All Forum Posts by: Dan D.

Hi,

Can you tell me what your current loan to value is across all of the properties?

You are working right now.  Is your goal to get enough cash flow to not work, or do you plan to work, and your goal is to gain total net worth?

If  you want to quit your job, how much cashflow do you need for your lifestyle?

Cashflow will help you quit a job.

Making a play on total net worth is more about buying properties that will increase in value, and leveraging large mortgages which will get paid down overtime.

I know cashflow is king, but certain people would be happy with properties that would appreciate at or above market rates (which is speculative) but can help you buy more properties than a smaller property that may cashflow better but never appraise for enough for a much large mortgage.

I think the reason it's the go to for many people is that for some reason, clear easy to read language, or whatever...  it's the book that gives everyone the "aha" moment.

Until you change your focus from being tied to a desk tied to the need for a paycheck in trade of your time, to wanting something better, it doesn't much matter.   I think this book does a great job of getting people to see the different of looking for a better paycheck to taking control of their own lives.

If you are already taking control of your life, your past the need for this book.  Also, at a certain point you can stop reading books because the knowledge you will gain after that first layer comes from real world experience and specific circumstances.  In those cases, posting questions in the forums will get you the knowledge from the specific experiences you are experiencing.  There won't be a book written for every scenario you run into.

 Look into neighboring towns / counties to see if there are lower taxes in the next town over.  A 5 mile drive might be worth a couple hundred bucks in cash flow the way it looks and you could probably get similar rents.  

If the area I'm looking at is correct, there are homes for sale in your area for $100,000 to $140,000.  At 20-25% down, you can grab one for $20-35k.

Rents on those appear to be in the plus $1,500  range.

In my opinion, those would be a better house because of the large size and room for growth and not bad ratios.

A new fridge cost about the same for a $70,000 property as it does for a $170,000 property.

 You might wait 20 years for the next down turn.

My point is you really have to screw up or miss-time the market to not see a return if you can manage to buy and hold it for 10 years.

Rent at $775.

Mortgage at $325.

Annual Taxes at $3600 (which is high)

Other expense of $3000 a year (high expense ratio)

Year one, cash flow negative $2130, but overall wealth from mortgage paydown, depreciation, and 1% appreciation puts you at a 4.7 return over 10 years if you get 1% rent increase from inflation.

I wouldn't recommend it from a cashflow perspective since those expenses seem so high.  If it's a growing area, you'd be fine.  If it's not a nice house, then not so much.

Is it something you'd want to live in?

Maybe I should call this investment gone horribly bad instead, but look at these numbers as I started to outlay above.

The numbers:

$150,000 house. 20% down, ($30,000).

Rent $1,100 a month. Mortgage at 4.5% = $608.02.

But this time we'll make things really bad.

Assume 10% vacancy every year.

Assume only 1.0% increase due to inflation of the dollar, and 1.0% appreciation per year.

I am also going to assume an expense ratio of 80%.  Every dollar in rent will be used for repairs for this problem child with horrible taxes and insurance and unforeseen issues.

If I can float it with my full time job for the first few to keep from becoming cash flow starved and hold it for a total of 10 years, the return by year would be about:

After 10 years, that's an annualized return of $5,118, or 1.7%.  Keep in mind, this is 10 years after you have spent $99,433 for expenses to repair the property (and pay taxes and insurance).  If you did that and your appreciation only improved $15,000 over 10 years, you might be doing something wrong and might want to spend the $40-50k that were not spent on insurance and taxes on something that will improve the value of the home from when you bought it ten short years ago.

A bit more realistic:

If instead of rent inflation and property appreciation of 1.0% each, you happen to get luckier with 1.5% (instead of 3% or 5% that a good area might see over time), the numbers improve to a return of 4.7%, still assuming 80% expense ratio.

What if you can lower your expense ratio:

Let's stick with the 1.5% inflation on rents and the property appreciation of 1.5%, and you decide to change one thing from what I just wrote, and you're going to work to lower those expenses knowing this is a 10 year investment, and in doing so you lower your expense ratio from 80% to 70% of rents. that returns goes from 4.7% per year over 10 years to 8.9%.

If you are more successful, here are your returns on the declining expense ratios over the ten year period.

60% = 13,2% return

50% = 17,4% 

40% = 21.6%

35% = 23.8%

30% = 25.9%

One more scenario... Screw the pooch style... 

Assume you have the same mortgage as I mentioned with zero appreciation on rent.  On top of that, you only rent it out for $800 a month just to barely cover your mortgage and taxes.  You are spending $4,800 a year on expenses figuring 50% on what would be gross rents would have been.  But on top of that, you have horrible luck finding good tenants so your place is vacant 4 months of every year.  This is a train wreck. Negative cash flow of $400-500 a month. The only good thing is I'm able to maintain a meager 1.5% appreciation over 10 years from maintaining the property well with my nice budget for expenses.  If I hold it, my returns are as follows:

After those 10 years of bad luck and bad management, I'm up $4,900.  Or 1.6% a year for 10 years.

 And in the example I was mentioning, after all the benefits, it's probably around a 10% return, provided you aren't in Illinois paying $4,000 a year property tax.

 If you can find something for a better price than retail, than do that.

But don't "Not do anything" because you don't think it will work.

People buy houses all the time and <gasp> live in them with no return.  Instead of doing that, buy one to rent out.

 Well, your taxes are certainly higher and would make these deals prohibitive.

Off topic, but do you have income tax in Illinois?