All Forum Posts by: Lucas Mills

Please see the screenshot I took of this forum post, here.

I don't even know where to begin on what to think about this -- what is this guy talking about?

Edit: The same guy posted a follow-up response, as seen here.

Interesting stuff. Personally, I don't have anything against the concepts that he is describing, but I'm pretty ignorant to this line of thinking. I like the way things are now because of the opportunity it does present, but does that mean that more people are worse-off because of the few that have the chance to benefit to this degree?

Well, a couple guys I know are doing 2-year lease options. If the tenant decides to buy, then they make some money and move on to the next house. If they don't, then they lease it again and collect another "down payment", which could be considered to help cover CapEx if necessary (even though the tenant is supposed to be taking care of CapEx items).

To me, this approach sounds very desirable - except for the fact that at some point, I no longer want to hustle and worry about continuing to find new properties in case my tenants decide to purchase when the option comes up. At some point I'm going to want it to be much more autonomous. So shouldn't I start with more of a long-term buy and hold mentality right now, so that I'm prepared for that time when it comes?

Yeah, I agree that percentages seem kind of worthless for anything but property management (and maybe vacancy). But as fair as repairs/CapEx, a percentage really doesn't make sense to me.

And yes, I also agree that CapEx seems relatively simple to figure out. Which is why I don't understand why more people, even (apparently) experienced investors don't seem to account for it (and other expenses) properly.

Though it kind of feels like I will never buy a property if I stick to my guns, that's still better than a deal that costs me money each month.

@William Bianco

Thanks. I was starting to wonder if I was crazy, or overly conservative in my expense estimation.

Heck, BP advertises the 50% rule (50% of your monthly income will go to expenses) -- that seems like WAY more than the local guys I know allot for their properties. But, it seems like a realistic number. I'm coming up with ~45% for the properties that I'm looking at.

At the same time, I think that there surely must be some other explanation as to why the guys in my local REI group are doing what they're doing, but so far I have been unable to get a satisfactory answer.

Essam, ironically enough, I felt that the number given in the CapEx article I linked to above (which is where I got that CapEx number), was a bit liberal. I thought it should probably be close to $200 if not a bit more.

Of course, paying down the principle is all good and well. But, I don't want to reap the benefits of my investments 25 years down the road, but rather 5-10 from now. In order to do that, I can't invest in properties that will only give me $20 each month when it's all said and done.

If I just choose to ignore CapEx, or at least ignore it to a certain degree, I feel it will only come back to bite me 10-15 years down the road when, "suddenly", addressing these CapEx items becomes evident and necessary.

That said, how much do you feel I should be putting back for CapEx?

Even though the house would likely appraise for 60k, I would only "cash out" 37k, or what I was "all-in" at. I wouldn't take out a loan for the full 60k.

Yeah, I'm familiar with the lower interest rates (and longer, 30-year fixed terms) of convention/FHA loans. However, while I may or may not do that for a single property, I'm thinking more in terms of portfolio loans because that's how I'll need to go if I hope to scale to any appreciable degree in the near future.

I recently became aware of a run-down property in need of about 30k - 40k worth of work which could be purchased for 7k. So let's assume that I was all-in at 37k, sort of a best-case scenario. This property then appraises at 60k, and I cash-out and get a mortgage for 37k. This property will likely rent for $550, give or take. That is a rent-to-price ratio of approximately 1.5%, and that's pretty good for Springfield, MO. Certainly, nothing on the MLS comes close from what I've seen.

But even at 1.5%, which seems not too bad, the expenses are too great for rent this low.

$550

- $216 (P&I for 37k portfolio loan at 5% amortized for 25 years)

- $45 (to cover 1 month of vacancy per year)

- $30 (somewhat arbitrary amount for misc. monthly repairs)

- $185 (CapEx)

- $55 (property management)

Total cash flow remaining: $19

This is supposed to be an example of a good deal, and I'm left with not even 20 bucks at the end of the month. I just don't get it. How are local investors doing anything but setting themselves up for future disappointment? Maybe they have some other exit strategy or something?

What I'm starting to think is that since expenses don't necessarily increase with income, I need to look at lower end properties in areas where the cost of living is higher in order to make a better spread. The properties where I live are just too cheap. The expenses run the cash flow into the ground.

You're right, multifamiles are better in terms of cash flow, but not THAT much better. It's funny, because I have guys telling me that you can do the BRRRR in Springfield "all day", but after running the numbers, it just doesn't seem very viable to me. And yet, at my local real estate meetings, there are guys who have been doing this for a few years and seemingly quite successful. But one of them told me, and I quote "if you have $200 after the principal and interest, you're doing well" -- What?!

I just don't get it. I even brought up the question of CapEx, repairs, vacancy, etc. in a meeting and was looked at with some degree of incredulity, like "what are you talking about?" kind of look. I just don't understand how these guys are doing this while seemingly diverting so little to the expenses category. I guess that doing lease option can mitigate a large percentage of the variable expenses since the tenant is supposed to be doing that, but it seems to me that, in order to be safe, you should account for those expenses regardless in the case that the tenant decides not to pay, or whatever the case may be. Maybe not?

I just don't know. It feels very confusing and a bit depressing, to be honest. The more I dig in, the less it seems like buy and hold works here in Springfield. Apparently, I need to find a market where the difference between the P&I and the monthly income is $800... But that introduces a whole host of other questions. Like, how do I find these markets, how do I invest in these markets, how do I do a BRRRR in a non-local market where I can't oversee the job and etc.?

Or, maybe I'm jumping the gun and missing some kind of critical piece of information that has so far eluded me. I would love to be proven wrong about the state of cash flowing properties in my own town, but it just doesn't seem to be that great.

Wow. Is this a real life example of a rental property? You have $800 left over after principal and interest? That just seems insane. I don't see you setting aside any amount for vacancy or property management, but you obviously have more than enough to cover those things in that example.

According to this post, I should be setting aside at least $182.75 each month for capital expenditures alone for an average, single-family house. That variable expense in and of itself seems to destroy most of the cash flow that's left after deducting the principle and interest on many homes that I've analyzed here in Springfield, MO. And that's before accounting for vacancy (maybe $45), repairs ($30?), and property management (10%, or perhaps $40 - $50 on the houses that cash flow here). That's a total of $307...

I don't think I have yet analyzed a property in Springfield that has had cash flow of over $300 after the principal and interest. Let alone another $150 - $200 on top of that after the fact!! We would be talking $450 - $500 in cash flow after P&I!! I have not seen that or anywhere CLOSE to it.

Does this mean I need to forget about my current city in terms of buy and hold?