All Forum Posts by: Brandon Hall

I'm assuming "Cumulative Cash on Cash Return" is the total return from year 1 to 30. Thus, $50,000 would actually turn into $550,000 with a 1000% return.

To calculate ROI: (Ending Investment - Beginning Investment) / Beginning Investment

You look at the area and determine how many homes are being rented vs. owner occupied. You look at what the going rental rate is in the area, compare your house to comps, then determine a worst case/ best case rental rate. You estimate all of your operating expenses, capital expenditures, financing costs, and other fixed costs. You create a spreadsheet that will allow you to easily input numbers to show you the expected return over 10, 20, and 30 years. After you do all of that, you can play with the purchase price to determine what purchase price you need to meet your expected return.

As ratios go, everyone will say something different. I will want to know the cap rate, the year-over-year return (which includes your built up equity), and your total return (which includes previous year's returns).

Also, while you make think a positive cash flow is good no matter how small, you need to understand that your time is going to be your biggest constraint, and in most cases, you do not want to work for $1 per month in cash flow. Also, what happens if there is a storm and you need a new roof? What happens if you need to evict your tenants? What happens if you have to replace appliances or other equipment? $1/ mo won't cut it.

Keep reading BP. Read books and soak in as much knowledge as you can. Pick houses, do your deal analysis, and post it here on BP for feedback. You can jump right in if you want, but after reading BP, you'll realize that the people who jump right in tend to get burned on their first few deals.

I do already have a backup plan should I go homeless. How should I approach the situation of being added as an authorized occupant? Just ask?

Hello BP. I am going to apologize for the length of this post in advance.

I am in the Washington DC metro area. As I am sure you are all well aware, rents here can be pretty expensive. I have been using Craigslist to search for rooms and roommates the past two weeks. I found a guy (we'll call him Dave) who is looking for roommates and just put in a lease application today. It is in an excellent location (in the heart of DC) and will reduce my daily commute time by approximately 1.5 hrs. The best part is, my cost will only be $950/mo, utilities included.

Does it sound too good to be true? I consider myself business savvy and find myself aware of many things involving business transactions that the average person would overlook. Dave is signing the lease with a friend of his. I asked if we could meet so that I too could sign. He said no need to sign anything and that we can meet this Saturday.

We would move in Feb. 1st. I will need to put down one month's rent as a security deposit and also pay for my first month's rent by Jan. 31. I asked him for the house's address because he had not yet provided it to me. Once I had that, I mapped it to verify that it was the same one he had sent me pictures of. I then threw it into Google and used Zillow and Trulia to find the listing agent. I called her and asked about the place. She said she had just received a rental application for it today (good!). I then confessed that I was doing due diligence to make sure a rental application had been submitted by these guys and I verified their first names which checked out.

She then called the guys, who then called me and apologized if they made me feel uncomfortable. They sound like really nice guys and they have found a killer deal right in the heart of the city. I am nervous, because being a student of business (and I am sure you would all agree) if something is too good to be true, it usually is.

The guys told me that I do not need to sign anything, which makes me nervous. I can be on a month-to-month basis, six-month, or year long agreement. The problem is that they don't seem intent on putting the agreement in writing. I think the reason for this is that they are also trying to rent out a bonus room lacking a closet and therefore not considered a "room."

What do you guys think? I don't think I am being duped as the realtor checked out. How can I protect myself? Try not to focus on the people themselves but rather the situation.

Thanks in advance.

-Brandon

@Supreet Singh Sachdeva I think that more information is needed to truly determine whether or not this is a good buy. Based on those numbers, it looks great, but who is doing the due diligence to make sure those numbers check out? What other numbers are involved? Are the demographics changing? Are the majority of the homes in the area owner occupied? Is the area experiencing economic growth? These are the questions you should consider answering.

@Josiah Swartz I'm getting a cashflow around $25/door/mo. I'd have to agree with the above posters, based purely on the numbers provided, this isn't a good deal.

**Edit: Also note that your monthly rent is around 1.6% of your purchase price which isn't too bad. You may want to double check those expenses as I have them sitting around 70% of annual rent based on your numbers.

@Supreet Singh Sachdeva Alright I'm with you now. They are taxing your income at 36%, which is your $2,041. So they are estimating that your LLC is in the 36% tax bracket.

You would have tax savings if your before tax income was negative (i.e. you would be getting a refund). This isn't the case in your scenario though.

@Supreet Singh Sachdeva I am assuming that the data is retrospective. A tax liability occurs when someone uses aggressive tax strategies to save money upfront, like accelerated depreciation. Of course the government will want to collect its money eventually - hence the tax liability.

Unless there is a lien on the property, you shouldn't be responsible for that liability, though I am basing this on business theory so I could be wrong!

**Edit: I just realized it is actually decreasing your cashflow... Is this decreasing your taxable cashflow? If so, that is beneficial to you.

Those are excellent numbers, in fact my calculations are a few points higher in terms of your returns. I'd just make sure I wasn't underestimating any capital improvements and maintenance costs.

@Curt Davis I don't mean to hijack this thread, but what makes for a good CPA to use with REI?

I ask because I am in the process of obtaining my CPA and would love to know how I will be able to best serve future clients.