$150/mo - Does that cover downside risk?

Question

I was in @Brandon Turner's webinar yesterday and thought all the info was super helpful but one question I'm trying to reconcile is $100 - $200/month enough on a rental to cover any potential downside risk.  I partnered on a couple of homes down in Houston from 2007 - 2014 and that's basically how our model looked.  The problem was it never seemed like we could get ahead.  There was always some kind of issue with maintenance, or capex or tenant and in the end, we were never really able to take any cashflow out of the properties.

It's possible we had a management issue, we had a 3rd party management company, and I don't really know how competent they were, but that margin just seems so skinny.  I realize in the calculation there's also money set aside each month for reserves, but again, I just wanted to see if that margin works for everyone overall?

Thanks in advance!

David

Account Closed · Answer

You need much more than $100 a month to cover the expenses and risks of a rental. One month's vacancy a year wipes out any profit. A broken water heater, emergency repairs of any sort make it a losing proposition.

A far superior model is instead of having "tenants", have "tenant buyers".

It's common to get $500 to $700 a month cash flow on a $60,000 investment by taking over existing financing.

All of the Turnkeys we sell are set up that way. They cash flow at least $500 a month for the investor or we keep the property in personal inventory. Since either the investor or in the case we keep the property, we put tenant buyers in the properties on lease option. Then the tenant buyer puts down $20,000 as an option fee and it mitigates our risk. We get to keep the $20,000. They then have skin in the game. The tenant buyer is responsible for repairs and maintenance. We still get all of the tax write offs since it it is lease option not a sale and they get a place they treat as a home.

There is substantial demand from people to have the option to own rather than just rent.

The model works well in Arizona and Texas where I invest but might be a bit harder to cash flow in California or any other high expense state. It also works well in the midwest. So, if you are intending on investing in CA or IL or WA you might want to look OOS to AZ TX OH MO or TN instead. It's a matter of economics.

Anthony Wick · Answer

@David J Carciere

Well, first of all, if you purchased in the 2005-07 date range, you bought at the top of the market. Therefore, your overhead was probably high to begin with.

Tenants pay PITI, cash flow, tax benefits, appreciation. Those are just a few of the ways you’re making money. And if you’re making $150 per unit per month and you have 20 units, that’s $3k per month just cash flow. The reserves for vacancy, capex, maintenance, management should be a whole separate account and pay for itself.

But I should also point out this isn’t my full time job, and I also diversify with 401k and other investments.

David J Carciere · Answer

Account Closed thanks for the feedback.

I should clarify, the $100 - 200 target was profit/mo, after all expenses being paid including cash being set aside for reserves.  That said, the margin still feels skinny, and based on my prior experience it never seem to be enough, but I'm hoping maybe we had management issues previously which is why we didn't make headway.

Mike, that's an interesting model.  I may circle back with you at some point on it.

Thanks again.

David

Account Closed · Answer

You need much more than $100 a month to cover the expenses and risks of a rental. One month's vacancy a year wipes out any profit. A broken water heater, emergency repairs of any sort make it a losing proposition.

A far superior model is instead of having "tenants", have "tenant buyers".

It's common to get $500 to $700 a month cash flow on a $60,000 investment by taking over existing financing.

All of the Turnkeys we sell are set up that way. They cash flow at least $500 a month for the investor or we keep the property in personal inventory. Since either the investor or in the case we keep the property, we put tenant buyers in the properties on lease option. Then the tenant buyer puts down $20,000 as an option fee and it mitigates our risk. We get to keep the $20,000. They then have skin in the game. The tenant buyer is responsible for repairs and maintenance. We still get all of the tax write offs since it it is lease option not a sale and they get a place they treat as a home.

There is substantial demand from people to have the option to own rather than just rent.

The model works well in Arizona and Texas where I invest but might be a bit harder to cash flow in California or any other high expense state. It also works well in the midwest. So, if you are intending on investing in CA or IL or WA you might want to look OOS to AZ TX OH MO or TN instead. It's a matter of economics.

Some people read spreadsheets to understand the numbers so you can look at the link and get the detail

Average Turnkey Cash Flow Per Door In Phoenix Metro Area No Bank Needed

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

David J Carciere · Answer

@Anthony Wick

Very good point about the size of the mistake on buy-and-hold vs. flipping....

Anthony Wick · Answer

@David J Carciere

No doubt things will go wrong on occasion. That’s why so many people on BP talk about having reserves and not overextending yourself so much. Some true horror stories on here. But if you do have those reserves, you will weather the storm.

I almost was going to try flipping since the buy and hold was going well. But then I decided; if I make a mistake on buy and hold then that means I probably break even. If I make a mistake on flipping, I could lose $20, 30, 50 thousand dollars.

Bjorn Ahlblad · Answer

It depends somewhat on what size and cost property we are talking about. In a 10-20 unit 200/door after everything in most situations is good; 200 in a 250k duplex not so much. In many cases the PM is making more money than the LL; yes the PM is doing more work but not taking any risk. 100/door just does not do anything for me.

David J Carciere · Answer

@Anthony Wick

Yeah, we certainly didn't buy at an ideal time, the assets were probably overvalued, and therefore we certainly didn't benefit from appreciation but that can be remedied by buying better in the future.  I'm really trying to wrap my head around the cash-flow and make sure I have that solid going forward.

In our prior case we had good tenants and had cash set aside for R&M, CapEx, Vacancy all that stuff it still just always seemed tight.  And with that as a back drop I look at while 20 units x $150 = $3000/month in revenue, that's also 20 units that have something that can go wrong with them.  But maybe when things are firing correctly, the normal reserve accounts covered everything and that $150 really actually works out to be profit?!

It's fun getting back into this, I just want to try and make sure it works out better this time around so...

Lawrence Gillett · Answer

I also have the same fear, and in the end is why we decided to sell our home rather than turn it into a rental. I think 200$ plus is needed to have an actual cash flow that can be a safe bet. What i mean by that is 200$ AFTER all your other allotments, PITI, HOA (maybe), Management, capex, maintenance, vacancy.... if theres still 200$ after all those, that's when ill feel safe to jump.

$150/mo - Does that cover downside risk?

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