All Forum Posts by: Robert Mayo

Thanks for the feedback. I believe the 50% rule is good enough for mid-range properties, but I'm still unconvinced it works well in other cases.

For example, the "benchmark house" magically transported to downtown Palo Alto, CA, would now rent for five times as much, but I doubt repair expenses would go up five times. Similarly, moving the house to a not-so-good part of Memphis might draw half the rent, but is unlikely to have one half the repair cost.

I'm trying to break things down for a BP Benchmark House.

Property value: $50,000
Gross Rent (mo.): $1,000

LONG-TERM REPAIRS (includes annual maintenance)

roof: $4,750 over 25 year period.
exterior paint: $3,000 over 10 years.
interior paint: $1,400 over 4 years.
carpet: $1,500 over 4 years.
appliances (5 of them): $3,500 over 20 years.
replace kitchen: $10,000 every 20 years.
replace bathrooms: $8,000 every 20 years.
TOTAL PER MONTH: $191. (fixed, not a percent of rent or value)

RECONCILE TO 50% RULE

property taxes: $83
insurance: $33
property management: $80
vacancy: $70
utilties during vacancy: $4
legal fees, evictions, etc: $17
repairs due to tenant use: $50
long-term repairs: $191
MONTHLY TOTAL EXPENSES: $528 (52.8% of GR)

These numbers are pulled out of my head, not based upon actual experience. I'd like to hear what experienced people think. If I'm going to be looking at properties in low-rent areas I feel I need a more detailed handle on expenses than the 50% rule gives me.

Perhaps you can provide some insight based upon your experience with properties in this price range.

With prices and rents that low couldn't expenses like a new furnace wipe out your profit? I've noticed similar deals in other cities but am wary; it seems the margin is so thin (in $ not %). One major repair, which is bound to happen, and you're in negative territory.

Regarding the 2% rule, I see those sorts of numbers *on paper* for very low priced properties. But I'm hesitant to actually purchase them, as I'm nervous about expenses.

For instance, say a $10k property rents for $300/month. 50% rule would say expenses are $150/month. After taxes, insurance, etc, there's very little left. But this thing is still going to need a new roof, furnace, etc, eventually.

Does anybody here break maintenance costs down in a way more detailed than the 50% rule? I would think it would be more proportional to the number of square feet and the number of bathrooms than the rent. And couldn't low-end properties be poorly constructed and thus require even higher expenses?

Eddie, you manage these from out of state, right? I see you live in CA but invest in Birmingham.

Do you also do your rehabs without being personally present? I wonder how that works. Do you visit often? Is it all delegated to your PM?

Bryan, sorry for the confusion. I meant EIN not TIN.

TIN is just Taxpayer Identification Number, a general term. The two most common types are SSN (for individuals) and EIN (for employers), but there are others.

How much of this is hidden when you use a property manager?

Sure, you need to verify that there are rentals in that sort of area, the vacancy rates, and what the rents are.... but if the cash-flow is fine is the extra hassle all on your property manager's plate? Or does it rise up and bite you?

I'm most comfortable buying houses in nice neighborhoods but, thanks to this forum, I now know that low-income areas have better cash flow. Running the numbers myself has convinced me, too. But how much hassle comes along with it?

Wow, doesn't anybody like HOAs? I was actually trying to find SFRs with HOAs that take care of the front landscaping. That seems like a way to ensure that a neighborhood does not go downhill.

I'm looking in Las Vegas and with all the houses turning into rentals I thought an HOA might give my house an extra edge in value preservation and/or appreciation.

Am I nuts, or does this make sense to others?

Do you need a TIN if you want the LLC to be a flow-through entity for tax purposes? In that case don't the banks just need the SSN of the "authorized person" that controls the account?

Alfred, what are your concerns? Is it just lining up and closing on that many?

I may exchange 1 for 7 this spring. I assume I'll be busy lining up the replacement properties, getting as many under contingent contract as I can even before the relinquished property closes. Then there is the ~$300 fee from QI per property.

I would like to know about any other problems ahead of time.