Asset Manager · Miami , FL · Member since 2015 · 36 posts · 7 votes
Hey BP -
If I invest money into the rental units I have my ROI will increase to 9% and my cash on cash return will decrease to 24%. If I leave the rental units "as-is", I will get a 7% ROI with 50% cash on cash return.
What is better? Do I leave it alone or do I put money into the property?
@Kathleen Rothenberg Unfortunately your statement is too broad to respond to. It would all depend on the location, type of market, type of building and your hold strategy. I can only say if in your market you can attract a better type of tenant with a fixed property then with an "as is" one, it might be worth your sanity to do it. One nasty eviction and your numbers are not going to look as pretty. (Depending on location here in Chicago it's up to 4 months)
On the other hand, if your tenants are going to destroy anything nice you put into the place, stick to "as is". I have heard horror stories from the South Side where tenants walked out with kitchens and toilets.
If you have multis are they selling fixed? How long does it take for them to sell? What are your market trends? I would check Marcus & Millichap for real estate outlook. I stumbled onto them by accident and thought they were good.
Single families are easier but no one has a crystal ball. I'm fairly new at this by the way, but thought I'd give my 2 cents.
@Kathleen Rothenberg Unfortunately your statement is too broad to respond to. It would all depend on the location, type of market, type of building and your hold strategy. I can only say if in your market you can attract a better type of tenant with a fixed property then with an "as is" one, it might be worth your sanity to do it. One nasty eviction and your numbers are not going to look as pretty. (Depending on location here in Chicago it's up to 4 months)
On the other hand, if your tenants are going to destroy anything nice you put into the place, stick to "as is". I have heard horror stories from the South Side where tenants walked out with kitchens and toilets.
If you have multis are they selling fixed? How long does it take for them to sell? What are your market trends? I would check Marcus & Millichap for real estate outlook. I stumbled onto them by accident and thought they were good.
Single families are easier but no one has a crystal ball. I'm fairly new at this by the way, but thought I'd give my 2 cents.
Ultimately your entire return cannot be calculated until you sell the property. The best metrics Internal Rate of Return (IRR) but that takes into account future increases which is at best an educated guess.
To Wayne's point "cash on cash" is the cash return on the cash invested. Isn't that ROI?
We don't know what number you're using as your NOI. This looks like an FHA owner occupied, with the 3.5% down payment. You will having closing costs and prepaids of about 5-6%. I assume you realize you'll also have upfront (1.75%) along with monthly MIP(.85% of loan/12 months). Not sure if you have repairs in there, and $1000/year for capex looks low.
If you don't NEED to put another $40k into the same investment, how about just putting it into ANOTHER one? I think you'll find that the long term numbers will favor: another one! Cheers...
@Brent Coombs I agree. I was going to use 0% interest credit cards to do the repairs but I will instead save the money and live in one of the units while I save up down payment for another investment.
My two cents is that bulletproofing rentals is a good long term investment. If the bathrooms need new toilets, vanities, tubs, etc. then it's much easier to do this up front, or if/when they are vacant. If the repairs/upgrades are needed CapEx and necessary replacements, I'd do what I could.
If they don't "need" the investment, but you can delay it and reap the reward later (like before a sale) or it's purely cosmetic and because you want granite or nicer stuff, I just remind myself that it is not for me to live in, so it just needs to be safe and relatively clean.
If you do it on 0% interest CCs, how would you pay it off in a year? Put all the cash flow into paying them off? I'd rather have cash saved for replacement and operating reserves first than to put everything on credit.
Again, it comes down to needs vs wants. Do these units need investments? If yes, get them done efficiently. If no, make sure they are as bullet proof as possible with what you've got and save and re-invest.
@Luke Grogan Thanks for the input. You're right...the units don't need anything and the current tenants pay on time and keep their units very clean. So, don't touch what's not broken and just keep my replacement reserves account building up for when I do need to make a repair/improvement.
@Wayne Brooks The numbers are tight and I wasn't sure if I wanted to share them with everyone. But it's a learning experience and for my current situation it helps me get one step closer to my financial goals.
Here is my 2-year plan and numbers:
Currently, I am in debt: I have 0% interest on my current credit cards and have 18 and 21 months (two different cards) to pay it off before the interest is jacked up. That is going to cost me $700/mo (after 18/mo I pay $300/mo) to get this all paid off.
When I move into one of the units, I will be paying half what I normally pay in rent, saving me $900. That money is going to pay off my debt. The extra income, the building brings in will be set aside for repairs, vacancy loss, and savings to buy another building. I have two years to go before I have no car payment and no credit card debt.
Once I move out of the unit, I will rent it at market value, hopefully, it will be higher rent at that point. If I feel the market has increased at any point, I will have an appraisal done and hopefully, remove the PMI.
The owner is paying for closing cost and pre-paid fees/expenses.
I don't know what the trash or water bill will be...I am guessing on those numbers.
@Kathleen R. I see 10% for capex, but nothing for ongoing/turnover repairs and make rent ready costs. With washers and dryers that number will increase a bit. And just a note, on FHA you can't ever remove the MIP, it's for the life of the loan. I didn't see closing costs (5-6% including prepaids), or mention the seller was paying for them.
@Wayne Brooks, Owner/Seller paying the closing was mentioned.
@Kathleen R., usmortgagecalculator.org comes up with $289.90/m PMI, = $3480/y.
On the same site, Property Taxes = $364.58/m, = $4375/y. I don't know how generic those numbers are, but, can you afford to be less conservative than necessary? Check others too?...