What am I missing with rental properties?

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What am I missing with rental properties?

Jared Baker
Hartford, WI · Member since 2016 · 162 posts · 50 votes

I have been thinking a lot about getting into rental properties, they seem like a good investment to allow me to retire early but also still do the things I want to do.  My question is how do you create a positive cash flow from rental properties early on?

I keep hearing on the BP Podcast and reading on the forum about how people are getting into rentals and making positive cash flow right away, or at least that is the way it sounds to me.  That doesn't make any sense to me.  (I am not very good with the numbers side of things yet, but bear with me)

If someone buys a 4-plex for $140,000 and rents each unit (lets say $600 a month) out to meet the payments for the loan and expense for the year and nets a profit of $100 a month that is only $1200 a year that someone is putting in there pocket.  Assuming they used any form of loan they will have a period of possibly up to 30 years that they are repaying the loan.

So although this is positive cash flow it is a very small amount compared to what could be earned if the property is completely paid for.  So is the idea of getting into rentals to continue to buy using financing until the small amount of net income earned is a substantial amount that can be put toward paying off the properties sooner so that maximum profit can be earned?

Hopefully my question makes sense.

Thanks for the help!

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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y

Cash flow + mortgage principal reduction + appreciation = total profit

The monthly cash flow is only one piece of the profit.  Your residents are paying down the mortgage each month, plus many properties appreciate in value over time.

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  • Kory Denny
    Inspector · Raleigh, NC · Member since 2017 · 55 posts · 25 votes
    9y

    That's a very specific example but even so... an investor who might still my invest in this property with the proper experience could still make plenty of money. Many investors look for value adding plays. Ways to make additional income and increase property values. 

    I'm not going to dump numbers on you but I will say time to start reading and learning about all the numbers that investors use to find and make deals happen. The numbers are very important to understand... all the costs associated with owning property and the understanding of the rental market in your area as well. Bigger pockets has a ton of information for you.

    Even so the ways to make money here is having someone pay your mortgage over 30 years, collect the tax benefit of depreciation, any profit from monthly rents and the property appreciation along the way. 

    0Reply
  • Jeff Lindborg
    Investor · Tucson, AZ · Member since 2017 · 3 posts · 3 votes
    9y

    not sure how you arrive at $100 a month after expenses in your example... with 140,000 property say you put down %20 and get a loan for the balance at, let's say 4% - your minimum payment is about 550 a month - in your example you're pulling down 2400/month - taking into account, say, paying water/sewer/garbage, insurance and property taxes and a buffer for repairs and such, you're still ahead of $100/month.  It helps if you're managing your own units and doing a lot of your own "day to day" repairs/maintenance of course but you can still make money with a property management company in the mix.  

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Ok so there is a boat load to learn about investing in real estate. First it is a long slow path to wealth growth. 100/door starting is a realistic minimum goal.

    Second cash is extremely valuable to a investor, minimum it has a 10% opportunity value. Equity therefor sitting dead in a property does not increase cash flow it reduces cash flow. It is only inexperienced investors that do not understand and respect that fact and believe paying off a property increases cash flow. 

    Paying off a income property is the extreme conservative approach to investing. It is cash hoarding and will only result in negative true cash flow and is basically buying fake cash flow with your own money. Paying off a property is home owner mentality.

    Positive cash flow is maximised through leverage.

    Investors set a goal of owning X number of doors to multiply their income and maximise the use of their cash. Properties purchased right can produce far more that $100/door, especially multi plex investing, allowing a faster income growth.

    3Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Cash flow + mortgage principal reduction + appreciation = total profit

    The monthly cash flow is only one piece of the profit.  Your residents are paying down the mortgage each month, plus many properties appreciate in value over time.

    5Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y

    Before you can truly understand the answer to your question, you must first learn and understand the differences between the follow:

    1 - Cash and Leverage 
    2 - Good debt and bad debt
    3 - Cost and Expense
    4 - Cash and "Cash Like Substance"
    5 - Using Partners and Not Using Partners
    6 - Time and Money
    7 - Money = Noun and Money = Verb
    8 - Plans, Goals and Milestones
    9 - Cost of your time and the cost of others time
    10 - Being Rich and being wealthy

    2Reply
  • Jared Baker
    OP
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    9y

    Thanks all for your input.  I was thinking in terms of a duplex where there is only one unit that can provide income if you live in the other side.

    So a follow up question then: So if purchasing a multi-family unit, lets say a 4-plex, an investor would take out a 30 year loan of the remainder cost after the down payment.  They would then rent out the units, only paying the minimum payment and then stash the rest to invest into another property?

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Joe Villeneuve:

    Before you can truly understand the answer to your question, you must first learn and understand the differences between the follow:

    1 - Cash and Leverage 
    2 - Good debt and bad debt
    3 - Cost and Expense
    4 - Cash and "Cash Like Substance"
    5 - Using Partners and Not Using Partners
    6 - Time and Money
    7 - Money = Noun and Money = Verb
    8 - Plans, Goals and Milestones
    9 - Cost of your time and the cost of others time
    10 - Being Rich and being wealthy

     "Cash-like substance" - LOL. That made me smile this morning. 

    Podcast Guest on Show #243
    Skyline Properties
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    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y
    Originally posted by @JD Martin:
    Originally posted by @Joe Villeneuve:

    Before you can truly understand the answer to your question, you must first learn and understand the differences between the follow:

    1 - Cash and Leverage 
    2 - Good debt and bad debt
    3 - Cost and Expense
    4 - Cash and "Cash Like Substance"
    5 - Using Partners and Not Using Partners
    6 - Time and Money
    7 - Money = Noun and Money = Verb
    8 - Plans, Goals and Milestones
    9 - Cost of your time and the cost of others time
    10 - Being Rich and being wealthy

     "Cash-like substance" - LOL. That made me smile this morning. 

     That either gets a person scratching their head, shaking their head, or laughing...or, sometimes all three at once.  You know what I'm referring to, right?

    0Reply
  • Jasmine Benford
    Real Estate Agent · Hampton, VA · Member since 2017 · 88 posts · 24 votes
    9y

    Hi @Jared Baker, 

    I am new to invest but will be going along the same route with rentals...moreso house hacking a duplex or triplex when the right deal comes along! From my knowledge, reading books and podcasts, many investors analyze the deal of cash flow. So it really depends on the route you are going...will you be living in the property? 

    ...in addition to paying down the mortgage dont forget to count for repairs when setting aside money, so I guess you would't "stash" the rest of the money for investing in another property. Brandon Turner just hosted a great webinar on analyzing rental properties.

    Good luck!

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y
    Originally posted by @Jared Baker:

    Thanks all for your input.  I was thinking in terms of a duplex where there is only one unit that can provide income if you live in the other side.

    So a follow up question then: So if purchasing a multi-family unit, lets say a 4-plex, an investor would take out a 30 year loan of the remainder cost after the down payment.  They would then rent out the units, only paying the minimum payment and then stash the rest to invest into another property?

    That works...but very slowly. Do the extended math. It's a popular way of REI, but it takes a long time to get to any financial goals you may have. What you need is a plan where you initially invest to "expand" your seed money to the point where you can reinvest that seed money over and over, but spend the profits (generated over and over) on your cash flow properties. Much faster, cheaper (free actually), and easier.

    0Reply
  • Jared Baker
    OP
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    9y

    @Joe Villeneuve Can you give an example of what you mean, possible with some numbers?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Jared Baker there is lots of good input on this thread, but I would argue the critical part is time:

    1. Rents increase over time

    2. Properties appreciate over time (generally but this is location specific)

    3. Mortgage is paid down over time

    Monetary advantage comes several ways and you are only looking at cash flow:

    1. Cash flow

    2. Mortgage pay down (tenants buy your property for you)

    3. Leverage (using other peoples money to invest)

    4. Tax advantages (depreciation and deductions)

    5. Appreciation (property can be sold for profit or refinanced to pull out equity)

    Rental properties are a get rich slow scheme, unless you have scale. Even scaling quickly has it's own challenges as financing can get harder to find. People who are trying to make a living will whole sale or flip, sometimes as a way to fund buy-and-hold purchases. You will find within a few short years that your net worth will snowball, as all the monetary advantages work together.

    The best part of real estate is relatively low risk compared to other businesses. Real estate generally holds its value our appreciates over a several year period.

    1Reply
  • Drew Bonner
    Lynchburg, VA · Member since 2017 · 61 posts · 41 votes
    9y
    Jared Baker Good afternoon Jared! I just wanted to give you a piece of mind that if you buy a 4-plex right, you will cash flow a lot more than $100 a month. Heck you will cash flow more than $100 a unit a month. We bought our first 4-plex a month ago for $198,000 on a 30 year loan at 4.7% fixed rate. The PITI (Principle, Interest, Taxes, Insurance) adds up to $1,050. We budget $50 for vacancy, $125 for maintenance, $175 for cap ex, and we pay $100 for water and sewer. All 4 units are rented out for $600/unit right now. Income= $2400 Expenses= $1500. Total Cash Flow= $900/month. So that $1200 a year looks more like $10,000 when you purchase correctly. Not to mention the property is appreciating like crazy. You got this brotha! Rental Properties are the way to go. Hope this lifted your spirits about rentals! Have a great day.
    1Reply
  • Drew Bonner
    Lynchburg, VA · Member since 2017 · 61 posts · 41 votes
    9y
    Jared Baker lol sorry peace of mind not piece of mind.
    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    Rentals are a great way to build SUSTAINABLE INCOME. Once you have enough income you can quit a job and relax. Your new job is being a landlord. Sounds easy but can be problematic as well. It is generally not fast BUT you build with each rental. Being a landlord you will have to deal with evictions, make ready, book keeping, etc but generally the time invested pays well. I would advise to stay away from rough areas. Generally speaking, nicer properties cost more BUT you get higher rents and a better quality of tenants. Leverage, OPM, is the way to achieve this but I would caution against be over leveraged. Use each rental as a building block to buy more. Take your time, be careful, and don't buy just to buy. You make your money WHEN YOU BUY. That money can be tax free at some point by using a 1031 to scale into nicer properties. 

    3Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    The saying it is not that you paid to much, but bought it to soon.  Is applicable here.  Over time most investments will become profitable.  However, I am not interested in properties that do not cash flow from the beginning. 

    I just bought a triplex for 100k and the rent is $1,800, after all expenses, I am netting around $900 a month.  Cashflow deals are out there, you just need to keep an eye out and be patient.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Mike Dymski:

    Cash flow + mortgage principal reduction + appreciation = total profit

    The monthly cash flow is only one piece of the profit.  Your residents are paying down the mortgage each month, plus many properties appreciate in value over time.

     + tax savings to boot!

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    One key ingredient that you may be missing is forced appreciation ... if you were able to pick up that 4-plex at $70k because it was run down and vacant, then spend $30k to fix it up, put tenants in there, and be all in for $100k, but the property at that point would be worth $140k because of improvements ... yes, this type of thing is a lot of work to find these types of deals and remodel them, but those are the kind of numbers that get you in the right direction, speed up your progress, and supercharge your profits.

    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Jared Baker:

     My question is how do you create a positive cash flow from rental properties early on?

    You have to buy the property at a price rent ratio (Purchase Price/Gross Rent Per Year) that enables you to cash flow. This example, based on the numbers you provided, suggest a price rent ratio of 4.9 which would be above par and probably a Class C property at 11.3% cap. 

    If the property has/had  4 rentable units at the $140,000 price, gross rent exceeds both mortgage and expenses, producing a CF of $7,328 per year. Not something you can retire on but 10 of a similar property puts you at $73,280 per year.

    The headache of managing 10 of such properties, at different locations and with a total of about 40 tenants would almost be a nightmare.. so at some point, an apartment might be less run around for same CF per year. But then, a 40 unit apartment at $1,400,000 would be about $35,000 per door -- that narrows significantly which markets you would be looking into.

    Purchase Price               $140,000
    Down Payment 25%                 $ 35,000
    Loan Amount                $105,000
    Mortgage Rate                       4.5%
    Term                30 Years
    Mortgage Payment (Month)                      $709
    4 units @ $600 each (Month)                   $ 2,400
    Gross Rent (Year)                 $ 28,800
    Expenses 45% (Year)                 $ 12,960
    Net Operating Income NOI                 $ 15,840
    Debt Service (Year)                    $8,512
    Cash Flow (Year)                   $ 7,328
    Cash Flow (Month)                      $ 611
    CF Per Unit                      $ 153
    Cap Rate                   11.31%
    0Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Account Closed Good info. How did you get your columns to format correctly? I tried, but I lose my formatting when I post. I have a comparison of two options I want to do a post side by side with.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y
    Originally posted by @Drew Bonner:

    Jared Baker Good afternoon Jared! I just wanted to give you a piece of mind that if you buy a 4-plex right, you will cash flow a lot more than $100 a month. Heck you will cash flow more than $100 a unit a month. We bought our first 4-plex a month ago for $198,000 on a 30 year loan at 4.7% fixed rate. The PITI (Principle, Interest, Taxes, Insurance) adds up to $1,050. We budget $50 for vacancy, $125 for maintenance, $175 for cap ex, and we pay $100 for water and sewer. All 4 units are rented out for $600/unit right now. Income= $2400 Expenses= $1500. Total Cash Flow= $900/month. So that $1200 a year looks more like $10,000 when you purchase correctly. Not to mention the property is appreciating like crazy. You got this brotha! Rental Properties are the way to go. Hope this lifted your spirits about rentals! Have a great day.

    Your vacancy and capex numbers are pretty low. That $50 a month assumes one unit vacant, one month per year. I would plug in 10% for a fourplex. Vacancy includes not only rents, but turn over costs like paying electric and getting the property rent ready. Capex may seem like a lot at $175 per month, but that is only $2100 a year. That would barely replace carpet or an air conditioner in a single unit. Let alone replacing a whole roof, siding, parking lot, etc. Of course if your property is new construction, then low CAPEX may be fine.

    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Account Closed:

    @Account Closed Good info. How did you get your columns to format correctly? I tried, but I lose my formatting when I post. I have a comparison of two options I want to do a post side by side with.

     I happen to use a different type of spreadsheet called Gnumeric. I guess the data is read differently when posted.

    0Reply
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