All Forum Posts by: Ben Wilkins

@Tarcisio Mora - that is correct, I use 10% for Maintenance and 10% for CapEx as a general rule. If I'm looking at a new construction I'll consider putting CapEx at 6%-8%, but I prefer to stay on the safer side to avoid bad surprises.

Other than that, you did a pretty good first analysis of the numbers. Don't forget to include utilities, as most duplexes don't split water or sewer / trash and the landlord carries those bills (or includes them in the rent as a variable). 

Are you looking for your first purchase?

@Tarcisio Mora - first note: Maintenance and CapEx should be considered two separate figures (and percentages). $260 per month is low if you use it for both. If you use 10% for both, it brings your cash flow down to $210 per month.

If you don't set them apart, you'll end up using your "profit" on a large-ticket item down the road.

That alone would bring this down to a point that wouldn't make it worth it in my estimation.

@Tyler Blodgett - I usually recommend RentJungle for comparing rent rates. Put in a location and some optional information (number of beds for example) and it will show you what is currently on the market. This isn't exact, but it gives you an idea of what people are paying.

There is also a nice link for "Rent Trends", which tells you some of the averages.

I'm sure that you can use IFTTT (If This Then That) to set up a spreadsheet for rents on Craigslist. I use IFTTT for property listings, but never considered using it for trending rent rates... I'll let you know if I end up doing something like that

@Tyler Blodgett - there are a lot of companies that specialize in "Turn-Key" properties, which are usually something that they flipped and are reselling. From a cash flow perspective, this can potentially be a good deal. An investment property that already has major issues taken care of, fresh paint, and ready to rent?

If you have never done a renovation before, and you want to get into buy-and-hold rentals, this might be a good deal for you.

@Grant Rothenburger gave excellent advice to take an contractor through as part of your inspection process

Find what the rental income will be, what the rental market looks like (high demand?), and what the purchase price will be. Determine your estimated cash flow and decide if this property will fit your goals as a first property.

There's absolutely nothing wrong with buying a recently-renovated property if it fits your goals. The best investments are ones that you can improve / force appreciation / increase cash flow, but that doesn't mean that a turn-key is a bad investment either.

Best of luck!

@Daizy Gutierrez - while I agree with the fact that this is not the best fit as a first purchase, I'm going to point out a few other options.

The best investment is one that you can improve upon. If you purchase a property based on cash flow of three units, and can increase your income by adding two more units, you force appreciation of the property and increase both the income and the resale value. This kind of deal requires a knowledge of calculating current cash flow, improvement costs (construction in this case), future-state cash flow, etc. Because it's a little more complicated, I wouldn't say that you want to do this on your first deal.

In general, your realtor is correct in pointing out that the ability to add units is a good thing that should be considered.

The same can be said about forcing appreciation through other means ("shows potential") such as splitting utilities to the tenants, improving the living quality of the apartments to increase rent, etc.

Now, all of that being said (and without knowing the area), you have to run some numbers for yourself (and us, if you want more specific help). Find the following:

1. Current rental income per month of the Triplex

2. Go to RentJungle and type in your zip code. Find a similar apartment, and use that to determine what you could rent each unit for. This gives you best-case scenario.

3. Calculate your monthly mortgage based on purchase price, interest rate, down payment amount

4. Use the 50% rule, which states that 50% of your income will go toward maintenance, CapEx, vacancy savings, insurance, etc.

To do this:

(Total Income per Month) * (50%) - (Monthly Mortgage Pay) = Best Case Cash Flow

We can help you more from there :)

@Joe Garvin - what exactly are you looking for? Any specific advice?

Just by going over the numbers quickly, I have a few questions / comments.

First question: You say that rent should be raised to $900, seller says $850. If it could be raised to $850, why didn't he do it? Sellers usually raise rents as much as they can in order to make their property look like a better investment. Where did you get the $900 from?

Advice: Check out RentJungle or RentOMeter to compare local rent rates. This can give you a good idea of how much an apartment will go for based on size and number of rooms.

First Comment: Good job running another look at the numbers. The seller states a cash flow of almost $500 per month, but this never takes into account maintenance, CapEx savings, vacancy, etc.

Second piece of advice: You only have 3% CapEx savings per month. The property has already had work done, but it isn't a new construction. I strongly suggest raising CapEx to a minimum of 5% per month, with an even stronger recommendation of putting it closer to 10% per month. Older buildings are more prone to needing larger-ticket items, and it will always feel better to pay out of a savings account rather than out of what you had originally thought was profit.

Suggestion: You know what your expenses will be (8% maintenance is fair, raise CapEx to 10%, vacancy of 4% may be low, insurance I would get a quote on as your rate seems high). Don't play with expenses, thinking that you can cut corners to increase cash flow. Your options are to increase rent (RentJungle will tell you how high you can expect), or decrease your financing payments (decrease purchase price, negotiate for a lower interest rate, etc).

My philosophy: (Almost) Every investment property has a price at which it would be worth it for me. If I know my expenses and income, I can find a purchase price that will bring my mortgage down far enough to provide my target cash flow. There are always exceptions to this rule, but they are usually extreme.

Advice: Decide what you want. If you are looking for a cash flow number (say, $200 per door per month), you can find a purchase price that will give this to you. That way, you know what your bottom line is and you won't slip past it while chasing a property.

If you are looking for something more targeted in feedback, ask away!

@Quincy Adams - I've been through the neighborhood, and it's a rough area to own rentals. This is the sort of property that you would need a property manager for to handle chasing down rent, evicting tenants, finding new ones, etc. 

I disagree with @Thomas S. - this is exactly the type of place that you would send your worst enemies to haha

As a side note, it can be difficult to find financing for an investment property under $40k - most banks view this is not being worth their time, and would require a portfolio lend or something of that sort.

@Steve C. - purchasing based solely on future appreciation is a higher-risk method of investing. Cash flow is something that you can immediately benefit from, whereas appreciation is a forecast of what might happen. As such, it is a speculative investment that has no guarantees. 

The only time that I would invest based on appreciation (assuming negative cash flow for your example) is if I have enough cash flow from other properties and can sustain the negative cash flow from. This isn't the same for everyone, but that's the only way that I would approach this sort of property.

I personally have nothing against single-bedroom units. The argument usually quoted against this sort of investment is that a single vacancy equals 100% vacancy and a total lack of income. This risk can be reduced by screening tenants, setting aside a vacancy "expense", etc.

Bottom line: negative cash flow for a speculative investment is more risky than a positive cash flowing property that might never appreciate. You can look at pros and cons (I gave cons) and decide how much of a risk you can afford. Appreciation does have high reward possibilities, but with more risk.

Single-room rentals can be good if you have good tenants and plan for possible vacancies.

I hope this helps! Good luck

@Mark Tallent - I don't have numbers to run, but the description sounds like a strong investment opportunity. Assuming it is already marginally cash-flowing, it has room to grow and improve. The best investments are ones where you have a plan to improve, and a way to leverage the property.

That said, there's a lot of improvement and work that you listed in order to make this a solid investment. You'll need to handle hard money lending, rent increases / tenant replacement, construction management or sourcing, and general property management. If you don't have a lot of experience in each of these areas, you'll be attempting to learn a lot all at the same time.

If you an find a more experienced investor in your local groups that wants to take this project themselves and mentor you through it, that might be a great option.

My concern is that this would be too much too fast, and that you aren't setting yourself up for success if you go into this large of a project as your first.

@Kevin Rollins - In response to @Timothy Doenges concern about "safety net", I'm happy to see that your initial analysis included CapEx, Maintenance, and Vacancy. Quite a few newer investors forget to include these as "expenses", and you show that you've done some research (kudos!)

The percentages that you used seem low (only 5% for both maintenance and CapEx) - I would only use this low of an estimate if it was a new property. You can't exactly plan for an emergency CapEx expenditure (new roof, water heater failure, etc), but most properties should assume 10% maintenance and 10% CapEx - especially if this is your first property and you have no other possible funds to pull from for repairs.

If you increase both of these percentages to 10% you'll be closer to $120 monthly cash flow (estimating, I didn't do the math). At this point, you've covered the concern of repairs and can see that this investment probably isn't worth it from a cash flow perspective.

Overall, you did a good initial analysis - now you're at the point of refining and deciding what to do with the knowledge. Try to make your first property a solid one, or you'll run a higher risk of regrets if anything goes wrong.