How Much Should A Rental Property Cashflow?

[Hector Espinosa]

Hi All,

I would like to hear your comments about the following property, which I think, based on the analysis I made, seems to a be a potential good investment:

* Purchase Price: $98,000
* Monthly Cash Flow: $310
* Annual Cash Flow: $3731
* CoC ROI: 15.86%
* 5-year annualized return: 15.35% (with a profit if sold of $25K)

Also, what are some of the disadvantages of buying old houses? Is there any particular maintenance that is required in a regular basis?

Something I noticed that is making me doubt about making an official offer is that it seems to be in an area with high crime.  

Appreciate your comments.

[Jaycee Greene]

Hey @Hector Espinosa! I see your purchase cap rate is over 10%, so I would suspect it's in a class C/D neighborhood. FWIW, I think your operating expenses might be high, but it's hard to say for sure without more details.

[Alex Craig]

That is a good cash flow. I think it all depends where you are starting in your career. If you are just starting, I would think on a leveraged purchase, $200 a month in todays market, that is assuming the home is fully renovated and capex items are fairly new. If you are doing a BRRRR and leaving older items in place, not updating electrical and plumbing, I think you need $300 t0 $350 if you are just getting started. I have close to 100 doors, thus I will pick up something even if it is barely cash flowing so that my other cash flowing assets can pay down the mortgage reasonably quick. I started that strategy when I got to 10 doors where I would pick up homes that barely cash flowed, but good homes that were fixed up well. Those newer pickup's individually did not sustain themselves, but typically had the mortgage paid off within a few years.

[Hector Espinosa]

HI @Jaycee Greene,

Thanks for your response. Since this would be my first property, I'm assigned 10% for each repairs & maintenance, vacancy and capital expenditures (just in case).  I thin it is a C
neighborhood.  

What additional information would you require?


 

[Hector Espinosa]

Hi @Alex Craig,

This would be my first property and as I mentioned before I think numbers looks good but something is causing me trouble is the high crime rate in the area.  

My initial plan is hold the properties for at least 5-10 years so for now I'm not doing BRRRR.

[Jay Fayz]

Quote from @Jaycee Greene:

Hey @Hector Espinosa! I see your purchase cap rate is over 10%, so I would suspect it's in a class C/D neighborhood. FWIW, I think your operating expenses might be high, but it's hard to say for sure without more details.

 Hi Jaycee. Im kinda knew to this and was doing some research. If you can please explain how you got the cap rate over 10%. From what i see you dived the annual income ($3,731) from the purchase price ($98,000) which would be 3.8%. Also is a higher cap rate directly correlated to a lower class neighborhood? Thanks

[Jaycee Greene]

Great question, @Jay Fayz. I ran my own proforma and used an 8% vacancy rate and a 35% operating expense margin, which are the %s that most banks my clients work with use to underwrite their DSCR loans. This would put the NOI in year 1 at just under $11k.

In general, the cap rate on any real estate asset correlates to the perceived risk of the investments and/or predictability of the cash flow. 

Higher cap rate ~ higher perceived risk ~ lower predictability of cash flow

Lower cap rate ~ lower perceived risk ~ higher predictability of cash flow

[Jay Fayz]

Thank you for the response @Jaycee Greene

[Alex Craig]

Quote from @Hector Espinosa:

Hi @Alex Craig,

This would be my first property and as I mentioned before I think numbers looks good but something is causing me trouble is the high crime rate in the area.  

My initial plan is hold the properties for at least 5-10 years so for now I'm not doing BRRRR.

I feel high crime rate can be overstated at times. Typically, crime is going to be present in a lot of the areas where #'s make sense, but the key is making sure the house you are buying does not have obvious crime ridden houses in the immediate area. I have a lot of houses that my friends with say is "high crime", but that is because it is areas they would not live and do not understand. Place good residents, make sure the block is nice (just not the street) and you should be fine. There are good people who, if they could, would choose to live in Class B neighborhoods, but they can only afford class C....that is your target resident. 

[Hector Espinosa]

Quote from @Jaycee Greene:

Great question, @Jay Fayz. I ran my own proforma and used an 8% vacancy rate and a 35% operating expense margin, which are the %s that most banks my clients work with use to underwrite their DSCR loans. This would put the NOI in year 1 at just under $11k.

In general, the cap rate on any real estate asset correlates to the perceived risk of the investments and/or predictability of the cash flow. 

Higher cap rate ~ higher perceived risk ~ lower predictability of cash flow

Lower cap rate ~ lower perceived risk ~ higher predictability of cash flow

 @Jaycee Greene what would be or is considered a good cap rate?

[Calvin Thomas]

Quote from @Hector Espinosa:

Hi All,

I would like to hear your comments about the following property, which I think, based on the analysis I made, seems to a be a potential good investment:

* Purchase Price: $98,000
* Monthly Cash Flow: $310
* Annual Cash Flow: $3731
* CoC ROI: 15.86%
* 5-year annualized return: 15.35% (with a profit if sold of $25K)

Also, what are some of the disadvantages of buying old houses? Is there any particular maintenance that is required in a regular basis?

Something I noticed that is making me doubt about making an official offer is that it seems to be in an area with high crime.  

Appreciate your comments.

 Pass.  One or two maintenance or plumbing /HVAC repairs and your profit is shot for the year.

[Jaycee Greene]

@Hector Espinosa While cap rates can vary widely from one market/city to another and from one type and class of property to another (and based on the quality of the tenant), I did a quick search on LoopNet for MF properties currently for sale in SD and most "asking prices" suggest cap rates in the 4%-5% range. There are a few below 4%, but most of them appear to be relatively new or recently rehabbed.

[Stephen Smith]

I am no expert, so take this with a grain of salt.  I think that if you cash flow $300 per month, you are doing quite well, AS LONG AS you have reason o believe that no major repairs will be needed in the short term. You asked about buying older properties and the biggest issues I have found is that roofs need to be replaced, HVAC needs servicing/replaced, and sometimes there are foundational issues (not super common).  I you know how to swing a hammer or turn a wrench, you can save a ton of money on the maintenance side of things.  If you are not super handy, I would suggest getting on YouTube to prepare yourself, or pass on older properties.  

You did not specify the age of the property so it is purely speculation at this point.  Often times older properties come with aluminum wiring or lead pipes.  These items can make it expensive or difficult to get insurance for as well.  Again, if you can do maintenance yourself, some of this may be fixable by yourself.  A good electrician is going to cost a chunk of change to replace all of the wiring for the house, and a good Plummer will be pricey to replace the old pipes.  

If the updating has taken place, then your repairs should be low and the $300 a month would be a great return for a noob in the investing realm.  Just be sure to save that money up, and don't go using it for personal expenditures for the first 6-8 months and I would think you will have a great hold on your property.  

If that roof is more than 20 years old though... I'd learn to swing a hammer to pass on the deal.  Roofs get pricey quick if you don't know how to handle it yourself.  I wish you the best of luck, and I hope this helped a little bit.

[Nicholas L.]

@Hector Espinosa

you won't cash flow anything for several years, if ever.  percentages are worthless.  what are the actual expenses?  and if you don't know, how can you shell out $100K??

[Mark Cruse]

Not enough details so most of the answers will be general. However, one concern with newbies is attempting to self-manage in high crime areas. High crime is sort of relative and varies from person to person. However, if it's truly one of those communities that has very high crime and difficult to attract any descent tenants, it can lead to disaster. If you don't understand the dynamics of these communities, it can sink you. Most in BP, from many responses I see do not have to ability to navigate this. If you don't fully understand screening or the culture, dealing with the wrong people will lead to mass turnover. Constantly evicting people is expensive for a variety of reason and sinks profit. In addition, the wrong people will destroy things and there could be high theft. Over and over, you can be constantly evicting and replacing appliances and doing major repairs. Now, if you are familiar with this type of investing it can be very lucrative and literally lead to vast wealth. 

You also have to take into considerations things like appreciation levels and the current condition. Suppose you have several high end, major repairs in the near future? That, combined with hidden repairs combined with self-managing a low income could all construe to thousands in losses. 

Good Luck. 

You should provide more details! 

[Kaden Nguyen]

I noticed that you didn't have any initial "Rehab" to get the property rent ready so I can only assume that this would be a turn-key property. But you also mentioned it's an older house which will mostly likely will need some maintenances and CapEX in the near future. In my experience when buying older houses, there are always something needed to be rent ready.

If your ARV can support it, I would look into BRRRRing it and take care of the CapEx items during the process. Of course, all of this I'm only assuming since I don't have all the info. All the best.

[Bud Gaffney]

Looks like a win to me. On to the next 1!

[Bud Gaffney]

Analysis Paralysis is real. Winner. ON TO THE NEXT!

[Jeff S.]

@Hector Espinosa when will you hop on a plane and check out your investment? Will it be after it has been stripped of all the appliances etc etc?

Go to the neighborhood at 2 in the morning and see what is going on. Maybe take a cab and ask the driver about the area. If the cab driver is scared you should be too.

Cash flow is not a static number you can't predict with any accuracy what it will be. It can look good on paper but reality is another story. 

[Nick Velez]

I would personally never invest in a high crime area, especially for an asset that will have below average appreciation. $300 a month cash flow is not a bad target but when you are dealing with properties of that caliber, one bad tenant or big repair can wipe out years of cash flow. 

On my end, I would never purchase a property that won't produce at lease 1k in net cash flow, and it must be in a desirable area that is expected to appreciate. I have been looking at my year end numbers and most of my properties (STR's of course), will have generated over 3k a month in net cash flow on a 12 month average. More work? Barely, but I guarantee they will be in better shape 3 years from now than a 100k property in a high crime area. Just my 2 cents.

[Hector Espinosa]

@Mark Cruse thanks for your response.  What additional details should I share?