Minneapolis, MN · Member since 2017 · 353 posts · 223 votes
8y
For me, the cash flow would need to be very good and sustainable (not above market rents). I haven't seen many properties where it would cash flow well even at market value in my market so I would look at your numbers closely to see if your analysis is correct and if it would meet your goals.
If it appraises for less, you could try to come back to the seller for a reduction but it might be hard depending on the type of property. If it is multi family, the value is generally derived based on the rents, which is different than a single family.
Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
8y
Depends on your goals @Will Harrison, but I'm focused on cash flow and would seriously consider it...HOWEVER, I haven't been able to find a property (with financing) that'll cash flow with at or above market pricing. I'd go back through your analysis with a fine tooth comb to ensure your #s are solid. Happy to look at with you too.
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
If this place cash flows above market rate, other places at market level (or below) will probably cash flow even better. Don't get emotionally fixed on a property and go chasing it.
Milwaukee, WI · Member since 2017 · 9 posts · 1 vote
8y
Thank you for all the responses. I will post the numbers on the property that I'm looking at sometime today for you guys to look at with a couple scenarios that I have calculated! Thanks again!
Goal is at least $200/mo cash flow per rental property for my business
4plex
3 units have already been updated
Potential to increase rents
Let me know what I'm missing
ARV. $150000
ASKING. $170000
REPAIRS. $20000
Income (rents). $2680
Expenses
Vacancy. $268
Landscaping $80
Reserve/repair. $200
Water. $250
Utilities. $200
Total. $730
Loans
Mort. $136000 (30 yrs @4.5%)
Private. $34000 (@8%)
Total. $956
Cash flow $216
Cash on cash 4.72%
I'm missing something...
Vacancy + Landscaping + Reserve/repair + Water + Utilities = Total Expenses (it doesn't, but ok)
268 + 80 + 200 + 250 + 200 = does not equal 730. It is $998.
Does your mortgage include taxes and insurance?
Do your expenses include CAPEX and Property Management? There is a difference between CAPEX and "Reserve/repair" -- they should be separate. You should allocate 10% of rent to property management.
Looks like a terrible deal for cash flow once your numbers are correct and you account for other expenses you haven't considered.
Pottstown, PA · Member since 2017 · 79 posts · 31 votes
8y
I agree with @Joe P.. You're not accounting for capex at all and 7% for repairs doesn't seem enough. You don't include prop. mgt either. Even if you're self managing you may not want to do that forever. If the numbers don't work with prop mgt you'll be forced to sell when you're ready to scale your business.
Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes
8y
There isn't a cut and dry rule, but I like to work conservatively and work my way backwards. You should probably use the BP calculator (free for 5 uses) when evaluating a deal. It's a guideline, its not perfect, but it'll give you a good baseline of current and future modeling.
I'm concerned that you are asking about percentages, but not really thinking through all the actual categories of expenses, or their impact.
Your P&L evaluation appeared to be devoid of CAPEX, property management fees, taxes, and insurance. So if you aren't thinking through those items your evaluation of properties is off to begin with. You might have accounted for them (e.g. your mortgage payment was actually PITI) but I didn't see it.
There may be items I am even forgetting, and I think I'm comprehensive and conservative when I evaluate deals. Other investors can chime in accordingly.
I use 10% Prop Management, 10% CAPEX (most properties in my area were built in the early 1900s), 8% vacancy, 8% maintenance, all of rent. But again -- guidelines, not absolutes.
Minneapolis, MN · Member since 2017 · 353 posts · 223 votes
8y
I agree about needing to add insurance, more for Cap Ex and including property management. I usually use 10% for Cap Ex and 10% for 10% for property management even if I plan to self manage in case I get sick of it.
At the end of the day, even if you think your numbers are reasonable, the 4% return makes it a reason not to invest in the property.
as the saying goes "You don't make money when you sell, you make money when you BUY"
Are there no other deals in the united states that you would be forced to buy one at a higher than value cost?
would you pay $35,000 for a $30,000 car?
would you pay $2,000 for a $1,200 amazon stock?
would you pay $20,000 for a $10,000 bitcoin
and would you pay $170,000 for a $150,000 house
This thread is crazy talk.
No but you may be willing to pay $12,000 for a $10,000 bond that is delivering above market returns....
The making money when you buy isn't always correct either, you had several people who "made money" purchasing a house with equity in 2005 that ended up losing money when the market tanked.
I am not saying he should buy this, I am just shooting a massive hole through your theory. If a property had great cash flow it may be worth paying a premium but at the same time one would question whether the price was listed correctly. His expected ROI with limited cash invested really breaks this deal.
Milwaukee, WI · Member since 2017 · 9 posts · 1 vote
8y
Thanks for all the responses! This was truly helpful. I may have left some things out in the post but it did account for taxes insurance and cap ex but not PM. The property has new roofing and quite a few other updates so i didnt go crazy on cap ex and repair allowance. I'll go back and factor that in PM and up repairs and cap ex and see what I would need to purchase at for it to make sense and if they object I'll just walk away knowing I made an educated decision. Thanks everyone!!!
as the saying goes "You don't make money when you sell, you make money when you BUY"
Are there no other deals in the united states that you would be forced to buy one at a higher than value cost?
would you pay $35,000 for a $30,000 car?
would you pay $2,000 for a $1,200 amazon stock?
would you pay $20,000 for a $10,000 bitcoin
and would you pay $170,000 for a $150,000 house
This thread is crazy talk.
No but you may be willing to pay $12,000 for a $10,000 bond that is delivering above market returns....
The making money when you buy isn't always correct either, you had several people who "made money" purchasing a house with equity in 2005 that ended up losing money when the market tanked.
I am not saying he should buy this, I am just shooting a massive hole through your theory. If a property had great cash flow it may be worth paying a premium but at the same time one would question whether the price was listed correctly. His expected ROI with limited cash invested really breaks this deal.
I wasn't writing a book of economic LAWS, just riffing some examples for perspective on this particular deal.
Thanks for all the responses! This was truly helpful. I may have left some things out in the post but it did account for taxes insurance and cap ex but not PM. The property has new roofing and quite a few other updates so i didnt go crazy on cap ex and repair allowance. I'll go back and factor that in PM and up repairs and cap ex and see what I would need to purchase at for it to make sense and if they object I'll just walk away knowing I made an educated decision. Thanks everyone!!!
I'm not sure I would spend too much more time on this property unless you think the seller is willing to come down a bit. Maybe just have your agent reach out to their agent to see how flexible they are on price since it doesn't really seem to work out as a rental at that valuation.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Will Harrison This is a crazy simple way to look at what you're proposing. You want to pay $170K + $20K in repairs = $190K for a property you think is work $150K. So you want to overpay by $40K to make $216/month. At least I think that's what you're saying. That's 15 years (185 months) of cash-flow before you break-even on overpaying. Either I'm not understanding something or you're nuts :-)
Investor · Columbus, OH · Member since 2016 · 139 posts · 136 votes
8y
I failed Math 104 twice, but that seems like a lot of risk and money for only $200 CF each month. Not to mention, you stated you're paying more than market value, why? If you're paying more than it's worth currently, is that really cash flow?
Goal is at least $200/mo cash flow per rental property for my business
4plex
3 units have already been updated
Potential to increase rents
Let me know what I'm missing
ARV. $150000
ASKING. $170000
REPAIRS. $20000
Income (rents). $2680
Expenses
Vacancy. $268
Landscaping $80
Reserve/repair. $200
Water. $250
Utilities. $200
Total. $730
Loans
Mort. $136000 (30 yrs @4.5%)
Private. $34000 (@8%)
Total. $956
Cash flow $216
Cash on cash 4.72%
Will, very tight numbers, not sure you can get to the goal you are looking for ... missing taxes, how much rent increase do you think you can get? What is your reasoning for raising rents? Will this require turning over the existing tenants, is this vacant? Management fee or you will do yourself?
It's been a few days for the comments to come through. Are you still looking at that asset? Are you still interested in how to make a property like this work?
I read all the replies and there were basically two themes. One, you have to be nuts to overpay for a cashflow property. Two, it might work, but the numbers are so tight that you would be better off searching elsewhere. Nobody actually answered your real question!
You asked for thoughts on buying this, but would it be fair to say that what you really want to know is "how can I make this work?" I would like to suggest that there is positive solution to this, but it's not for the faint of heart. It may not work in this case, but it is designed to work in negative equity, non-distressed sale situations like this.
Do you know why the seller is selling? He has apparently conveyed to you that he's not flexible in the price, but most people are not interested in paying over 13% above market for a fixer. Worse than that lenders are usually going to unwilling to finance above 80% let alone 100%, so who else is going to buy this? Sure, someone who just loves the place and is willing to put $50k and has another $20k lying around for repairs just to bring in a relatively meager rent, i.e. a unicorn.
So, find out what moves this seller. If he won't budge on price, then GET BETTER TERMS! You've indicated that you're settling for $216 in cash flow based on a bank loan for 30 yrs. Your expense total does no match the expense you itemized, nor do your expenses include taxes, insurance and PM, so I'll estimate that they'll be somewhat closer to $1200/mo.
Gross Schedule Rent: $2680
Expense Total: $1200
Net Operating Income: $1480
Debt Service: $956
Cash flow: $524 ($131/door)
On top of that you still have to find a way to finance $20k in repairs, right?
What if you get a little creative? What if you capitalize on the seller's need to sell at above market to negotiate a lower debt service? Would the seller be willing to carry back the $170k @ 4% for say 50 years? This would drop your debt service to a much more manageable $301/mo for 600 months, which yields $1179/mo or $295/door. Does this appeal to you a little better?
"Wow! That's awesome, but I'll never be able to reach the end of a 50 year mortgage!" So what?!? Are you looking to pay a mortgage off or make money?
"But the seller won't carry back the whole amount. He needs $20k down." Cool, let's see, $150k @ 4% for 600 months works out to $265/month plus whatever your private money guy is charging. It'll bite into your cash flow some, but you'll still be in good shape.
"Now the seller is telling me to have carnal knowledge with myself! He says he'd rather hunt for a unicorn." In this case let him. You can't fix stupid!
Moral of the story, you as an investor MUST get either your price OR your terms OR both for the deal to be a deal.
I hope this is more the kind of answer you were looking for. Contact me if you're not sure about any part of this or you wanna bounce an idea around.