Strategies and Philosophies: Multi-part question

[Todd Gustafson]

I've been reading some on landlord mentality. It's led me to a few things I need to clear up. I'm a newb and still in the absorbing information phase.

This may be easier as three seperate questions. Here it goes:

1) Tell me if this is correct regarding the 50% rule. If I conclude a property will produce $1,000 per month rent then $500 per month will be consumed in expenses over time. This does NOT include a mortgage or note owed on the property. Am I correct or missing something?

2) Is there an industry standard checklist for expenses? I've seen a few personal lists and would like to see what I'm getting into - LOL.

3) If question 1 is true, how in the heck do you cashflow? Do most properties not produce income until paid off? It seems most any note owed would put you in the red, unless you got it for next to nothing.

I'm sure this has been addressed before. Guiding me in the right direction is most appreciated, especially when it comes to screening and business organization.

TIA

[Jon Holdman]

1) The 50% taken for "expenses" is really operating expenses (as defined by the IRS), vacancy (actual or economic), and capital (big expenses like roof or furnaces that must be depreciated on your tax return.) Economic vacancy refers to discounts and incentives you give to tenants. The 50% that's left is your NOI - net operating income. From that you have to pay the note (just the P&I part, not taxes and insurance) and collect your cash flow.

2) IRS Form E would be a good starting point.

3) You just have to find a good deal. Simply said, hard to do. Nearly impossible in many areas. Very difficult in the Denver area. Fairly simple in some areas. Search around in the lower priced areas near you and you may find an area that works. Prices vary much more than rents, so having established the rents for your area, you need to find cheap enough properties to work with that rent.

4) Don't forget your down payment. In the analysis I write, I consider this two different ways. One is to assume 100% financing, even if you can't get it. The cash flow with 100% financing is, to my way of thinking, the cash flow from the property. If you then put in a down payment, and the cash flow is higher, that's the cash flow from your down payment. A second method is to compute cash on cash. Put in the down payment and compute cash flow. Divide by the total cash invested. If that's 2%, its not interesting. If its 25%, its very interesting. You have to compare that cash flow to other opportunities for your money. For example, if you have a wad of cash you could be making hard money loans, either by yourself or with a group. That will produce something like 10-14% returns. If rentals produce 8%, you're giving up some of your returns, presumably for the chance for appreciation.

5) You can reduce the actual cash expenses by doing some of the work yourself. In particular, property management and maintenance. A lot of maintenance is minor stuff and is caused by the tenants. Most of the time management doesn't involve anything more than chasing the rent. For those two items you can earn about 15% of the gross rents back for yourself. You will be earning that money, and if you have 50 units, it will keep you hopping. But it is a way to increase your cash flow.