FINDING TOO MANY DEALS?!!?

Question

Okay okay the title might be a bit misleading. I'm currently a real estate investor in the midwest, more specifically Metro Detroit. I've read a few of the biggerpockets books and spent a lot of time watching the podcasts, reading forums, etc. One thing I hear often is that there aren't enough deals out there, blah blah… When I run my numbers i run them setting aside ~25% for expenses (vacancy, repairs, cap ex, Prop management - even though ill be managing the first one myself). With these numbers i find a good amount that meet my cash flow goals of $200 per door.

What's the explanation? Is it just because I'm in the midwest ill be cashflowing often - but no appreciation. Am I running numbers right ( i have an agent who runs the reports with comps)

Thoughts?

What's the explanation? Is it just because I'm in the midwest ill be cashflowing often - but no appreciation. Am I running numbers right ( i have an agent who runs the reports with comps)

Thoughts?

Will Barnard · Answer

You are leaving out a ton of operating costs in your calculation here which is why your analysis is showing such positive returns (but not real world). Taxes, insurance, utilities (during vacancies for showings), loss to lease, accounting, legal (evictions, entity formation, etc.), and the list goes on. For your properties, you can expect your total costs (excluding debt service) to be 40%-50%, not 25%. Also, your CAP Ex may very well be too low depending on your rental rates. As an example, if your rental rate is say $1,000 monthly, your 5% cap ex figure allows for only $50 monthly ($600 a year). If a system (HVAC, roof, water heater, appliances or any one major item) goes out in the first few years, you will be upside down on cap ex in that example. This is why you should expect 40%-50% towards operating/cap ex/vacancy expenses each year.

Account Closed · Answer

It isn't the numbers, it's the neighborhood. Would you let your wife take the kids to the park there? If not, the numbers don't matter.

Allan Smith · Answer

25% is too low and is one of the reasons deals are more available. I wouldn't go lower than 40%.

remember, prop mgmt is a job. You aren't "saving" 10%, you are making $15/hr until you have efficiencies and systems to automate and hire out tasks. Most would say that time is better spent on higher leverage activities.

Jonathan Greene · Answer

You are just running newbie projections that don't translate to real life. Taking a standard 25% of anything is misleading and will help you lose money in most cases because you are putting the data first. How many properties have you see in real life for investment? If zero, you shouldn't be buying. You need to see a ton of properties so the numbers and formulas you are running make sense. The plague for new investors is just running data based on some random formula or calculation and not realizing that costs are all market-specific and property-specific and if you don't know what to look for, no calculation will save you.

Greg Scott · Answer

There are plenty of properties in the area that can cash flow.  We are blessed to live in an area that does.

But, what is more important is understanding total return.  For example, what kind of  cash-on-cash returns are you seeing?

When I was investing in single family, I regularly invested in properties getting $500/mo in cash flow, but more important, generated 20%+ cash on cash returns.  Those are harder to find now.

Anthony King · Answer

@Nader Hachem if you're running numbers for a home in a neighborhood you wouldn't walk through after dark you might see great returns on paper. Reality is usually much different. If it's in an A or B class neighborhood double check your numbers since these cash cows generally aren't sitting on the market waiting for someone to take that 15% CoC you're calculating. Your total expenses should be closer to 45-50%. I recommend using real numbers on everything, except maybe maintenance, versus percentages.

Marc Rice · Answer

Operating expenses are usually 35-40% on 1-4 units and closer to 50% on 5+ units. 25% seems accurate if you're self managing with low overhead.

Allan Smith · Answer

40% is minimum, and includes all operating expenses. Not debt servicing. Lower clas properties are going to be closer to 50%.

top performers hire professionals to learn from. I think people don't realize how labor and process intensive prop mgmt is. What will be your tenant qualifications? What is your script for answering prospective tenant calls? What is your series of steps if rent is not paid on the 1st? Does your software send automatic notifications? What about sending an eviction letter with one click of a button (I built this into podio.com)? What is going to be your procedure for regular inspections? What items are on the list, and how are you archiving the field reports?

That and so much more is the mountain of work of a prop mgr. It takes years to build, but only costs you 11-12% to leverage someone else's machine.

Mike Dymski · Answer

1%'ers in linear (no appreciation) submarkets will not make a profit.  Not suggesting this is one.

Zee Abbas · Answer

@Nader Hachem A “deal” depends on your investment criteria. If you’re analyzing deals you should have a set of criteria such as IRR, payout time, ROI%, etc. If the property is exceeding all of your criteria accounting for the figures everyone else has mentioned above then it’s a deal. Conversely, it’s possible that while the property may meet your net profit goal, it hasn’t screened against a capital efficiency criteria.

FINDING TOO MANY DEALS?!!?

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