All Forum Posts by: Jean Santiago

@Jean Santiago

You left out appreciation which is huge in CA. What’s the % for your house? I think you’re leaving a lot of money unchecked by not analyzing the appreciation of the property. It could help you make a decision.

• What are you trying to get at here, @Jean Santiago? Do you plan to rent this property after living there for a year or just trying to thoughtfully understand the real living expenses of a potential home?
• If you plan to rent this out eventually, why would you use $2600 instead of the market rate you cite?
• What's important? Cashflow and CoC ROI are most important. Every property is a tiny business that must be able to support itself and be profitable.
• Until you get to 5+ units, Cap Rate don't matter much aside from a measuring stick for you to compare similar properties. They do not impact values at all.
• The 50% rule is dangerous. Way too many variations from property to property and location to location. You have to actually run the numbers on every potential deal.

As far as your analysis:

• Electricity looks low at $50/month. I'd expect at least 2X that, depending on the size of the home and number of people living there.
• Insurance looks very low for a $450k property. Talk with a local insurance agent.
• If you're adding $90k of value, you should expect your taxes will eventually go up.

As a rental, I think this is a hard pass. As a personal residence...really up to you.

@Jean Santiago to do a BRRR you have to work backwards. Start at your arv of 450k. Multiply that times 75%=$337.5k Take your repair costs. 40k and closing costs(normally holding costs utilities, taxes, insurance, etc. 10k=$50k. max offer is $337.5-$50k=$287.5K. The way you have it set up you will have to bring ab additional 22K to pay off the higher mortgage. You are only able to get a max of 75% cash out refi. I see in some other threads max cashout is 60%. You must be the only landlord not to have a vacancy. When I analyse I use 8% or 1 vacancy per 12 months. After you move out you shouldn't have any utilities. After you move out you will have to feed the alligator several hundreds of$. Also missing pmi for under 20% down on acquisition

Just chiming in on the cap rate comment to agree. Cap rate doesn't apply to single family properties unless you're talking about a portfolio. Brokers and realtors have started trying to apply it because in many cases it allows them to justify a higher price than the property is really worth. 

Cap rates aren't targeted per se in the same way that other metrics are targeted. Cap rate is driven by the market, as it is the multiple of cash flow that the market is paying for a particular property or set of properties. You may aim to buy for 50 bps over market cap, but targeting the cap rate itself is not really the right metric. 

Focus more on things like cash on cash return, IRR, monthly cash flow, things like that. Those include cost of debt.

@Jean Santiago I'll take a run at your questions.

1. What average amount of cashflow are you targetting?

I have a condo I break even on (since it wasn't purchased as an investment, but I'm not interested in selling it); a condo I make ~$375 on after all expenses, and a SFH I make $300 on. For my next property, I'm going to try to BRRRR to pull all my cash out and I'm targeting cash flow of $250 a month.

2. What cash on cash ROI are you targetting?

I purchased two properties with conventional financing before learning more about investing on BP, and my cash on cash return is terrible (even though the properties cash flow well.) For my next, I'm less worried about the cash on cash return, and more focused on trying to predict the ARV accurately so that when I refinance I get most or all of my cash back out.

3. What Cap Rate are you targetting?

Cap rate is typically used more for multifamily properties rather than single family, but you can calculate it if you want.

4. Do you guys try to follow the 2% Rule?

I am not looking to purchase in markets where the 2% rule is possible, so for me, the answer is no.  This is going to vary by market, and even in markets where 2% is possible, you may be looking at C or D class properties.

5. Also, what is the 50% Rule Cash Flow Estimate?

This is a "rule of thumb" that says that 50% of your gross income will go to expenses, excluding the mortgage.  In your example the cash flow was pretty similar based on the two ways of calculating - $23 vs. $115.  That's pretty close.

Hope this helps.