Attn Bper: Bens $1000 a month rule - learn it, love it, leave it?
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votesOriginally posted by @Matt R.:
Originally posted by @Dawn Anastasi:
I do not agree with it. Only one of my single family homes makes over $1,000 in gross rent each and I still make money on them.
Dawn you are savvy enough to be one of the exceptions. Would you think this is generally a good rule for newbies starting out?
Generally, anyone new at anything is going to make more mistakes than someone more experienced. However, newbies to real estate on Bigger Pockets have access to thousands of more experienced investors to help them with deal analysis and any questions they may have. So it's like having thousands of mentors at your fingertips. Plus, there are many people who are willing to work with someone locally just by having that person offer to buy them lunch or coffee.
Without having the internet, and sites like this, newbies didn't have as much of a support system. So now, someone could take on a project like this. It's just important to know your own limitations.
126 Replies
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
right now I am playing in that 100 to 175 fix and flip retail sand box.. in 11 states my guys and gals average reno to make these homes sell for 100 to 175k is right at 35 to 40k
Plus you just don't have a lot of retail acitivy at all at 100k and under.. those that can afford a owner occ home have good credit decent income and they will buy up in the market place not down.. now that is generally speaking but its also my personal experience in the market place the last year
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
@Jay Hinrichs - totally agree. It costs the same to do $100,000 as it does $175,000; very little variance. It costs very similarly to do $50,000 (if you are going to do it right), which is why you can't afford to do it right - which is why it's a PIG :)
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
keep in mind though one persons pig is another persons treasure..!!
However each of these mid size to bigger mid west cities have many folks that own hundreds of these homes and make a very nice living with this commodity.
Not everyone can be a big boy syndicator like you are...
- Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes11y
Jeff S. from Oregon sounds like an Honest man, and this is coming from a property manager of over 30 years. Jeff " just don't care for property managers ?"
As a member of an association of income producing property owners, I like managing my property and money too. However, with hundreds of properties, Owned by people across the Country. Jeff would have a hard time at want he is doing, and pray for an organization, like the one I'm a member.
I love my 45k (all in) houses that rent for $850. Not pigs I suppose as they're worth 15 to 20K more as soon as they're rent ready. They probably won't be 145K houses in my lifetime but I can certainly see them being 100k houses someday.
I agree with so many of the folks saying these costs are way too high for capex as well. If you're paying retail for any of this work you're paying way too much. I had an entire house re-plumbed for $1000. New roof for a 3/2 and the standalone 1 car garage is 4k. Etc etc. if you spend the time developing relationships with quality contractors it's easy to do.
Anyway... This thread reminds me of something I read on BP many years ago that I think is very true. It's hard to make landlording work with one house. Things will come up that eat an entire years rent. However, once you have a handful, it's easy cheesy. I stay proactive and basically plan on doing a big chunk of work to one of the rentals each year, typically during make ready. New roof? Needs new flooring? No big shakes... I'll spend the money without complaint and the other rents will keep building cash for more acquisitions.
Also, because HVAC was mentioned a few times as well as the issue with filters.... I'd encourage you all to get on a twice yearly service plan. I get discounts on all labor and parts and my actual emergency calls have nearly disappeared. The filters are changed at least twice a year this way too.
Best,
- Chuck
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
Well, @Jay Hinrichs - it is in fact debatable whether they truly make money. Unless we sit down and perform a rather sophisticated analysis of all of the cash flows, including the exit, discounted appropriately and honestly to net present buying power, we just do not know if we are indeed keeping up and getting ahead...
Though, if we think we are doing well - we are doing well. There is a lot of power in that line of thought, indeed. But, for me, it's a lot easier not to do a deal, than to do one that might break even or give me 3% ROI in real terms. I tend to think, Jay, that I can leverage my brain better than that...:) This, by the way, works the same in 120-unit buildings as it does in SFR - rules are different, but perspective is the same, or at least it should be IMO.
re: rental not going to sell for retail
Now that I would definitely agree with. And I understand what the rule is trying to get at. I'm not one to push that 30k house model. That being said, I know some people that made out like bandits using with that model and I know there's money to be made. But I also know its a slippery slope to go down that path too because you can also take a beating when you're dealing with low income areas and houses.
But the one thing I think some people forget is that the profit margins on those houses can actually support the kind of cap ex that I think reality would allow for. And the point of entry is much easier too.
At the end of the day, I think it still comes down to numbers. If the 30k house rents for 800 and your PITI is 400, then I don't see how thats any less likely to make money than someone who has a 130k house that rents for 1300 and their PITI is 900.
Still leaves you with the exact same gross profit number. And while maintenance and vacancy will likely be greater on the 30k house, the vacancy hit is off a smaller number too so that should help even some of that out.
i.e. 5% vacancy on 1,300 - 65/mo
5% vacancy on 800 is 40/mo, assuming higher vacancy, then 10% on 800 is 80. Not as big a jump as you'd think. 15/mo.And, lets be honest, the level of finish you have to have in a 30k house to keep it rented, is going to be much less than you'd have in a 130k house. Not necessarily on the big stuff - if the roof goes, you need a new roof, etc.
But on the little stuff, I think you let some of that go a little more. i.e. Big scratch in the countertops - maybe that can stay in a 30k house.
@Account Closed not quite sure what you are saying but I meant no harm. I have a friend that is a PM and I understand what he needs to do to stay in business.
The manager comment was in regards to what I have observed is that their focus is ego driven and looking good is more important to many, than is the end result. In other words I can look like a fool, a blumbering idiot when I do a project but it is with the end in mind. The results are what counts for me, not how cool I look doing it. Having worked in a bureaucracy where the managers don't give a rip about the future of the organization, only their own power and ability to control those below them, has given me a unique perspective on managers of all kinds.
I could go on a long time about this nonsense but the thing I like is calling the shots and being responsible for what happens. At the end of the day I have to believe that what I have decided was not that bad considering my level of experience and value system.
- Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes11y
Originally posted by @Jeff S.:
@Account Closed not quite sure what you are saying but I meant no harm. I have a friend that is a PM and I understand what he needs to do to stay in business.
The manager comment was in regards to what I have observed is that their focus is ego driven and looking good is more important to many, than is the end result. In other words I can look like a fool, a blumbering idiot when I do a project but it is with the end in mind. The results are what counts for me, not how cool I look doing it. Having worked in a bureaucracy where the managers don't give a rip about the future of the organization, only their own power and ability to control those below them, has given me a unique perspective on managers of all kinds.
I could go on a long time about this nonsense but the thing I like is calling the shots and being responsible for what happens. At the end of the day I have to believe that what I have decided was not that bad considering my level of experience and value system.
Just noticed Jeff's comment to my Post. I didn't take the comment as meaning any harm or mean spirited. I was trying to explain a way of land lording with centralized operations, funding, personnel, and purchasing. Non profit member based associations of hundreds of land lords is a bureaucracy of a sort but, when the organization is a Community Housing Development Organization with a membership of those actual property owners, the managers are also members and property owners. The members enjoy the fact that their one, two or four or five properties are handle like they were owners of hundreds. We are all managers invested in the future of our company as association members.
An individual Land Lord can't benefit from governmental community "BLock Grants", funding of rental updates through Foundations, and Grants. When you buy a Gallon of paint, as an individual you don't get the break we have of the cost of buying 50 Gallons, nor do you have crews doing work paid by the organization. I could go on and on about benefits because it is not nonsense, its good sense.
- Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes11y
Originally posted by @Ben Leybovich:
It costs very similarly to do $50,000 (if you are going to do it right), which is why you can't afford to do it right - which is why it's a PIG :)
Ben, I and many other more experienced landlords are disagreeing with your underlying assumptions about the costs you used. In my area $30k can get a decent 3 bed house. Your repair/replacement costs are far higher than I pay. Just as one should look for a good deal on a house you should look for better prices. I had a new roof installed once for $3K. As for windows and cabinets we shop at Habitat For Humanity stores, Goodwill, etc. and get things for pennies on the dollar. It is good stuff too. I got a new Anderson insulated window for $75, and just had to make the opening a tad larger to accommodate it. We know of a plumbing store in Detroit that has good discounts on hot water heaters. Any appliances we buy are used. I could go on and on. I agree with Dawn Anastasi and others. If you look for deals you can find them. I also firmly agree with the pro PEX users over copper. It is a great invention for the DIYer like me.
But yes, if I could afford the +30K houses and get $1K a month I would love it. Only two of my houses get that now. I keep track of every dime I spend and make in Quickbooks, and my "pigs" are all cash flowing fairly well except one where we had a sewer disaster and had to spend $3k for excavation.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
What would happen if you had a disaster like the one with the sewer every year at one of your properties? Are you prepared for it? Something like this happens at least once per year in my portfolio - seriously!
The thing is - go ahead and cut my numbers in half, and then project the next 5 years relative to the worst-case. How's it look? Steve - if you really and truly set enough money aside so that your portfolio is bullet-proof to those $3,000 days, you will realize that there's no CF left...
There's money in the bank today. Partially because you don't put enough away. Partially because you self-manage. And partially, because you take the time to look for bargains at the Habitat for Humanity. A turn-key buyer will not be able to do any of those things. And even in your case, while there seems to be money in the bank today, how many $3,000 days before there's pain?!
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes11y
To sum this up, Ben has his "facts" and many others have their "facts". Ben's stated facts say copper pipes wear out and he has recurring (20 yr.) maintenance to replace his copper pipes with other copper pipes. My view is a little different, and in fact I would never put copper in any property when other material (PEX, CPVC) exists... and like foundations, I've never seen copper pipes wear out and need to be replaced after 20 years.
So Ben can't make money on $700/month rent. Period. That's fine. My company can. And we do.My SDIRA does too. $700 rent, 5-7 year expected hold, all new 'systems' (but no copper pipe nor foundation replacement;) in up front, REO discount purchase (at $35K), one tenant. I've had brokers tell me "you can't sell your own property" and "You can't manage it, that's against the law." Well, that's their reality and their "facts". Not mine. I chose the manager and terms. If they don't work, I self manage until I get another.
Disclosure: My only turn-key properties are the ones I create for myself.
I've seen and heard (some in posts here on BP) that (paraphrased) 'You can't get property that meets the 1% rule here.' Well, they can't. I can. And I did. 2% Rule in fact.
Ben's worst cases? House burns down. Yes, that has happened to us. Tenant dies. Yes, we've had that happen. Suits. Yes. Car through property. Yes. Tornado destruction. Yes. Vandalism(s). Yes. Flooding. Yes. Ben, get and keep hazard insurance. Some people get new appliance insurance. Not that we do, but there are assurances against your disaster scenarios. Someone wrecked one of our fleet vehicles. Disaster? No. Insurance. Turns out the culprit (other driver, but no-fault kicked in) was covered. If he wasn't, we have uninsured motorist insurance protection. I'd advise Ben gets that too. But only make a claim when it makes sense. $86K fire. Makes sense. $500 theft... no.
No question in my mind. Many, many people make $30K-ish properties work profitably, even where I am. Especially those who convert the 'pigs' into 'work horses'.
- Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes11y
Originally posted by @Ben Leybovich:
There's money in the bank today. Partially because you don't put enough away. Partially because you self-manage. And partially, because you take the time to look for bargains at the Habitat for Humanity. A turn-key buyer will not be able to do any of those things. And even in your case, while there seems to be money in the bank today, how many $3,000 days before there's pain?!
Ben, I understand what you mean. So is it better to buy one house for $100K and get rent from $1100 to $1200 or buy four houses for $25k each and get $650 to $720 a month?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
@Mark Forest and I do. This also will drive you CCR and IRR.
Naturally, the presumption is that there will be appreciation - that's why you are paying more. If not, buy a 4-plex instead :)
- 11yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Here is a slightly different scenario for you - a passel of hogs if you will.
We stumbled across a 4-unit- with potential for a fifth unit - which is an REO where the property was taken partway through a renovation - one unit is rented (500/mth), the rest are vacant.
We can acquire this building for <15K/unit and have it rent-ready for <22K/unit (generous contingency, which would allow the 5th unit to be brought on-line if not required). Once repositioned, the property will generate $2200 - 2400/month in revenue ($2600 - 2700 if we add the fifth unit).
Allowing for 60% operating costs (generous as tenant pay all utilities save water/sewer), that leaves $880 - 960/month, or ~10.5K - 11.5K/year. (13 - 14% CoC). The (M)IRR is not wonderful, though it gets better if/when we pull some/all our capital (and probably more) out 12-18 months down the road ...
We anticipate no appreciation - in fact, we see the asset as disposable {though preferably after 5-8-years}.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
What discount rate are you using in your MIRR? Since you won't initially have any debt against this?
- 11yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Ben Leybovich:
What discount rate are you using in your MIRR? Since you won't initially have any debt against this?
My opportunity rate of 6% - the funds are generating 5.75 where they are parked at the moment.
- 11yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Ben Leybovich:
Nice, @Roy N. - just don't buy pigs :)
Ben,
This is a drove of pigs - 4 (maybe 5) little pigs under one roof. My {antagonizing} point was that every once is a while a little pig (or 4) can be good {even for those of us who don't eat them}.
Assuming we do not refinance and pull out our funds, once this pig cash-flows back the repositioning costs (<3years) plus one year, it could fall down and the land would be worth as much (maybe more) than our entry.
A disposable pig, can make cents.
- Real Estate Investor · Fenton, MI · Member since 2008 · 946 posts · 153 votes11y
Originally posted by @Ben Leybovich:
@Mark Forest - you are looking at this in 2 dimensions: PP vs. CF. There's more to this.
Purchase price would be the same. The assumption is that at the time of liquidation, you'll generate capital gains on the quality asset, and none on the pigs. So, the question is: will there be enough cash flow on the pigs to organically drive the IRR, without appreciation?
I appreciate your extended answer, and you have given me something to think about. However one of my pigs I am thinking about that I purchased two years ago for $24K is a nice 3 bed north of 9 Mile (8 Mile is Detroit proper. In the Michigan suburbs everything is gauged by how close you are to Detroit) that comps indicate is worth now about $32K. These small pigs are indeed appreciating fairly dramatically. Will that continue? I don't know. However I would not say that these $30K houses do not grow.
- Property Manager · Bixby, OK · Member since 2015 · 52 posts · 13 votes11y
I think if you have a rental that rents for $`1000 or $500 and cash flows the same dollar amount or rate of return it doesnt matter what the rent rate is. I think if you're going to have a rule of thumb it should be rate of return or monthly cash flow or both. Gross rent doesnt meant much
- 11yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
Originally posted by @Roy N.:
Originally posted by @Ben Leybovich:
Nice, @Roy N. - just don't buy pigs :)
Ben,
This is a drove of pigs - 4 (maybe 5) little pigs under one roof.
Piglets, then?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
Originally posted by @Dawn Anastasi:
Originally posted by @Roy N.:
Originally posted by @Ben Leybovich:
Nice, @Roy N. - just don't buy pigs :)
Ben,
This is a drove of pigs - 4 (maybe 5) little pigs under one roof.
Piglets, then?
Guys - closed on the refinance of my Symphony deal yesterday. Put $100,000 on ht balance sheet. Added about $1,500 to annual cash flow through lower debt service.
What folks need to understand is that apartments are not the same thing as SFR. $40,000/door in apartments is a much better quality proposition, in terms of desirability, than is a $40,000 SFR. $600 rent in an apartment is not the same thing as $600 rent in an SFR - we are talking about totally different segments there.
$40,000/door in apartments buys infinitely better location and attracts infinitely better qualified tenants than $40,000 SFR. There are efficiencies in apartments in terms of CapEx that just aren't there in SFR. It's apples and oranges to compare the two.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes11y
Well, another thread that made a rope that is long enough to hang any newbie based on assumptions.
I stopped reading the blog when I saw the $700 water heater, for that I'd have 2 40 gal. heaters on a looped system, who would do that in a 30K property, probably doesn't have a oversized Jacuzzi !
There seems to be no future value applied to the Capex, oil prices can drive the price of a roof up 50% in a few months, may not be the best time to replace but repair. Saying material prices fluctuate beyond cost of living guesses in a pro forma, so there should also be a +/- factored.
This is simply one model, no a rule not even a consistent theory, we don't have any SFR that rents at 2% in the area. Apartments at 40K a door would be up scaled somewhat, coming closer to 2%, but I'd disagree that "all" apartment dwellers would not go to a lesser expensive SFR, they certainly do, especially first time homebuyers and tenants that want the "Green Acres" life style.
Also why landlords need to rotate their inventory, I'd never hold a rental for 20 years, generally, 7 to 12 years is a window of opportunity to move on. That's before the roof needs to be replaced and still has a decent life left to sell the place with.
Good job, Ben, I encourage everyone to learn to assess and value each property in the market they are dealing with instead of assuming your performance will be replicated someplace else, which just goes against the laws of economic factors of RE. :)
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes11y
Yes and no! How's that for a definitive answer. I agree that there are efficiencies with apts.
However, I also believe from doing this for decades and 800+ deals later that there are efficiencies with SFR also. Like:
1. Tenants stay longer, reducing vacancy costs, and fix-up between tenants. I have 30 yr tenant, and 20, 17, 15, 12 yr tenants.
2. I provide less appliances with SFR, typically only a range, no frig, no washer, dryer, no windows A/C. Less appliances means less repairs and replacement costs.
3. In all my Apts, I supply water, sewer and trash. I even have some units where I supply heat. (Oh, dread!) In SFR I never supply heat or water, seldom supply trash and sometimes supply sewer. Reduced utility coverage means less costs for SFR.
4. SFR tenants take care of snow removal (I think we've had snow on the ground continuously for 2 months, still here!) mowing lawns, planting flowers, and minor maintenance. Less maintenance costs for SFR.
5. Surprisingly sometimes SFR tenants, particularly long term tenants want to make improvements to the property on THEIR nickel. I've gotten a large 5 bedroom house re-carpeted. One SFR tenant had a deck professionally built. One tenant had a $13,000 "Sports Court" built. One tenant wanted a specialty shower. One tenant didn't want an replacement electric hot water heater but a more expensive oil HWH. All these project were done at no cost to me and totally paid for by the tenants. That just doesn't happen in apts.
6. Apt tenants have a different mind set of getting a bundle of services included in their rent. I've even had Apt tenants call me to replace light bulbs inside their unit. SFR tenants have a different mind set of doing more themselves, more independence, and more home owners in training.
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