All Forum Posts by: JT Spangler

Except you neglect the fact that management is budgeted into the expense calculations, so whether it's 2 houses or 50 your time per week is zero.

You also do some hand-wavey math when saying, in example one, you could cover the rent for all six houses without it being an issue, but in example two covering the rent for only four (1/3 of 12) would dip into your (greater than example one's) profit. Not quite sure of the logic behind that one.

Leverage, as I understand it, is primarily about your risk tolerance. On the one hand, if you own more properties, you're more protected from a nightmare scenario at any one of them. Basically, it's a form of dollar cost averaging for owning rentals. That said, your capitals expenses can be way higher. Lots more roofs, HVAC systems, and plumbing than if you just own one property. Again, though, this expense is accounted for in the 50% rule (and, if you're actually buying, your due diligence calculations), so if you are careful with your buying you should be covered.

The argument BUT YOUR EXPENSES ARE WAY MORE! is spurious, because YOUR INCOME IS WAY MORE TOO!

It seems like where people have been burned on leverage is either (1) when the market crashes and the properties are suddenly not worth what you owe, or (2) not buying each individual property very carefully. Both of those dangers are present when you buy cash, in smaller doses. For instance, if you own a SFR free and clear and the market tanks, there may suddenly be a glut of rentals out there undercutting you, meaning you can't fill your rental. The bank doesn't take it away from you, but since there are carrying costs it's cash flow negative. If you don't come out of pocket to pay those costs you'll lose the property. If you paid cash betting on appreciation and you don't get it, same potential issue. You're stuck with a place that is costing you money. It's just less money than if you financed 10 of them. So, again, it's about risk tolerance, and (IMO) it's a difference of degree; not kind.

Hilarious and also true, @Ali Boone

Anyway, would love to hear the elevator version of your experience in Nica, anytime that's convenient for you.

@Ali Boone Is the story of your Nicaragua investment online somewhere? I'd love to read it.

I'm a buy and hold investor in East Nashville as well, @Matthew S. . Colleague request/PM me if you want to talk shop or just get a coffee. I am still occasionally finding deals, although you have to hunt for them a bit.

@Will Barnard Thanks, man! I still feel like a rookie, since analyzing the deals is a different animal then actually closing them and then living them. But one day soon!

Check out this recent thread on BP: http://www.biggerpockets.com/forums/88/topics/108833-need-advice-on-investment-property

It deals with your question pretty well and includes numbers you can show your wife. :)

How's the neighborhood? And is it move-in ready or are there other expenses to prepare it for a tenant? I looked this morning at a 3/2, built in 2005, that rents for 8-850, needs just a coat of paint inside, listed for 65k, and I decided while it was an ok deal my cap rate, cashflow, and COC are all better on the few duplexes I'm considering.

Apologies for being far from an expert on this, but the conventional wisdom is that, all else being equal, more properties is the better play. In general, cash is king, and you want to use as little of it as possible to generate a positive cash flow return.

Let's look at your example, and make some assumptions, and then tack some numbers on there. We have two identical 2/1 condos, each with a 50k purchase price, where each rents for $750/month. For simplicity's sake let's ignore the soft costs like closing, title, and inspection.

Scenario 1: You spend your 50k on buying one of them outright, and your gross income is $9000/yr (750*12). Cashflow is $375/month or $4500/yr (50% rule says that half of your gross income can be expected to go towards your non-mortgage expenses, such as maintenance/vacancies/management/capex/utilities/etc). Your cash on cash return (the money you get back vs. what you put in) is $4500/$50000, or 9%. Fair, I suppose, but let's look at scenario 2.

Scenario 2: You spend 50k to put 25k down on both condos, meaning you're financing the other 50%. Your expenses are doubled (two units), but so is the rental income. The added variable is debt servicing. Again, with numbers. Gross Income is 18k/yr (2*750*12). Expenses are $9000/yr (50% rule). Leftover is profit of 9k, but you still have to pay the mortgage. I plugged financing 50k at 5.25% over 30 years into a mortgage calculator and got payments of 275/mo, which is the total debt servicing on both units. So 9k - (275*12) = $5700 yearly cashflow. Better! And your cash on cash return is 5700/50000, or 11.4%. Better there are well.

The thing to understand is that your best cashflow is going to be on a property that's paid off, but it's artificial, because you have to put more cash into it to force that return. Cash that's tied up in rentals is cash that can't be used to buy more rentals.

Suppose we take it even further (why not?!) with scenario 3: 4 condos, each listed for 50k and with that same 750/mo rent. You put 25% down on each (for a total cash outlay of that same 50k), and finance the remainder. Gross income is 36k/yr (4*750*12), and expenses are 18k/yr (50% rule). Leftover profit (called Net Operating Income) of 18k/yr. Now subtract the debt servicing (financing 150k @5.25%: $830/mo*12months= $9960/yr) and you're left with a yearly cashflow of $8040. Best yet! And your cash on cash goes to 8040/50000, or 16%!

Now, there's no question that, from a mathematical standpoint, the less you spend on a property that cash flows the better your return on investment is. But there are other expenses involved in buying multiple properties all at once, most notably the soft costs I ignored earlier (closing costs, inspections, etc). This is why people love multifamily rentals, because you get the benefit of the improved return with only one transaction.

Hope that helps!

@Penny I. I'd be interested in the details of your Puerto Vallarta deal, either in a thread or PM. Thanks!

Title pretty well covers it. While I wait on a few offers to be responded to, I continue to hunt deals. I've seen a few duplexes and triplexes that have what seems to be decent cash flow, but at a higher entry price. I'm wondering what you guys set as your minimum COC return for a small MF, and whether there are extenuating circumstances (if the place has recently been remodeled, or is in a hotter area).