I keep getting negative CoC in my model, am I totally wrong?

Question

I keep getting properties from my agent in Austen area. I keep plugging the numbers and it is a blood bath.. it is so wrong, that I am thinking that I am doing something really wrong. Is it me or is it that retail prices in Austin are THAT bad?

Here is an example: 9940 Milla Cir #24 Austin, TX78748

Interest   Rate:

4.25%

Down Payment:

25%

Loan Term:

30

Closing Cost:

$  4,000

Rental   Income (m):

$2,000

Property   taxes (m):

$  353

Insurance (m):

$  179

HOA:

$94

Management fee (%):

8%

Maintanance (%):

5%

Appreciation (%):

1%

Vacancy (%):

5%

I also account for filling fee (70% of rent once every 3 years).

I get CoC: -1.5%... in other cases I get at best a positive 2% CoC... anyone can tell me if I am doing it wrong? I cannot be THAT off can I? how can anyone make investments if these are the numbers?

Year1

Gross income

$  24,000

less vacancy

$  1,200

Total Operating income

$  22,800

Prop Taxes

$  4,237

Insurance

$  2,145

HOA

$  1,128

Maintanance (from gross   income)

$  1,200

prop management

$  2,387

Total Operating Expenses:

$  11,097

Net Operating Income (NOI):

$  11,703

less mortgage expense:

$12,835

Annual Cash Flow:

$  (1,132)

Monthly cash flow:

$  (94.34)

Hattie Dizmond · Answer

First, I wouldn't suggest an appreciation play in Texas, unless you can get at least cash flow neutral.  Austin and DFW are both experiencing above normal appreciation, but it's fools gold to think that will continue unchecked.

Second, cash flow is easier to find in older neighborhoods. I know a lot of CA investors want newer homes, thinking there will be less maintenance involved. I think you'll find the maintenence isn't that big of an issue. Stick with older properties in blue collar areas. That's where the good cash flow is right now.

Brent Coombs · Answer

@Hernan Guelman, I don't recommend raising your deposit percentage just so you can massage the figures into showing a (small) positive cash flow return. Find deals that give you say 10% CoC, where your outlay is no more than the 25% you already suggested. If you HAVE more than 25% to play with (on top of the necessary extra reserves you need anyway), use it towards ANOTHER deal! Cheers...

Luke Holcomb · Answer

@Hernan Guelman,

Other options would be investing in markets that aren't as hot. I had dinner with a guy from BP the other day who came to our fair city. (Chatt, TN) to look at rentals. He is accustomed to doing turn key stuff and getting anywhere between 10 and 20% CoC returns. From My understanding he plans on having someone around here to find stuff for him and a property manager manage it. Depending on your loan scenario we have a number of different CoC options that are north of 15%. I think a lot of it boils down to, do you want to look at Real Estate as a way to diversify your portfolio into something with more secure returns, or do you want to build a business that acquires and rents properties.

I am interested in the later, so for me, it makes more sense to be in a market that is close and that I am familiar with.

If you are in the former category, then hypothetically it matters much less where the investment lies.

I have a deal up on the Market place in Chatt that with your loan terms and accounting for 50% expenses, and not accounting for any appreciation, your CoC would be 15.9%.

All in all I think your situation can be summed up in the sense that it doesn't make sense to invest in this area (austin) without an almost speculative appreciation play. But like Brandon and those guys say on the podcast, there is probably a market within an hour drive that does make sense. And if not, you can always come visit our happy town (Outside magazines town of the year) and look at what we have.

take care and happy investing.

ps- I love numbers, so if you ever need help figuring out a deal, please PM me.

-Luke

Linda Osborn · Answer

I agree with most of being said, and Austin IS a tough market overall. But there ARE areas in Austin where you can still find good deals if you look in the right places. We've found some good deals in both older neighborhoods and newer ones. For example, there has been quite a bit of  new home building in Austin...to the point where many builders were/are having trouble selling their homes. My broker (who is a great outside the box thinker herself) created her own great deals and bought 2 brand new north Austin buy & hold  SF investment homes last December. In addition, even as Austin grows, some of the outlying neighborhoods still have great deals while benefiting from the high rents and high demand in Austin proper.

Brent Coombs · Answer

@Hernan Guelman, the only reason I felt the need to suggest NOT raising your deposit percentage is that @Mike Makkar wrote: "the only way to make this property cash flow positive is increase your down payment to 30 to 35%" - which could easily have been (incorrectly?) interpreted as his recommendation.

But I'm glad to read that you are NOT considering doing that! Cheers...

Nick L. · Answer

@Hernan Guelman That deal sounds like a dog and Austin is a tough market. But what you want is not impossible.

I just picked up some units in 78704 that will have an 8%+ CoC ROI (on a conservative calculation) after a little rehab and management work. Talk to @Carrie Hiner or @Adrian Salas.

Garth Wilson · Answer

Hi Hernan,

Your mistakes are…

1. Austin

2. Texas property tax

3. Property Management

4. HOA dues

5. Overheated market

6. Your agent sounds inexperienced

7. Not thinking outside the box

There, I just turned your property cash positive, but you shouldn’t want it anyway. Walk away.. it’s an oinker.

Try again, look closer to home or something you’re familiar with. Be more careful when selecting an agent. A license is just a piece of paper it’s what’s between the ears that makes good agents. Avoid high property tax states. Forget popular markets, they are overheated. Dig something out yourself, if someone tells you about an area… it’s already too late. HOA dues are for homeowners, not investors (the clue is in the name).

I think I covered most of the bases.

Will R. · Answer

It might seem crazy but you have to buy with cash and rehab in Austin to get a 1% deal. It is not an easy place to cash flow. Austin is a bit more like gambling right now. If you pick a winner, you can make a killing in appreciation.

Hernan Guelman · Answer

Thanks @Brent Coombs, yes I didn't think of changing the %down just to change the cash flow. at the end we are trying to keep some things constant as we compare different deals.

I guess than that Austen as a market is just a appreciation play at this point, and only fits folks that don't mind subsidizing the renters while they wait/hope they will keep making it on appreciation..

I can be ok with very small CoC in such market, but negative is not for me.

If anyone has ideas or deal examples in that area that are positive CoC, please let me know.

Michael Lee · Answer

Hello and welcome to BP!  You probably are not doing anything wrong.  Prices are high right now and I am not surprised that it makes your numbers the way they are.  Investors just need to be patient.  Offer less and tell them why.  A negative cash flow is no good.  Be consistent.  Just walk away from bad deals and just keep on making offers.  If you keep on doing that it will pay off.  I am 59 years old and I found BP about 6 months ago and I am still trying to decide what to do.  I got a college degree In business with an emphasis on real estate.  I also got a broker license that same year, 1980.  My Dad has been in real estate for about 40 years and I have learned a little bit from him.  If you think I could help you in any way please contact me at any time.  I have been in the construction business since i was 17.  Good luck!

I keep getting negative CoC in my model, am I totally wrong?

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