All Forum Posts by: Cliff Harrison

Do you have home equity in your San Diego residence?

Congrats!!  I am not far from leaving the day job also, it is a mental challenge I've been working on.

@Chris Nordella - my suggestion for CapEX is to use a constant factor like $125 or $100 per month ($100 is the minimum on a 3/2 type of property) for capex.  If you average out the cost of replacements and the service life on the components you come up with something like this.  The replacement cost doesn't vary between an $800 rental and $950 rental, no need to use a percentage.  I personally also do this on maintenance and repairs - a sewer line cleanout costs $115 regardless if the rent is $800 or $950.   Consider unit turnover cost in the vacancy or make sure it is accounted for elsewhere - not just time with no rent, but your out of pocket costs for paint, cleaning, flooring, etc.   If you spend $1000 on a make-ready that is a big chunk of annual cash flow gone.  

Situation:

Single Family Rental financed on 15 year note.  P&I payment is $330 dollars.  13 years remaining on amortization schedule.  Payoff amount is $35,000.  Interest rate is 5.25%.  No plans to sell, assume a hold period of 20 years from present.  Tax bracket 33%.  25.5 years of depreciation expense remaining.

What is the ROI for paying the $35,000 to pay off the mortgage? Is it as simple as (5.25 - mortgage interest deduction) or is more complicated and involving an IRR calculation over the amortization period or even over the hold period? You will receive an additional income stream (additional cash flow) of $3960 annually for the 13 years up until the mortgage would be paid off through they normal amortization. However a portion of that money not being received as cash flow is going towards paying down the principal, and it remains with you as an asset (equity), so from a net worth perspective this portion of the cash flow is not an incremental return on investment. Do I need to plug in a return on the new cash flow (depending on what is done with it - spending, investment, etc) to calculate the true ROI? Is there a discount rate for the fact the additional cashflow is GUARANTEED with the simple act of paying off the mortgage with no additional assumptions? Interesting.

Thanks

Cliff

Awesome deal, thanks for sharing the details.   The payback of principal to the private lender family member is undefined or was there an understanding of a refinance/payback in a certain number of years?  In any case, you did great.

Congrats!  @Corey Jacobs  that is the way to get off to get good start - no money out of pocket!  Would you like to post up your numbers and we can give feedback.  I'm interested in the 25% down from the private lender and how long you will ride that.

$1300 3/2.5/2 + sunroom deck 1400 sq feet KC,MO

It is great that you have reserves. But imo its a mistake to consider that when determining your estimated cash flow if you plan to hold for a long time.  In effect you will be indirectly paying your cash flow to yourself out of the reserve fund, instead of receiving it from the tenants.  If you do this over and over it will lead to problems, not financial security.  

In future I would add in maint, capex, vacancy/credit losses, and PM.  I include PM even if you are planning to self manage, because that may change in future and its best to invest in holds that can pay for it.  

Is $615 the market rent or are you giving a great deal to your tenant?

Good luck, and I don't want to come across as negative. You are in the game and doing stuff, learning, and you will make it all work out.

Cliff

People beat me to it but please be careful not to take too much money out on your refinance even though it's available to take. $595 isn't enough to cash flow much or even at all on a SFR with a mortgage if expenses are accounted for. Assuming a great note 4.25 at 30 year fixed...

• Loan Payment: $255
• Taxes (assume $500 annual in a low rent area): $42
• Insurance (assume a $600 annual policy for cash value to cover the bank at least): $50
• Maintenance Expense: $100  
• CapEx Account: $100 (conservative - how old is the house)
• Vacancy & credit loss & legal fees: 6% $35.7  (conservative due to long term tenant)
• Total expenses $582 (conservatively estimated).  This could realistically be over $600.

Thanks Victoria.

The Entity is a Manager Managed LLC with 9 passive investors. The investors have equity in the company pro-rata according to amount of their capital contribution. I took 30% equity for my work on the deal and as the Manager, the investor/members (of which I am also one) share the other 70%.

We put 20% down

Payouts occur at least annually per the Operating Agreement, but the plan is to issue quarterly dividends.  The plan is to return the member's capital in year 5 refinance, and then for a final sale in year 10 (all members will share).

800% leveraged, and it was done through a local bank I have done a few smaller SFR portfolio loans with before.

I used a local attorney on the entity, I drafted a layman's version of the operating agreement and he "legalized" the language for me. Also filed the SEC Form D, etc. 

Good luck!  This is a challenging endeavor, hopefully it all pays off an planned.