Cashflow, Vacancy, late fees?

Question

Further Analyzing rental property. Purchase price $50-60k. Low income area, not a warzone. Not counting on appreciation. Rehab 15K.

Here's my #'s

Home rents for $900 per month (5-10% below MR). Vac 10% ($90), maintenance 5%($45), capex 5% ($45), property tax $140, insurance $91, property mngt 10% ($90). $501 + Mortgage $235 (20% down on 60k loan) = Total expenses $736

Monthly Cash flow $164 ($1968 yr)

Cash to close (3% closing + rehab + downpayment) $28,800

Coc 6.8% ( 11% if rented @ market rent)

Equity- $38K

Couple questions I hope to clear up:

Assuming rehab and ARV are spot on....

1. Are my numbers too conservative, making me pass on rentals that can really pay off

2. If I assume a high vacancy, can I also assume at least 5 out of 11 months incurs a 5% late fee each yr? ( $225 yr)

3. Can I calculate pet deposit $200 or $25 month pet service in analysis. Or just a bonus assuming I will have to change the carpets yearly anyway..

Thanks.

Sterling White · Answer

Instead of carpet @Scott Titus have you considered laminate flooring? Last longer and depending where you get it from can cost just about the same if not just a little more. Numbers look good however as pointed out cap ex maybe a little low

Michele Fischer · Answer

We change carpet every year, if our tenants only stay a year.  If they have pets, the carpet is not usable for the next tenant.  We try to install laminate if we have enough time during the turnover.

I would not include late fees or pet fees in analysis.  Our vacancy rate is 3-5% some years, but averages 1% over the long term.  Our turnover costs, however, average 6%.  I don't think of it as capex because it is redoing the same things over and over, not truly improving the property.  Our maintenance costs average 5%.  Plus landscaping/lawn care - even you think the tenants will do it, you will do it on some level in low income areas.  I don't think your numbers are conservative.

Michele Fischer · Answer

Scott, I have not yet needed to incur legal fees, we have done cash for keys.  Which has been minimal cash in the grand scheme of things and ends up in the turnover costs.

Correct on the numbers.  Except our PM is only 7%, quite a steal!  I don't specifically budget capex, we just reinvest the profits back into the property when they need it, but better to build a dedicated reserve.  We have roofs, foundation, sheds, etc. as larger items, but the smaller items fall into expensed turnover costs with the new IRS rules, like used appliances and some carpeting every few years.

Nick Stoddard · Answer

are you sure the roof is only 12 sq's? That would be a really small 2bdr house.

Also 220 a sq for tear off and replacement is pretty low, in Kc it's going to run

$300 a sq.

Scott Titus · Answer

Yes I have been looking at some nice pergo laminate. About a $1.50 a sqft. The carpet was appealing because Lowes Will install it for $97 plus materials.

Scott Titus · Answer

You bring up a good point. To clarify, when you analyze a potential rental, you include the following:

Vacancy 4%, Cap Ex 10%, Turnover 6%, Maintenance 5%, property mngt 10% + PITI = Total Expenses.

To further that, should I include legal/eviction fees of x %?

Scott Titus · Answer

@Ken P. very good point on the Cap ex. My initial equity after a 15K rehab would be 35K. I am more concerned with building capital initially on the first few investments. I'm open though with exit strategies below...

On capex: Driveway is good, roof may go in 3 years..roughly 12 square @220 a square tear off and new replacement ($3K), Maybe add that to rehab cost? Less COC but more cashflow….

Strategy 1:

3 Year Hold. Cash flow 7-10K in that period and sell it for Market value (38K equity)

Strategy 2: Lease option for 3 Years, get an option deposit, a little more in rent (10%) 10-12K cashflow (less maintenane/vacancy) and Still sell at market value.

Strategy 3: long term properus cash flowing vehicle for wealth.

P.S-  Still a newbie, feel free to rip apart my logic.... : )

Ken P. · Answer

CapEx is way too low unless this house is freshly rehabbed, and even then  assumes that you have an exit strategy getting you out of the house before anything major goes wrong. How does CapEx  that little pay for roof replacement, driveway replacement, etc.?

Scott Titus · Answer

I have experience in Property Mngt myself and will definitely NOT pay a property mngt company; however, In the event I wholesale the deal on a double closing, I want to assume the investor/Landlord has 20 properties and will need this expense included.

Brent, I will continue my education on this subject, in regards to carpets/paint, I am banking on (somewhat) worst* case scenario and yearly turnover.

Also a side note- I have a home warranty on my main residence. The company offers the same package on rental properties. $49 a month with a $60 service fee per occurance.

If Furnace and AC take a dive, I pay $60 to replace both.

I have the reserves to cover them out of pocket, but assumed this is my Capital Expense line on the P&L.

Brent Coombs · Answer

@Scott Titus, "I will have to change the carpets yearly"? Who does that?

On the other hand, you might be wise to pay for a Property Manager. Those Pet and Late Fees issues can EASILY be explained by those who know their stuff.

Wise to be conservative. Put in your conservative Offers on LOTS of properties. (If you start getting too many acceptances - maybe you've not been conservative enough)! All the best...

Cashflow, Vacancy, late fees?

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