How to make low-rent properties cash flow?

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How to make low-rent properties cash flow?

Abi Wegman
Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes

Most of the expense assumptions I use are based on rent. For example, I budget 10% of rental income for PM, 10% for vacancy, and 10% for capex/maintenance. Then there are fixed costs: I generally budget $700/yr for insurance, and $200/mo for water+sewer as it must be paid by the owner (I'm looking in Cleveland, OH).

Given that I have fixed monthly costs of $258 (insurance + water/sewer), and 30% of my income will go to variable costs (I haven't even touched on property taxes, which runs ~10% to rental income in my analyses), how can you ever cash flow on a property unless it has disproportionately high rent?

Let's look at an example:

Price: $20,000

Rent: $450/mo

Sweet! 2% rule passed!

But now I have $45/mo for PM, $45/mo for vacancy, $45/mo for capex, $258/mo for insurance & water/sewer, and maybe $40/mo for property taxes...and now I'm looking at monthly expenses of $433/mo, which leaves me with $17/mo positive cash flow. There goes any hopes of getting a mortgage! It also doesn't leave a lot of room for error.

Now, I understand that Vacancy and Capex/Maintenance are not true monthly costs, but a $1,000 water heater in Year 3 is what I'm planning for, right?

So... please help me understand how this works. Are my expense assumptions too high? What am I missing here?

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
8y

I think the problem is in the insurance, you are paying $700 to insure $20,000 worth of property.  Is it state law that water and sewer be paid by the owner?  If not that is a cost to pass along.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    I think the problem is in the insurance, you are paying $700 to insure $20,000 worth of property.  Is it state law that water and sewer be paid by the owner?  If not that is a cost to pass along.

    2Reply
  • Abi Wegman
    OP
    Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes
    8y

    It's a city law I think. The city of Cleveland will only bill the property owner, which makes it difficult to pass on to the tenant (from what I've read). You can't evict a tenant for not paying a water bill that was billed to you...

    I agree, the fixed costs are high and killing any profit. To the point where it might not be worth to look at Cleveland properties with less than, say, $1,200/mo rent.

    And yeah, the insurance is probably too high. Even if it's $200/year, that's only $40/mo savings over the $700. It's that darn water/sewer bill.

    0Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    Perhaps you would be better off looking in Cleveland suburbs if the water/ sewer is only a city law.

    1Reply
  • Miguel Nava
    Rental Property Investor · Houston, TX · Member since 2016 · 91 posts · 38 votes
    8y
    @Aaron Klatt I am pretty sure it is the same for all cities in the Cleveland area.
    1Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    @Miguel Nava I'm not sure but is it anything like the trash service out here where you can charge the tenant for it but if they don't pay it gets added to the property tax bill?

    0Reply
  • Abi Wegman
    OP
    Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes
    8y
    Originally posted by @Aaron K.:

    @Miguel Nava I'm not sure but is it anything like the trash service out here where you can charge the tenant for it but if they don't pay it gets added to the property tax bill?

     How does that work? If they don't pay, the responsibility ultimately falls to you, the landlord?

    All I know is that in the Cleveland area, water bills are sent directly to the registered homeowner and that cannot be changed. I have read of some strategies for recouping water costs, such as building it into the rent, but the market is the market and with most landlords paying for water, I'm not sure how competitive you can be billing it back to tenants.

    There are definitely people in Cleveland doing well with investing, and some of them must be looking at these sub-$50k homes. I just don't see what I'm not seeing...

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  • Miguel Nava
    Rental Property Investor · Houston, TX · Member since 2016 · 91 posts · 38 votes
    8y
    @Aaron Klatt I think they disconect/suspend service if the bill is not paid. Then owner is responsible for paying all charges and fees to get it back. Cleveland Heights in addition to wayer & sewer they also bill the owner (quarterly) for “sewer and landfill”. I am not sure if other cities in the area do the same.
    0Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    @Abi Wegman it ensures the trash company gets paid but it can be included in the terms of the lease just like all other utilities here.  It would only be a problem during an eviction.

    0Reply
  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    8y

    @Abi Wegman

    In Cleveland you are going to pay the Water and Sewage....really no way around it. You're at the 2% rule which is good......my concern is if it's a $20,000 property it is definitely in an "F" area so you may have some challenges regarding keeping good tenants, collecting rent....etc. 

    The way around this is if/when you evict the current tenant.....put a Section 8 tenant in there. Once a Section 8 tenant is in there they don't want to move out and CMHA will pay most if not all of the rent.

    0Reply
  • Abi Wegman
    OP
    Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes
    8y

    @Brian Garlington

    The $20k is really just as an example. I'm not talking about any specific property. I'm just trying to grasp the relationship between the expenses and the amount of the rent. It seems like it's really not possible to cash flow if rental income is below a certain amount, regardless of the price of the house.

    0Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    8y
    Originally posted by @Abi Wegman:

    Most of the expense assumptions I use are based on rent. For example, I budget 10% of rental income for PM, 10% for vacancy, and 10% for capex/maintenance. Then there are fixed costs: I generally budget $700/yr for insurance, and $200/mo for water+sewer as it must be paid by the owner (I'm looking in Cleveland, OH).

    Given that I have fixed monthly costs of $258 (insurance + water/sewer), and 30% of my income will go to variable costs (I haven't even touched on property taxes, which runs ~10% to rental income in my analyses), how can you ever cash flow on a property unless it has disproportionately high rent?

    Let's look at an example:

    Price: $20,000

    Rent: $450/mo

    Sweet! 2% rule passed!

    But now I have $45/mo for PM, $45/mo for vacancy, $45/mo for capex, $258/mo for insurance & water/sewer, and maybe $40/mo for property taxes...and now I'm looking at monthly expenses of $433/mo, which leaves me with $17/mo positive cash flow. There goes any hopes of getting a mortgage! It also doesn't leave a lot of room for error.

    Now, I understand that Vacancy and Capex/Maintenance are not true monthly costs, but a $1,000 water heater in Year 3 is what I'm planning for, right?

    So... please help me understand how this works. Are my expense assumptions too high? What am I missing here?

     I wouldn't touch a property like that. You'll be in eviction court all the time, and probably be dealing with a lot of maintenance. Have you tried looking in the suburbs? The value might be higher but so is the rent and the quality of the tenant. 

    Also, you can send the water bills to the tenant and require them to pay it as part of the lease. If they do not pay the water bill then they are in violation of their lease.

    0Reply
  • Abi Wegman
    OP
    Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes
    8y

     How difficult is it to evict a tenant for not paying the water bill, assuming they're current on rent?

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    8y
    Originally posted by @Abi Wegman:

    Most of the expense assumptions I use are based on rent. For example, I budget 10% of rental income for PM, 10% for vacancy, and 10% for capex/maintenance. Then there are fixed costs: I generally budget $700/yr for insurance, and $200/mo for water+sewer as it must be paid by the owner (I'm looking in Cleveland, OH).

    Given that I have fixed monthly costs of $258 (insurance + water/sewer), and 30% of my income will go to variable costs (I haven't even touched on property taxes, which runs ~10% to rental income in my analyses), how can you ever cash flow on a property unless it has disproportionately high rent?

    Let's look at an example:

    Price: $20,000

    Rent: $450/mo

    Sweet! 2% rule passed!

    But now I have $45/mo for PM, $45/mo for vacancy, $45/mo for capex, $258/mo for insurance & water/sewer, and maybe $40/mo for property taxes...and now I'm looking at monthly expenses of $433/mo, which leaves me with $17/mo positive cash flow. There goes any hopes of getting a mortgage! It also doesn't leave a lot of room for error.

    Now, I understand that Vacancy and Capex/Maintenance are not true monthly costs, but a $1,000 water heater in Year 3 is what I'm planning for, right?

    So... please help me understand how this works. Are my expense assumptions too high? What am I missing here?

     You cannot cash flow on a single family house with a rent of $450/mo. It's just not possible. The costs to house someone along with your capex will cost more over time then that rent. If you are looking at a free standing property you need to bring in at least $700/mo in rent for it to make sense.

    1Reply
  • Abi Wegman
    OP
    Santa Rosa, CA · Member since 2016 · 43 posts · 36 votes
    8y
    Originally posted by @James Wise:

     That's what I was thinking. Do you have an estimated range for the water charge? Is $200/month/unit reasonable?

    0Reply
  • Jason Goretzki
    Fort Lauderdale, FL · Member since 2016 · 214 posts · 95 votes
    8y
    Originally posted by @Abi Wegman:
    Originally posted by @Aaron K.:

    @Miguel Nava I'm not sure but is it anything like the trash service out here where you can charge the tenant for it but if they don't pay it gets added to the property tax bill?

     How does that work? If they don't pay, the responsibility ultimately falls to you, the landlord?

    My apologies if this is a little off-topic.  Our property in Akron has this same issue, & yes, that's the end resolution.  It's our responsibility that this bill is paid, even in the case of vacancy, & even in the case that the current occupant is unable to pay.  If they are late with the payment, we have to get the payment settled.  We are not allowed to put the water utilities in the tenants name, it must be in ours as the owners of the property.

    2Reply
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