$100 per door... really?

Question

Dear Pockets,

I've read a couple of times about folks saying they look for deals where they can get $100 per "door".  I'm not completely clear on the concept...  does this mean that you're buying highly leveraged rental property and only putting $100 a month per unit into your pocket (after loan, expenses, etc)?

I'm having trouble understanding how this can work.  You'd have to have 80 units be netting $8K a month.  The time and effort to put all of that together sounds astronomical.  So much so, that I think it'd be a full time job trying to get to that point and I'd starve to death somewhere around deal 40 in year five.

Am I misunderstanding what this means?  Maybe someone can elaborate on the concept for me.

Best,
 - Chuck

Rich Weese · Answer

As someone who owns several hundred units AND has owned thousands of units, again I repeat=DON'T get hung up on all these magical formulas like 100 bucks per door and 2% 50% crapola. You can do VERY well not worrying about these silly formulas imo. Areas are different, states are different, long term/short term holding and the net changes significantly on older/newer properties as well as highly financed/free and clear. Too many variables to pin formulas on. Don't lose confidence reading some of these posts that appear to make these goals solid in concrete. They are not and many don't even have the experience to make these claims of good/bad investments based on these formulas. Too many variables, imo. Rich

Jon Holdman · Answer

Something else to consider is that even a break even cash flow deal is getting ahead through principle paydown.  In one of his old posts, Rich advocates simply buying one rental per year with a 15 year note.  After 15 years you have a free and clear property.  That's going to generate much more cash flow than when you're paying a monthly nut for the debt.  Or, you can refi it back to roughly break even.  Now you have a big wad of cash.  Because one house gets paid off each year, that can be your annual income.  Then, when you die your heirs inherit your properties at a stepped up basis.  Some will be pretty heavily mortgaged, but others will be almost paid off.  They can keep them or sell, as they wish.  If they do sell, they have little or no tax because of the stepped up basis.

Most months my interaction with the tenant involves a reminder text message that the rent is due, watching the bank account around rent time to see when the deposits are made and mailing out a receipt.  Total time: 5-10 minutes.  At $100/unit, thats $600-1200 an hour.  Realistically, that's about $100 I would be paying a PM for that few minutes of work, so I'm actually reducing that 50% ratio to 40% because I'm managing the property myself.  Even more realistically, I do have to periodically deal with finding a new tenant.  Counting all the drive time and talking on the phone, that's maybe 10-15 hours.  A PM will charge me half a month's rent, which is 4% with one turnover per year or about $500 for my properties, to do that.  So, now my ratio is down to 36%.

Casey S. · Answer

A lot of us are in it more for the appreciation than current income.

If a young person can creatively buy properties with 95% borrowed/financed, keep the property up, and pay them off in 10-15 years while also working a normal income producing job it can be the road to a hell of an early retirement. It is probably the easiest road to 7 figure wealth out there.

That may be a terrible plan for someone in or near retirement or not working a normal job.

Different peoples situations dictate works best for them.

Jon Holdman · Answer

Rich is right that there are a lot of variables.  That said, don't fall for the "phony cash flow" myth.  Phony cash flow = Rent - PITI, and is by far the most commonly used formula in listings and advertisements.  There are many, many other expenses beyond that.  These are discussed in numerous other postings.  Many months you will actually "pocket" the phony cash flow amount, after accounting for any other ongoing expenses like a PM or HOA.  But every now and then you'll have some big repair or other expense.  If you've planed for this, you'll handle it with ease.  If you've assumed you can pocket the phony cash flow each month and you've spend it, you'll have a problem with your HVAC guy wants $3000 on the coldest day of the year and your tenants are freezing.  The 50% rule gives a much more accurate estimate of your vacancy plus operating expenses plus capital for a large number of properties for a long period of time than just taxes and insurance. Note the 50% does not include principle (which you're really just saving, not actually spending) and interest.

Chuck B. · Answer

@Jon and Vince - excellent points and I'm starting to understand the point.  I might need to rethink how I'm doing this in order to take advantage of this.  I really need to start using leverage as well instead of sweating it so much.

@Rusty - I'm afraid I'm not very analytical but I think they're doing pretty well.   I try to find really dirty fixer-uppers (3/1 or 3/2's) that have great bones or potential that I can buy and rehab for less than 45K or so and then rent them out section 8 for around $800 a month.   It takes a while to find the right tenant (60 days or so) but that's a function of how many applicants I discard and the fact that these are NOT great neighborhoods.   they're not full on war zones, but they're close to war zones.   It also takes a lot of hustle and work and negotiating to land one as cheap as I want them.   I made a post called PLEASE LOOK AT MY PLAN that has a lot more detail in it.  Any feedback is MUCH appreciated.

Best,
 - Chuck

Joel Owens · Answer

Mine average about 225 a unit for my apartments after everything.

Taxes are 2,600 a month but I am about to win a reduction of about 40 to 50%.

That will give me about another 41 dollars a door a month when that happens.

For 100 dollars a month per door there would have to be some other value play I was looking at as that is slim especially with all the properties to pick from.

Vince Greenland · Answer

Chuck
I also use the $100/unit cash flow as ONE of the factors to determining if it is a good deal.  I capped ONE because it is only one "tool in the tool box" so to speak that I use.  I have over 80 units and some commercial properties and all have a nice cash flow.  However, I try to use as little of my own money as possible.  The bottom line is that interest loans have been historically low and prefer to keep "my money" else where.  Although it is coming more of a challenge, little or no money down is still possible.  This is where the $100/unit and general positive cash flow is more of an issue.  Because not only are you getting the cash flow, you are also paying off the loan, while your biggest expense (mortgage) is fixed but your income, if you know what you are doing can continue to rise.  This philosophy may be why you think it may seem lower. Just another school of thought...keep in mind this thought....what is the rate of return on a a 7-unit getting $100/unit with no money down?  I call it the side way 8....infinity

Rusty Thompson · Answer

Chuck, what are your investment criteria? How are your current holdings performing?

Chuck B. · Answer

@Jon and @Rich - Thank you for the elaboration!   I follow you guys pretty closely here and would love your input on my other post regarding my progress/plan to-date.

@Rusty - I think I see what you're saying. I guess I'm looking at this from the perspective of what I've been doing, which I'm sure is not how everyone else is doing it.  I look for two or three months to find a good deal and once I've landed one, it takes me anywhere from 30 to 75 days to rehab it (I do some of it myself like demo, paint, landscaping, etc.).  I do this mostly part-time as I do have a day job (more or less). For me to close 8 deals a year like I've been doing them, I'd be working 60+ hour work weeks and unable to earn a living doing anything else in the meantime.  That's why I said I'd starve to death on the way there.  I think I could retire comfortably if I had 14 or so units, fully paid for, that were getting something around ~$800 a month each.  I'd still have maintenance and I'd still have taxes, but without a mortgage myself I think I could live pretty well.

I think I'm answering some of my own question by banging this email out.  That is, why have 8 units that you're only getting $100 a month from each when you could have two units that you're getting $400 a month from each.   The answer I imagine is appreciation, long-term you'd have much more equity.  I've just been thinking about it from a pure cash-flow stance.  You'd also have a lot more work involved, but nothing is easy, right?

Best,
 - Chuck

Rusty Thompson · Answer

I find this post very amusing. By deal 40 I'm assuming you mean 40 units. Which would equal out to ~ 23$ a hour, if I assume your comparing it to a 40hr a week job. I know a lot of people (me included) that don't make that much & I don't have any problem eating.

Also consider that 40 units would no longer be "passive income" but if your spending 40hrs a week on average managing them, then you are doing something wrong. So not only would you be making a above average "wage". But it would give you much more time to find all the other units you need to "survive".

My personal retirement goal is 40 units. I think anything more is unnecessary.

$100 per door... really?

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