My plan what do you think?

Question

I have a question. My goal is to have 15 rent homes within the next 5 years. my first step was to get my own primary home and I did 3 weeks ago. Now I want to work on buying a home to rent out. I asked a lender and he said I would need 15% down and of course closing cost. My question to the advanced investors that buy and hold,what should I be looking for? I know area has alot to do with a good rent house. I do not know the numbers though. What is the formula or what numbers need to work. I have read on several post that numbers have to work and that is the part that I am not clear on.

Sharon Tzib · Answer

Hi @Acencion  M. ! I'll be moving to Houston sometime this year, and I have a plan to have $10,000 in cash flow in five years. I'll be doing it through multi family investing, however, since having been a SFR investor for 14 years, I hate when my rental goes empty, all income stops. Even if you budget for it, it sucks lol!

In regards to the 2% and 50% rule, those are only rules to use when you are looking for property to quickly ascertain if they require a closer look, and you kind of need to know what's realistic for your area. For instance, some areas will never get to 2%, but it doesn't mean you can't make money at 1.25% or 1.5%. You just need to know what the norm is for your area.

The BP calculator rocks, and is a great tool, but you really should understand as an investor how to do the math yourself, since cash flow is an investor's number one goal. I'll show you how to calculate. So here goes:

Net Operating Income (NOI) = Income - Expenses

Cash Flow = NOI - Debt Service (P&I)

Income = Rent

Expenses = Taxes, Insurance, Maintenance, Utilities (if any), Management, Vacancy, Cap Ex, Landscaping/Snow Removal

Maintenance = 5% of gross rents

Management = 10%

Vacancy = Investors have different theories on this, but if you use 8-10% you should be covered

Cap Ex = 5% (if the property is old, you may want to increase this)

The other expenses you are going to have to do your research to come up with. If after doing all this, you come up with a negative number, then move on to the next deal.

You want to know how much extra cash is left over after you have paid all expenses and debt service. Most investors like to see at a minimum $100/door, but some have Cash on Cash requirements as well. To determine COC, take the annual cash flow and divide it by the money you invested (down payment, closing costs, and any rehab if applicable). Some like to see 10%, others won't settle for less than 20%. You will have to decide what works for you, in your area.

Hope this helps. Good luck!

Jerry W. · Answer

My first act is to give @Sharon Tzib a vote for taking the time to spell things out completely.  One small thing I have to add @Acencion  M. is that I have no idea where the 15% down came from.  With some FMHA loans you can get 3.5% down, or mostly 20% to 25% down, have never heard of 15% down to get a loan.

On another note read up in the Learn section above.  It is loaded with great information.  You will have to read a lot before it all soaks in.  Once the pieces fit together it will become much easier.  You can also set out some key word alerts to keep up on topics of interest like Dallas or Houston.

Charles Nguyen · Answer

Acencion,

There's a multitude of formulas you can go by and everyone follows their own  rules.  The Houston market is very hot so discounted properties are a little harder to come by; however, rental rates are very good.  Personally, I still look for discounted property and want several hundred dollars in cashflow per month.  There are a few BP Calculators which can help you with the numbers.  Make sure you understand the transaction and numbers before buying.  It can save you a lot of money.

Good luck.

Account Closed · Answer

Hi Acencion,

Congratulations on the purchase of your primary house. What a great start to 2014!!

15 rental properties would mean that you would need to purchase on average 3 properties per year. Are these properties going to move in ready when you purchase or is your plan to purchase foreclosures and then fix them? If latter, than you would need the 15% down payment for purchase plus the repair money.

As for better understanding the numbers, read more about 2% and 50% rule on the forum and that will give you a good understanding of the numbers. Every market is different, but 2% and 50% rules will be a good starting point.

Thanks and Best Regards!

Acencion M. · Answer

how can I refer to someone to where they get notified? As you can see I did it wrong.

Acencion M. · Answer

@steve endress where can I get an understanding of the different classes?

Steve Endress · Answer

Are you thinking of investing only in the Houston area?  I probably would if I were you since the market seems so good there.  I'm investing in new SFR's, they cash flow decently plus will keep their value long term.

If I had to do it over, I'd do the opposite of what I did!

START with A class, low-management rentals, then move to B and C after I have a little experience--not the other way around.

Sharon Tzib · Answer

You're welcome @Acencion  M. . Feel free to message me if you have questions - I'm happy to help.

Thanks @Mark Masiel  :)

Mark Masiel · Answer

Great post, Sharon. You make it sound so clear and easy!

Acencion M. · Answer

Sharon thank you or that formula. I need to dissect each part because I am new at this and need to read it a couple if times to get it. :)

My plan what do you think?

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