All Forum Posts by: Lucas Duce

Hey Matthew, If the tenant is giving a notice to you in advanced, try to minimize the vacancy time. Usually landlords will have a 2 month minimum notice of non-lease renewal, if this is the case, you can attempt to advertise the unit, accept applications, screen the tenant, and get a lease signed for the tenant to move in a few days after the old tenant moves out. During that 2 month period you can try to get into the property to see what repairs and cleaning will have to be done. After you know what is required to get the unit ready for the next tenant. Schedule all the cleaning and repairs to take place within that short couple of days time period. I've heard of landlords having the tenant move out by 10am on a Monday, have the repairs and cleaning scheduled for that afternoon/evening/night (if the repairs aren't substantial) and have the next tenant move in at 2pm that following Tuesday. It takes a lot of coordination, but saves you a ton on vacancy costs. - Lucas Duce

Hey David, The standard I've been seeing has been between 2-3% growth for the things you mentioned. Inflation will average about 3% per year, so your average expenses will grow by 3% per year. As for the possible increases in operating expenses. If you're referring to things like roofs or appliances needing to be replaced after multiple years, the % of monthly rent you're dedicating to CapEx reserves will likely pay for those items. You'll likely go a few years without needing a CapEx repair, so you keep rolling that money over. Likewise, there may also be a year where you have multiple CapEx repairs. That's why it's important to allocate around 5-7% of rental income to CapEx repairs. People usually use an average of 2% appreciate growth for the property per year. Your rent will also increase an average of 2-3% per year. I've heard of people having it in the lease where after each year the rent will increase by 3%. They do this because a $10 increase at the end of the year in rent is easier to accept for the renter, rather than having to increase rent by hypothetically $50 after 4 years and risk losing a good long term tenant and losing money through vacancy. While both your expenses and rents increase at approximately the same pace, as time passes, you'll be getting more and more cash flow each month since your monthly mortgage payment will stay the same from year 1 compared to year 20 (unless you refinance or something similar). - Lucas Duce

Hey Justin, In order to determine if a property is a good buy or not, you first need to run the numbers. Bigger Pockets has a variety of calculators to help do this. They allow 5 free uses of their calculators for non-pro members. It sounds to me like this would be a potential BRRRR property. The calculators would be essentially calculating your total cash flow of the property after factoring in rent, mortgage, repair costs, expenses, etc. A good standard to follow is wanting around $100-$200 a month in cash flow per unit. But without running the numbers first, it's difficult to determine if it's a good deal regardless of all the potential. Good luck! - Lucas Duce

Hey Steve, I'm happy to help! The link worked too. Have you talked to a bank that you're planning on refinancing through? It would be a good idea to begin communications with the bank to get an approximate interest rate as well as dialing in on at what LTV they are willing to loan on. You should also look into possibly getting prequalified for the loan just to make sure there are no surprises that come up during the underwriting process. Also, confirm the seasoning time for the refinance, 6 months renter stability in the property is often what banks want, but if you confirmed 5 months with them, that's good. Where did you get your ARV estimate and your rehab estimate from? If those numbers came from a reliable source, like a property manager and contractor, and are correct, then it looks like a good deal to me. - Lucas Duce

Hey Steve, There's a few things that concern me on your deal. For the refinance section, you put in a 9% interest rate. Was that a mistake? 9% is understandable from your private money, but for a bank's refinance, you'd be looking at more around 4.5%. The other thing is the loan amount. Banks will give you a Loan to Value (LTV) amount of %70-80% of the value of the house. So at a ARV of $87K, you may be only able to pull out around $60,900. Which you would be leaving about $14K into the deal. So you wouldn't get all the money back to pay back your private money. You're cash flow is only showing around $120 a month based on your entered expenses, likely due to you entering in 9% interest rate on the refinance for the loan. Fix that and then let me know what the P&I payment is. In a single family rental, you would try to have the tenant pay for all utilities, so you wouldn't be paying for the electricity, water, and garbage in your post-refinance expenses, so that would take away $30 worth of expenses in your calculations. I would also bump repairs up to 7%. Good luck! - Lucas Duce

Hey Adam, What is the current rent the property is getting and how confident are you that you will be able to raise it to $1,100? If you got the number from rentometer, that number might be unreliable. Maybe call a couple property management companies and ask them what properties in that area, within a mile radius, are getting for rent. Since you are not going into it and doing some initial CapEx repairs to it, unless it is a fairly newly built property, you may want to factor repairs and CapEx at 14% combined. It looks like your PMI looks a little light. I think standard is around $77 a month on a $100K loan, so for a loan around $84K, I believe you are looking at closer to around $65 a month. Unless you already have that $25 monthly PMI verified with your lender. The cashflow seems to be cutting it close, maybe try to sweeten the deal for you by getting some better terms to increase the cash flow. Possibly seller financing with little to no interest with a small down payment. Asking for a repair credit at closing to get some new CapEx items to lower your long term costs. Or even attempting to negotiate the seller down an extra $5K. Good luck! - Lucas Duce

Hey Justin, Banks will often want 4-6 months of seasoning before they'll let you refinance. But if you have already talked to a bank and they're allowing a 2 month period, then that's great. I agree with the 5% or CapEx, if that $5,000 repairs is going towards those CapEx items, but I would suggest bumping the repairs up to 7%. Other than that, if your numbers are correct, it appears like a good deal! - Lucas Duce

Hey Michael, Management will likely be 8% instead of 9%. Depending on the extent of the repairs you are doing with the $25K, you could possibly drop down the CapEx % to around 5% if you are initially fixing up all the big ticket items during the rehab. - Lucas Duce

Hey Bryce, I think your water estimate might be a little low. Call the local city water facility and ask for the yearly average for water cost for that specific address. You mentioned that the tenant pays electricity, you didn't mention who pays for garbage. If you're stuck with that cost, you'll want to call the local waste management company and get that estimated as well. Be careful when using past years' taxes for calculating your property tax fees. The new property tax for the property will be based off of the new purchase price and assessed value of the home. For example, I recently submitted an offer on a fourplex and the property tax for the last year was stated around $2,200 for last year in its MLS posting, but the seller purchased it 2010 right after the crash and the seller was selling it for nearly double what he paid for it. So the new property taxes would have been around $3,500 at his asking purchase price. This made the deal go from a great deal to a good deal, but in some cases can kill the cash flow completely if the numbers are barely working out. Have your realtor calculate the new property taxes based at the purchase price you and the seller agreed on. Good luck! Sincerely, Lucas Duce

Hey Taylor, Commonly, the landlord is stuck paying for water and garbage, and in some cases even electricity. I think your garbage estimation is pretty low, you can call local waste management companies and get a quick estimate on costs. You can also call the local water facility and ask for a yearly estimate of water costs for the specific address. I recommend doing that and then factoring that water cost into your analysis. Unless you already contacted the current landlord and confirmed that they only pay for garbage. Sincerely, Lucas Duce