All Forum Posts by: Ben Wilkins

@Anthony White - an 8-plex for $60k? Even with $40k in repairs, you only have to rent each one for a whopping $125 per month to match the 1% rule....

Which raises major flags for me.

What kind of condition is the building / units in? Where did you come up with $40k repairs? Are you sure that's accurate? I would usually say $15k per unit for a full rehab of kitchen, bathroom, paint, flooring... $40k doesn't seem like enough based solely on the purchase price.

What kind of area is this building in? What size are the units? $375 sounds like C or D-class, which has its own risks as an investment property.

Just a word of caution to check your numbers. $60k is insanely cheap for eight units, so more power to you - just check your rehab costs.

I would do a delayed finance - pay $60k in cash for a fast closing, then immediately refinance out 80% of the appraisal value with a bank with no seasoning period. Use the 80% to cover rehab, and supplement with friends / family or hard money to finish the rehab. Depending on how much it appraises for, you can get close to the $40k that you're estimating.

@Rachel Lindenthal - @Bram Spiero gave some good advice for raising maintenance up to 10% and including property management. For something small, and for your first, I suggest managing it yourself to learn what all goes into managing a rental. You will learn a lot from doing things yourself. As far as including PM - another way to look at it is that your time should be worth something to you. Always include PM!

My only concern is whether or not the HOA covers CapEx (my guess is that it doesn't cover everything). Some HOA's "own" the exterior of the house, which would cover roof and siding. Water heater, ACU, furnace might belong to you as the owner. Check with the HOA to see what is covered - if they handle everything exterior, put in 4% - 5% CapEx. If they handle everything, you should be fine without including anything.

Other than that, you ran some pretty good numbers. Kudos on remembering Vacancy!

@Nathan Gonzalez - if the units are older and "ugly", chances are that you might have to put some immediate maintenance work into them to fix them up a bit. Check the roof, furnace, water heater(s), and make sure that they are all in good condition.

When analyzing expenses, you did a great job including CapEx and a manager - those are two of the things that a lot of people forget, and it's fantastic that you remembered them. However, you still should account for vacancy even though it's "hardly ever vacant". Put in 5% as the national average, or 8% to be conservative. Also, include a regular monthly maintenance expense of 10%. While you have CapEx included, I would raise it up to $180 per month since the property is already in rough condition - the chances are that you'll have to do some work in the first five years.

So expenses come out to:

$600 PITI
$180 PM
$180 CapEx
$180 Maintenance
$144 Vacancy

$1284 Total Expense

$516 monthly cash flow

This isn't as good as you were first calculating, but it isn't too shabby. The biggest concerns for me would be: 

Will you continue to rent to the friend and his mom? I try to avoid renting to friends and family

What is the condition of the property? Will it cost you money up front or in the first year for any deferred maintenance or improvements?

Check RentJungle to see what the local rent values are for 1/1 apartments - if you aren't having a problem renting for $400, it's probably lower than average.

So far, good job on your analysis! Just increase your CapEx, add in some maintenance and vacancies, and do your due diligence to make sure there won't be any large expense items to fix up.

@Jay Orlauski - fair enough explanation. I am more a fan of putting the expenses and higher vacancy in from the start rather than if it looks too good, but that's just me I suppose. If you have Repairs and Maintenance as your CapEx, what do you use for general maintenance for wear and tear, or when a tenant moves out?

PMI changed, and is now on an FHA loan for life or until refinanced rather than just until 20% - welcome to the new world. It wasn't exactly touted to the general public, and is an easy fact to miss. Because of that, I include PMI in all FHA loans for life during my analyses, or at least account for refinance fees.

Good explanation of your thoughts, but I would rather run safe numbers on my expenses rather than try to undermine it with heavier expenses halfway through my analysis. I'm pretty sure you don't mean it like that, but "undermine" is a strongly negative word ;)

How do you keep from getting into an analysis paralysis mindset if you put in heavier expenses for a deal that looks too good? What if a deal is only "OK" in your first look, so you don't put in the heavier expenses? I would think that it would be better to use conservative numbers from the start based on the individual market - this would give you safer investments and would evaluate properties with a structured approach (if that makes sense)

@Jay Orlauski - No CapEx? You only have $416 monthly in taxes, when the poster stated $7500 annual ($625 monthly). I assumed he had actual numbers, but it might be less. No property management? Your only savings for each month is 5% vacancy plus 4% maintenance....

It's possible to make any property look good on paper, but you have to account for something breaking eventually. $166 monthly maintenance will barely cover lawn care, snow removal, basic repairs when a tenant moves out. All of your "profit" from the past five years will go toward replacing the furnace, water heater, roof, siding, etc and you'll be left with a loss or deferred maintenance.

For a first investment and someone who is putting down 5%, it would be risky not to set aside savings for CapEx items. He doesn't have other properties to float the repairs, and I'm afraid that your analysis doesn't set anything aside except for vacancies.

Other than that, your spreadsheet seems fairly well laid out. Are numbers in parentheses one-time expenses? Do you include an escrow account for one year of taxes such as most lending agencies request? Would that be included in your initial investment?

@Shawn Ward - take another look at the taxes, the fact that he will have PMI due to 5% down, and the fact that he's only renting out three units. Even at 4 units, I'm not seeing a positive cash flow, but maybe you saw something that I missed

@John Garretson - in my previous comment, I used the 50% Rule to do an initial analysis. While the property looks good on paper using that method, I then went on to argue that this is a situation where the 50% Rule is not the correct tool.

You could use something higher than 50% for your expenses and still apply that rule, but at that point you're guessing how much more your taxes and PMI will raise the expenses above 50% of your income. So instead, let's do a deeper analysis of this property.

First things first: Income. Since you're thinking of putting 5% down and house-hacking, I'll assume 3 rented units at $1300 each.

Total monthly income: $1300 x 3 = $3900

Next: Expenses

PM (10%): $390

Maintenance (10%): $390

CapEx (10%): $390

Vacancy (8%): $312

Taxes ($7500 annual): $625

Insurance ($2000 annual): $166.67

Utilities ($3500 annual): $291.67

I estimated insurance and utilities, but you can call around to get the insurance quote, and get historical amounts for the utilities.

So your monthly NOI: (Monthly Income) - (All of the above) = $1334.66

Assuming you put down 5%, 30 year loan, 5% interest, with 0.8% PMI, your monthly payment would be $2230.

Cash Flow: NOI - Mortgage = -$895.34 

The 50% rule said that your cash flow would be -$90, which is a far cry from -$900. If you rent all four properties at $1300, you would have -$80 per month cash flow.

As anticipated, the PMI and taxes hurt this deal a lot. My advice: Find a better deal, or see if you can partner with someone to collect the 20% down payment.

I hope this helps!

When looking at an investment, you have a few expenses that you need to consider. These are not concrete expenses such as taxes or bills, and are instead calculated as percentages of the income (I call them "Percentage Expenses")

Maintenance: 10%. This is for every day wear and tear, repairs, removing bee nests, etc

Capital Expenses (CapEx): 10%. This is your major repair items - basically, you're saving up for when the roof needs replaced, the water heater needs repairs, etc

Property Management (PM): 10%. Even if you plan to manage the property at first, you might decide not to later. Also, your time should be worth something

Vacancy: 8%. This should be based on the average of your market, but 8% is a safe, conservative number.

A quick method for evaluating is to assume 50% of your income will go toward your percentage expenses and your utility expenses. The remaining income will be an estimate of your monthly NOI. As a side note, 5% down on a $400k loan would make P&I closer to $2040 rather than $1900, and that doesn't include PMI or taxes.

So say you rent out three of the units for $1300 = $3900 monthly income.

Now, subtract 50% for expenses and you're left with $1950 as your NOI.

Take out your mortgage payments of $2040 = -$90 monthly cash flow

So you'll have negative cash flow based on this very loose evaluation, and assuming you live in one unit. If you rented all four units out, your number would change to $560 monthly cash flow.

On paper, it's actually not a bad deal, and you can live in one unit for only $90 per month. Once you move out, you can have $560 cash flow, which is better than $100 per door.

Now, the major "but":

This was done using 50% for expenses, which doesn't take into account PMI or the higher taxes. This is a good example of where the 50% Rule might not be a great first analysis.

My suggestion would be to do a full analysis of the property rather than depending on the 50% Rule. For the sake of keeping this post a little shorter, I'll run a full analysis in a second comment ;)

@Samuel Bavido - it's always fun when you find a property that isn't advertised very well - that always opens up more opportunities.

Most of the others hit some key notes about NOI, CapEx, etc. The major things: CapEx should be 10%, maintenance should be 10%, vacancies should be based on the market average (8% - 10% is conservative usually). Don't forget these numbers when calculating expenses.

Now, on to what you can do in order to make this deal better for yourself.

Expenses: Did I see correctly that the landlord pays water, sewer, and gas? Find out if you can split these utilities up through metering (likely not very cheap), or consider splitting the bill with the tenants. A third option that I have in my lease for properties where I pay the water: 

"If Landlord pays for water and sewer TENANT will not use excessive water and understands that he/she will be billed for water and sewer for any amount over the normal charge.

If Landlord supplies electricity to the Premises, the use of air conditioners, electric space heaters, or other heavy duty appliances requires the written consent of the Landlord"

There should be a way for you to lower your utility expenses... the key will be figuring out which path is best for you and this property.

Second: you have eight garages? Find out what the average rent is for a parking garage / storage unit, and rent them. At $35 per garage, you're making an extra 5% income... and that might be cheap for storage units or garages. Either way, there's income on the table that is being missed.

Last: Once you have the tenants under your own lease, you don't have to keep the early payment bonus. That's almost 4%-5% and should be needed if you screen your tenants.

With those three things, you can increase your cash income by somewhere around 10% without actually having to do anything other than implement your own leases. My point is that these people didn't manage the property, so they came up with the easy solutions - you can benefit by taking over and increasing the cash flow by managing it better.

Food for thought!

@Joseph M. - I saw that too, but assumed it was a typo by the poster since the rent was only $40 more than the single bedroom. I would guess that he has the correct rental income for a two bedroom unit in his post.