All Forum Posts by: Paul Novak

 Thanks for reaching out and providing your perspective.  I do measure my cash on cash return for my business and for each property.  My numbers are really accurate for the exception of the tax portion.  I am confident in my depreciation numbers on the dwelling but I make an assumption that my other tax deductions will all occur in the year that I have the expense when I know my CPA depreciates some of them as capital expenses over time.  While I know this throws off my calculations a bit they are still directionally correct.

Here are the numbers for my first property:

Cash To Purchase - $53,250.25

Mortgage Payments - $43,980.00

Expenses - $16,738.02

Total Cash Invested - $113,968.27

Total Cashflow - $22,041.81

Appreciation - $81,800.00

Debt Paydown - $10,143.12

Estimated Tax Deductions - $45,163.55

Total Returns - $159,148.48

Total Return % = 139.64%

I have owned the property for 42 months so my annual returns have been 39.90%.  I don't think the market will continue to appreciate as it has over the past few years and that equity isn't something I can realize until I sell the property which I don't plan to do.  It's nice but not something I plan to cash in on it as part of my strategy.  As for the tax portion I explained those numbers could be off slightly but overall I feel this still beats the market.

Using the same math my other properties have had lifetime returns of 89.97%, 22.69%, 46.90%, and 34.69%. Because we have been in growth mode acquiring properties with closing costs and rehab costs our business has been operating at a loss on paper each year not having to pay taxes for the business. This year our goal is to payback our HELOC and 401K loans so we won't have the same level of expenses which will leave us with higher tax implications at the end of the year. That will impact our percentages but overall I still feel this has been better than the stock market.

It's a combination of a few things that are allowing us to execute our strategy.  Our pretax income from our W2's is $235K per year combined.  We also live in a reasonably low cost of living area compared to the rest of the nation where the home prices we are looking at for rentals are between $200K and $250K.  In addition to that without having any real debt other than mortgages we are able to live comfortably while saving almost 60% of our income.  That figure is a combination of what we save from our W2's and reinvesting all our profits back into the business.

Quote from @Marcus Auerbach:

This brings back memories! 

My first live-in flip was a distressed 3,600 sqft home, shockingly not old just built in the 90s, but totally shot. I thought my 140k rehab funds were plenty, but I found out the hard way that it would really take $50-$60 per square foot for the interior. 

You do the math.

Plus all the the exterior projects: new siding, new roof, building out eave returns and soffit overhangs to fix the poor curb appeal, un-converting the attached garage, driveway, retaining walls, the detached garage, 144 truckloads of fill to create a front yard, landscaping... 

So outside of licensed electrician, plumber etc I ended up doing as much as possible myself, 5 hours every workday night and sun up to sun down on weekends.

Looking back this was a huge adventure for me personally, it took me 2 years, I learned a lot and it made me a better investor. I did it, because I had no choice, but I would not recommend it.

The pictures below are all (young me) me, including the guy inside the septic system.

 AMAZING!  Thanks for sharing the photo's.  You did one hell of a job!

I'm looking for some perspective from others in the BP community. I am 39 years old, and I recently shut off my wife and my 401K contributions. We also stopped investing in Roth IRA's. The only money we have going into the market is in our HSA. We have shifted all our investing to real estate. To take it a step further we have been taking loans from our 401K's to help support down payments on rental properties. Below is my logic and strategy.

Our combined 401K balances are $550K and Roth IRA's are $55K. No one knows what the future holds but assuming a 7% return over the next 20 years those accounts will grow in total to $2.4M. If my retirement goal is to generate $10K per month following the 4% rule I would need $2.5M to retire. With my current balances that would be enough to get there only looking at those two retirement accounts. I also have $50K in a taxable brokerage account and another $20K in an HSA which will continue to grow.

The main part of my portfolio I have been working to grow is my real estate portfolio. Currently the portfolio is 5 properties, 7 doors, valued at $1.2M with $558K equity. This portfolio is currently generating $4,425 per month cashflow. My goal over the next two years is to buy an additional two properties. Once I acquire them, I feel confident that I can generate $11K per month cashflow provided they are paid off in full. This will take me an additional 4-6 years to accomplish. At which point I will have exceeded my retirement income goal without even factoring in my retirement accounts.

My logic is that I want my wife and I to have the ability to retire early. I feel this will be possible somewhere between my mid to late 40's. If I do, I need income to get me to 59 ½ because I can't access my retirement accounts until that age. I understand that I can use the principle from my Roth IRA's but for the most part that money is locked away without paying penalties to access it. By investing in real estate, I can use the cashflow now. By shifting all that money, we were investing in our retirement accounts to real estate it has significantly increased the speed at which we are growing. If I am putting that money to work with investments and not spending it what's the difference if I use it for real estate to fuel my retirement or my 401K. Don't get me wrong I am sure I will put my money to good use in the future, but my thoughts are if my real estate portfolio can fund my lifestyle in retirement why do I even need the additional $2.4M dollars when I turn 59 ½? At that point I am delaying retirement just to grow my accounts to a size larger than I need, that doesn't make sense to me.

I understand that by stopping those tax advantaged accounts I could be missing out on additional growth over the long run. My wife and I are also missing out on free money with our company matches in our 401K’s. For me I feel shifting to real estate is the right play which is why we made the pivot last summer, but I am open to other perspectives. I am sure there are things I am not thinking. If anyone has any other tips and tricks or things they have learned through experience I would be happy to get your thoughts.

Because I run my business myself my expenses are little to nothing above and beyond my mortgage and escrow payments.  We do the book keeping and self manage our properties.  The only monthly expense my business takes to run is my monthly cell phone bill for $27 per month.  With only having 5 properties and them all being long term buy and hold we have found this to be very manageable.  It might take 1-2 hours a month to manage the business.  Obviously when things break and we need to manage contractors or go over personally to do repairs that time goes up significantly.  That happens in spirts and to be honest it doesn't happen very often.

As for my loan they have been 30 year conventional financing, not DSCR loans.

I have been working with many people who are just trying to get started with real estate investing. I won’t pretend to be an expert by any means as I have only been at this for 4 years and have 5 properties, but I thought it could be helpful to share actual numbers and different ways to look at them. I find I learn best when I can see real examples vs. hypotheticals. The data below is from an actual rental I purchased March 2024 in Sheboygan, WI. At that point in time the market was still hot for properties at my price point in my buy box. This property was also an on-market deal.

The property was a 4 bed/1 bath single family house. When we purchased it, it was fully renovated and set up as a 5 bed/1 bath Airbnb. We decided to market it as a 4 bed/1 bath with an office.

Listing Price - $199,900

Property Taxes - $2,230.13

Assumptions

• Purchase Price $230,000
  • In this case I had seen similar properties selling for $225K - $250K so I felt the property was listed low to drive up interest. Also, at this time I had seen properties selling for 10 – 20% over ask regularly.
• Interest Rate 30 year conventional 7%
• Homeowners Insurance = $1,000 annually
• Rents = $1,800 per month

When I looked at those assumptions, I would need to put down $80,000 on this house to get it to hit my cashflow goal of $500 minimum per month which equates to 35% down.

• Total mortgage + escrow = $1,267.13 per month with rents at $1,800 my monthly cashflow is $532.87.
  • From my experience, after taking out vacancy and maintenance costs you are left with around 73% of that total cashflow number once the rental is established.

People have asked why a $500 per month cashflow goal. The answer is its personal preference. I want enough money coming in so the business can sustain itself when issues occur with maintenance or vacancy.

If you wanted to do this with only 20% down ($46,000), which is all you need for a conventional loan, here is how the calculations change.

• Total mortgage + escrow $1,493.33 per month with cashflow reduced to $306.67 per month.

I prefer to overestimate purchase price, interest rates, and homeowners’ insurance to be conservative. In the same token I go on the low end for rents to stay conservative. If the numbers work when I run them, I know reality should only be better.

Actuals

• Purchase Price $227,500
• Interest Rate 30 year conventional 6.375%
• Homeowners Insurance = $920.21
• Rents = $1,900 per month

Total mortgage + escrow = $1,182.58 per month with rents at $1,900 my actual cashflow is $717.42.

Additional numbers behind the deal

• Total cash to close = $87,475.55
• Down payment = $80,000
• Homeowners Insurance - $918.36
• Rate Buy Down 1.283% - $1,892.43
  • We paid to lower the interest rate by 1.283% over the course of the 30-year loan. This wasn’t a required expense.
• Property Taxes - $926.88
  • We put in the offer to pay the full years property taxes vs. split them at the time of the sale. Normally you are responsible for the portion of the year you own the house, and the previous owner is responsible for the time they owned it. We put this in our offers to differentiate ourselves from other offers and we can write off this expense as a tax deduction. This increased this cost at closing.
• Additional closing costs fees - $3,737.88

I share this to let beginners know that you need more than the down payment to close. Some of my costs above are optional but not all. I normally estimate an additional $5,000 to close.

Hopefully this information helps those who are wondering about costs and deal analysis just trying to get started. If you are looking for more details or need help getting started don’t hesitate to reach out. I have built calculators to tackle more of the heavy lifting for me at this point.

 Marcus, thanks for reaching out and providing your perspective.  For my wife and I who have involved full-time careers with a 8 and 12 year hold at home time is something that is more valuable to me then money right now.  That is why flipping, short term rentals, and other strategies aren't as appealing in the short term.  That may change with time but short term we are focused on buying quality properties and renting long term.

3 properties ago I purchased a really solid property but it was dated.  It had new water proofing done in the basement, a new roof, new windows, etc....  Solid bones to the property.  We redid the flooring in the entire house, paint, new light fixtures along with completing a full bathroom and kitchen gut.  We moved plumbing, adding electrical, and added new appliances in the kitchen.  I like to be busy and feel I am pretty handy so my wife and I did all the work ourselves for the exception of hiring out carpet install and dry wall for the bathroom.  I ended up working at the rental like 6 hours a day after work and 12 hour plus days on the weekends June through August of 2023.  My wife was very clear with me that we aren't going to give up our limited summers with our children to work on the rentals.  It was at that point that we decided to pay a bit more and put more money into our deals for properties that only needed cosmetic upgrades or maybe a few weekends of work vs. rehab projects.

Again everyone's situation is different and for those who have more time then money this strategy might not be best.  Lord knows our strategy has evolved overtime but this is where we are at today.

 Hey Matt, I actually don't invest in Milwaukee but it's the closest big market to my location.  I invest in Sheboygan County.  We have 3 properties in Sheboygan Falls and 2 properties in Sheboygan.  It's about an hour north of Milwaukee.

 Bryan, thanks for sharing.  I will have to check out that!

I wanted to share my strategy because it's working for us and it's not one that I hear talked about much.  It's boring and takes more capital so it's not as exciting but it has been effective and I feel its something everyone can do.  With this strategy we are getting traditional financing and buying on market deals.  I subscribe to the "Small and Mighty Investor Strategy" of Coach Carson.  I personally am not trying to build a portfolio of 100 doors, I am trying to build a portfolio big enough to support our ideal lifestyle.

 - We start with the property vs. the numbers.  The property needs to be one we are proud to own and preferably would be willing to rent out ourselves.  We have found that slightly higher end properties and ones that align with our likes attract tenants that we can relate to.

 - Once we like the property we run the numbers on rents.  We use rentometer.com and knowledge of the market to establish what we feel we could get for rents.

 - Next we run the numbers on cost.  We put together a purchase price, interest rate, insurance cost, and property taxes.  When I run my numbers I round my interest rate and insurance costs up to build in a small safety net.

 - Next I use a calculator to determine how much money to put down.  My goal per property is to generate a minimum of $500 cashflow per month.  This means I may put down 20%, 25%, 35% to hit my goal.  Yes this leaves more money in the deal but it reduces my risk and ensures I can remain profitable in a down market.  I have learned that any property can cashflow but not when you are looking to put the least amount of money in the deal.  Again not for everyone but works for us.

 - Last as long as I have the cash to hit my goal and I am comfortable with how much money we would need to stick into the deal we purchase it.  If not we wait till the next deal.

We have used this strategy to purchase 5 properties, 7 doors, since 2021 so I understand we are still new.  My ultimate goal is to generate $11K per month cashflow which I will be able to do with 7 properties provided they are all paid off.  Once we acquire the last 2 properties we will shift from acquisition to debt paydown.