All Forum Posts by: Ben Wilkins

@Account Closed - yes, you are interpreting the rule incorrectly. It's a small difference, but leads to a large difference in results.

The 50% rule is to take 50% from your income ($850 * 0.5 = $425), then subtract the financing from there. Assuming 6% interest, your financing would be $355. From that, your cashflow would be ($425 - $355 = $70).

To put it in a single formula:

(Monthly Cashflow) = (Income) * 0.5 - (Mortgage)

You used:

(Monthly Cashflow) = (Income - Mortgage) * 0.5

So in the future:

1. Use the formula that I gave above (the correct one) as a first calculation. It's quick, it's easy, and above all it is not what your cashflow will be. It is only a quick estimation, and some people say to never use the 50% rule... however, I find it to be very useful when looking at a lot of properties because I only need the purchase price and I can calculate an estimated cashflow. Do not include taxes and insurance in the 50% rule, since that is exactly what the 50% represents (taxes + insurance + maintenance + CapEx + vacancy)

2. Once you have a property that looks good with the 50% rule, run a full analysis. This includes getting actual insurance quotes (or knowing what it will be based on previous quotes), actual taxes, actual income, and choosing what your percentage expenses will be. I use 10% CapEx, 10% maintenance, 8% vacancy. Some people throw property management in there as a percentage (your time should be worth something, right? And you won't always manage it yourself). Get an actual interest rate from a bank - for investing, it'll probably be around 5.5% (depends on your credit).

Don't purchase based solely on the 50% rule (I've said it several times, but once more won't hurt). Use the 50% rule as a starting point to weed out properties. After that, run the full analysis and decide if you want to purchase from there.

@Account Closed - a few thoughts.

1. Landlord insurance for a property that size will most likely be close to $600 per year

2. 50% rule is an estimate of everything except your financing cost, so it has built in estimate for insurance, CapEx, maintenance, vacancy. You don't add another 10% for vacancy like what you did, and you don't add in insurance since the 50% rule is supposed to cover these. Key note: the 50% rule is to be used only as an estimate - I only use it to very quickly evaluate a property when I first look at it since a full evaluation takes longer and requires more info other than financing and taxes. I also find that 60% is closer to actual value of expenses in my local areas - after you get a few properties under your belt, you can find what percentage works for you.

3. CapEx always comes into play, even if you save a substantial amount each month. If you are paying for anything out of pocket, you are putting more money into your investment and are therefore decreasing your returns. The entire goal of investing is to put as little of your own cash in as you possibly can. Always, always, always include CapEx in your calculations. Cutting corners or under-estimating expenses on a crappy investment just to make it look good still results in a crappy investment... you just end up paying more for it.

Now, on to your personal calculations - I see one error (and it's a small error that leads to large differences). How did you arrive at $210 per month cashflow? Mortgage with 15% down is $355 assuming 6% interest on a 30 year loan. 50% of income for expenses is $425. Add $355 + $425 and you're left with $70 cash flow per month. Make sure you are taking 50% of all cashflow, not 50% of cash flow remaining after mortgage. 

Again, this $425 is an estimate of all expenses. If I were to do an in-depth evaluation, my expenses would be 10% for maintenance ($85), 10% for CapEx ($85), 8% vacancy ($68), $600 annual insurance ($50 monthly), $1250 taxes ($104 monthly). This total comes out to $392, which is pretty close to the 50% guess of $425.

At this point, I would pass on this investment unless if you have a way of forcing appreciation (increase the value of the home) and therefore increasing rent.

I hope this helps! Let me know if this raises any other questions.

@Craig Ward - that's the piece of info that I needed to narrow down my earlier advice. 

Ask them if they want to write a new lease - if they say yes, set a date for that and include the expectation that they will need to have this month's rent at the time that they sign the new lease with you. Ask for a date that will work for them - chances are that they have the money and have been the ones paying the rent anyway (a guess on my part), but they just need the time to get everything else in order.

If they don't want to sign a lease, again give the expectation of when they will be out. Ask if they need any help getting stuff moved, and let them know that there will be other tenant candidates coming through. Start the screening process now for a new tenant - you've been in the rental business, so I won't go into advice on that unsolicited.

As to what is owed you - that depends on your lease and the local law. My lease specifically states that the "parties bound by lease includes all who lawfully succeed to their rights or take their places", which covers both the tenant and landlord sides. Local law will determine what your lease can say (if it says anything at all right now).

@Craig Ward - I'm actually kind of confused. If the elderly tenant is the only person on the lease and died, why does the family have any obligation to pay you? Are they living in the apartment? If so, why aren't their names on the lease? I'm assuming you have a clause stating that "only the listed person(s) may live here" or something along those lines.

Next question: please please please tell me that you have been saving a percentage of your income for vacancy. If you're so strapped for cash that this is a huge setback, then you're in more trouble than just dealing with a dead tenant - you need reserves to run a business.

Suggestion: If the family is still living in the property, get a new lease written with their names on it. Hopefully you have a cash reserve and an understanding that they have other issues right now. Even if it's just an e-mail asking them to agree in writing that they will sign a formal lease and that they want to stay there - once you have that in writing, understand what they are going through and make your expectations reasonable (and considerate) - ask for rent due by the 15th this month.

If the family is not planning to live in the apartment and state that in writing, then ask them if they would like help moving her stuff. If they want her stuff, they can provide storage space (a storage unit would work) and can either agree to have you move it or they will send some cousins or nephews to help. Start posting the apartment on your choice of websites / local papers and start screening tenants. Since no one is on the lease, you should be fine to take potential tenants through the apartment, give the apartment some TLC, etc to get it ready to move in a new tenant. This will take time anyway, so it would give the family time to move their stuff out.

Be considerate. Use your vacancy cash reserves as it is intended to be used. Get a new lease signed by the family (if they want it), or start screening new tenants. Either way, you can probably have a new tenant in and pro-rated by the 15th or have the family paying full rent by then. Are you really so tight on cash reserves that 15 days will break your business? If so, you need to reconsider how you're using the income.

@Paul Ewing - Um... am I the only one wondering what the story is behind a bull running into your car?

@Benjamin Riehle - very well-written post. If you extended out five more years, you could have shown how the growth is exponential and would have earned at least a second upvote from me.

@Thomas Riehle - no, do not pay down more principal on day 1. Putting more cash into equity will increase your cash flow (lower your mortgage), but it is a high price to pay for that slight increase. Instead, buy a larger property (4-unit instead of 2-unit).

@Byron Kearns - BRRR refers to a strategy that includes purchasing a property for cash, then refinancing with a lender. Most lenders won't allow you to pull more than 75% equity from a rental, so you will need to have 25% equity. With little money down, you most likely won't be able to achieve this.

Your best strategy in my mind would be to use this property to learn how to buy, rehab, and sell a property. It sounds like it doesn't need much work, so you might be able to do that.

Now, on the the questions that you need to answer:

First: How much will the house be worth once it is repaired? Go to your favorite MLS website and check for local comps - how much have similar houses been selling for in the area? This will give you: how much you could sell it for (and therefore, how much your profit would be), or how much you could refinance for (again, you'll need more than 25% of the comp selling price before you can take money out).

Second: how much will the rehab really cost you? If you have prior experience doing work like this, take a walk around the property and write up an estimate on how much it will cost you. If you don't have experience, ask some local investors for their favorite contractor who can walk through with you and give an estimate. Most investor-friendly contractors that I work with will walk the property for free with me. This info will tell you how much you will have to spend on repairs (obviously) and how long it will take to complete (how much money will you lose while paying mortgage / utilities while doing work - or "holding costs")

Third (which you already answered): how much can you rent the property for? Take a look at RentJungle and see how much a 3Bed/2Bath rents for in the area. This will tell you what your income would be if you hold and rent.

Fourth: what are your expenses going to be if you hold? Mortgage, taxes, insurance, and the "percentage expenses" (CapEx savings, maintenance savings, vacancy savings, and Property Management: 10%, 10%, 8%, 8% respectively is usually a good estimate on these). This will tell you if you can make money by renting the property once you're done rehab.

On to the bottom line of how much to offer:

For fix and flips, you usually want to aim for 70% of final sale value (how much the comps sold for). That means you want your purchase price plus rehab cost to equal 70% of the sale (or less). 

For buy and hold, you'll obviously want your income (rent income) to be greater than your expenses (listed above). To refinance, you will need to have the new appraisal (after rehab) to be large enough that your original loan is less than 75% of the new appraisal.

I hope this helps! If you have any questions, let me know

@Joshua D. - to scale SFH's, you'll be best off automating as much as you can. If you're looking for reasons why multi-fam is easier to scale, here are the obvious ones:

If you're going to have your wife taking care of bills, and you're handling lawncare - it's much easier if you have one property that holds 20 tenants rather than 20 properties that each hold one tenant. One lawn, one roof, one set of bills. If you are handling 14 properties now, that's 14 sets of bills, 14 exteriors to take care of, 14 roofs that might need replaced.

My opinion: the fewer properties that you own, the easier it is to manage and the lower the CapEx / expenses. This leads to better returns and less time spent managing.

If I were you, I would to a 1031 exchange with your properties - sell them, and purchase several larger multi-fams. First, you take advantage of the taxes. Second, you leverage your current equity and can expand. Third, you simplify your personal management that is needed. Fourth, you take advantage of the current housing market.

There are plenty of deals if you're willing to expand a little - McKeesport had some deals that I was looking into a few months back.

You can still expand using your current methods - it'll possibly be slower if you don't leverage, it'll require more management, and it might require help (PM company perhaps, which can cut into your profit).

@Abdul Shishi - OP asked for opinions... you can't fault people for saying what they think is the best strategy. Some people have more experience in different market types and strategies, so it's natural for them to promote those as the method that gave them success.

@Sean Krohn - this situation can swing both ways. If you were looking for a turnkey rental that was fully-tenanted, this is a slight setback. The tenant who is staying should pay your mortgage, which means you won't be losing money on this deal from day one.

On the other hand, I know of quite a few investors who insist on having a property vacated when they purchase so that they can screen their own tenants. Inherited tenants can be a huge detriment to your investment if the tenants weren't screened properly.

My advice would be to take the opportunity to do get some TLC done on the vacant unit, then rent it out. Make sure to screen tenants, and don't fall into the trap of filling the vacancy as quickly as possible. It isn't worth it, unless if you enjoy chasing rent and repairing units.

@Sean Carroll - allowing pets is a business decision that I based off of some numbers that I recently read. According to Zillow, only 27% of apartments in the U.S. allow pets (current data). 

On the other hand, a 2014 survey stated that 72% of renters owned pets. In 2017, a similar survey put that number at 32%. Looking at those numbers, I would say that there is a shortage of apartments that allow pets... and I want to take those tenants for myself!

If you charge $50 per pet per month, you're looking at $600 more per year in rent. If your state allows, you can add in a non-refundable fee up front. Yes, there can be more expenses involving pets - but that's what tenant screening is for. No, it won't weed out all of the bad tenants - but a solid screening plus a strong lease can mitigate the risks.

Since there is a lack of apartments that allow pets, these tenants usually expect to pay more per month so they usually won't bat an eye over paying an extra $50.

One major reason why I allow pets: less vacancy time. Since there's a relatively high demand for pet-friendly apartments, I usually have a list of people who apply. Once I have good tenants in, they usually renew their lease because of the difficulty in finding another apartment that will allow pets.

Bottom line: increased income for me, less vacancy rates for my rentals, at the cost of ensuring that my tenant-screening and lease are both iron-clad (or as close as I can get).