real Estate Investing from a Net Worth perspective. Because my primary objective is net worth - not cash on cash - strategies like BRRR are not appealing to me. As such, my strong preference is to evaluate deals on the basis of their Free and Clear values.

To those ends, I have begun evaluating the Dallas market for Single Family Residences that cash flow well, and have a target ROI of 9-12%, disregarding appreciation. However, I have only been able to find houses on the market that would ROI around an estimated 5%-7%. This is based on :

*NAV = Net Asset Value (House valuation)

   Assuming asset is bought at market value.
   1.81% Property Taxes on NAV
   5% Vacancy rate
   2.5% NAV on CapEx + General Repairs
   $6 per $1000 per Annum for Insurance
   $35/mo Legal Fees (Evictions, other)
   No HOA
10% Flat Property Management Fee
   Rent at Approx 1% of NAV per month

To me, a 5% return is not worth the hassle of getting into real estate. Today, I can buy and diversify BBB+ bonds at over 5% interest - no fuss. I'm struggling to get these numbers to work. From what I gather - either my expenses are over-estimated, or I'm undervaluing the Dallas market and not estimating high enough rent. Alternatively, I can look for a super "Deal" to get the target return. However, my calculations show that the seller would have to sell the property to me at about 66% of market value to reach the target ROI (i.e. unlikely).

What am I missing? Is there anyone in the Dallas Market that's not exercising a highly-leveraged strategy, but is still making a competitive ROI with their cash flow? Is there something obvious that I'm not accounting for? I truly want there to be excellent opportunity here, but I need to see the math work before executing an investment.

Bonus Question : What is the (Rent / House Price) ratio you personally have/use when making an investment in the Dallas area?

Free and clear (100% down) -  given the very limited information available to me - my guess at ROI is around 9-12% (depending on if you count appreciation). It's not a terrible ROI in my humble opinion. My major concern with that facility is how much you would need to spend in repairs.

If someone has a contrary opinion, I'd love to hear your thoughts (Speak Up! :)

* Disclaimer - I am not currently invested in real estate. However, I do like math, and have an interest in the numbers as well.

Because you are the investor, you will need to define what a "Good" deal is to you.
What is your target Cash Flow?
What is your target ROI?

Based on the property you linked and the $800 you expect in cash flow, I'm presuming that this would be a leveraged purchase. You need to provide some additional information so that we can track along with your train of thought.

    How much Down?
    What interest rate do you expect?
    Do you intend to use a management company?
   What % of assessed value are you calculating for CapEx?
   What vacancy % are you calculating for (Because it is a multi-unit, your turnover might be higher)?

I'm not in the Ohio markets, so I cannot tell you if the $800/mo per tenet is actually what you will get. However, I am suspicious of the fact that the listing only has one of the rooms as occupied (i.e. 75% vacant currently). Are there repairs that need to be done on the other 3 units that would increase the cost of entry? Is $800/mo above market?

Additionally, the property you listed was built in 1907. There are special problems that come with older homes that may increase the cost of entry.
   Old/Aging/Lead Pipes.
   Lack of central HVAC or modern Insulation.

Based on my numbers, this "$800" cash flow is heavily dependent on you taking on risk by taking out a loan over 30 years, no up-front repair costs, and no property management. These calculations were run on the following assumptions:
   6% interest on the loan.
   20% down payment
   30 Year Loan. 
   $700/month per unit /w 5% vacancy.
   2.5% CapEx + General Repairs
    $6 per $1000 coverage (annually) for insurance (I don't know what insurance is in Ohio)
   $1628 Annual Property Taxes (Pulled from the Redfin, but subject to potential error)
   $100/mo for Eviction expenses (Which will happen, eventually. Lawyers are expensive).

I've attached a screenshot of the spreadsheet if you really want to go in more detail on that math. With these values, you could potentially have $769 cash flow, before federal and state taxes. Because this would be leveraged, you'll need to determine if that volume of risk is worth it. By taking on the debt, you will be stuck paying it back for 30 years to maintain that level of cash flow. On paper, you could have a reasonable Cash on Cash annual return - but from a net worth perspective, it will take you multiple years to equalize. Make sure you consider net worth when evaluating the level of risk you're willing to take on. Highly leveraged properties will have great cash on cash, but come with a lot of risk.