All Forum Posts by: Eric Long

Hi @Forrest Owen,

Your numbers look pretty good. I normally do CapEx and Repairs at 7.5% and Management at 10%, but your numbers will likely even out. One thing to note is that CapEx prices are, generally, about the same for each house, regardless of how much rent is coming in (since CapEx is taken as a function of rental income). That means you may be able to put a max of necessary CapEx per month for these rough estimates.

The other thing to consider is how much rent you can reasonably pull in. It's easy to just assume you will get the rent you have, but unless you see what it rented for in the past, it's better to err on the safe side and choosing something more conservative. With that being said, it looks like you have some wiggle room with the rental value and still come out ahead. 

Finally, something else to consider is the fact you are long-distance investing. This may have extra costs that are related to the property directly but come with owning something far away such as travel to the area to meet your team or see the property at least once. 

Looking at the raw numbers, it seems to be a great deal. Some may argue that putting down $225K means you need higher return per door, but that is specific to where a person is at in the process of REI. For me, $407 for two doors is a good number.

But, to double-check some numbers, it seems that property management is very low at 3%. Repairs and CapEx also seem to be a little low, but I know that is area-specific and I believe the CapEx budget caps off after a certain rent income too. The other thing is the taxes. I know NJ is notorious for high taxes, but I am calculating $7500/year? That blows my mind! But if it is that much, then it is that much.

I believe it is dependent on state if a bedroom requires a closet to count. When I do general research on Google, I get varying answers. When I talk to an agent, I am told a closet is needed (for Indiana at least). Best bet: ask a local realtor. 

Right from the start: it's negative cash flow. Even if you see the home value dramatically increasing to offset the the negative cash flow, it is still dangerous territory. That would make this whole deal reliant on speculation, which is closer to gambling than investing in this case.

HOWEVER, I have property taxes coming in at $5,136/year? This may be correct for the are, but seems awfully high for a sfh. Since those records are public, getting an exact tax expense figured out will help with this deal quite a bit. Back-of-the-napkin math, but if your annual property taxes are half of that, then you will be coming out at about $200/month. Again, this assumes your property tax numbers are much higher than what they actually will be. All your other numbers look pretty good in general though.

I've seen this brought up a few times, mostly in the context of new REI having no idea why certain properties are being bought when there is no way they can cash flow. However, many people suggested it is because those properties are bought by people using it as a "tax shield". How much are these properties bought for appreciation or to make April 15th a more relaxing day?

For me, I like cash flow the most. I'm not as concerned about the CoC return at this stage but if you plan to hold the property long-term, it might become a factor for some people because you could assume that same cash invested right now in the stock market will likely return 10% per year. Compound that with 30 years and that can be a significant difference, but only if you are concerned on wringing every last value in your dollar out (this doesn't factor in equity growth either).However, you're still netting about $140 a door, which most people would be happy with even with the lower CoC return.

As for a first property, you have to ask yourself what would be the absolute worst outcome: for me, the absolute worst outcome in owning a first MFH is getting negative cash-flow. That doesn't mean I grab whatever MFH I can find, but that I have a limit of what I would call "failure" on my end (but as we know, there is no "failure" in getting started in real estate, just tuition to real estate school!) In this case, a duplex cash flowing $140/door gives me substantial room to still come out ahead, even if I over-estimate rents and my cash-flow is lower. In this case, if you like the house, it passes inspections, and everything follows through correctly, I would say it is a sound deal.

A couple of general comments:

Based on your numbers given, you'll be bringing in $246/month for a two-door which most people will say is at goal of what you should "expect".

In terms of actual numbers, $558/month in taxes seems awfully high. This is something specific to an area, but double checking tax records on that will be critical to get an accurate number (and that is pretty standard). Another thing to consider is the incomes you have right now. Are those actual numbers or estimates? $50/month for laundry seems like a high price but I'm speaking about that from a tenant perspective more than anything. And will the upstairs tenant mind paying the same rent except now having a roommate? I'm guessing that these are numbers after you move out, but still something to consider.

The big thing is being really careful with estimated incomes from everything. It's easy to make any deal make sense because you are able to casually change "predicted" incomes. You have about a $230 margin but only getting half for laundry or not being able to rent out a garage space can make this deal not worth it very quick.

Hope this helps!

I know it is area specific, but always double-check tax records as most of the "rules-of-thumb" values way under price actual taxes. The same goes for vacancy -- at 5% you're assuming less than one-month of vacancy per year? If they have been long-term tenants with no desire to move, then that would be a more fair-figure.

You're right, I have been slow about making the offer. But I am hoping to do so by Monday. I have to get a few things in-line before then, but it should be set to go on Monday!

Like Mike said above, it depends on your goals and how much you can leverage. True, you will pay more for the loan over 30 years versus 15 years but the 30 year loan has a lower monthly payment. If you are investing and can make a property positively cash-flow while paying the mortgage every month, the total amount you are paying on the loan is nearly meaningless. A 15-year mortgage makes more sense for your home (i.e. the place you live that you don't treat, primarily, as an investment vehicle) since that is sunk total cost for no reason. Conversely, a 30-year mortgage may make sense even on your primary residence and if you have a means of making the larger payments of a 15-year mortgage if you can use that extra money to invest at a rate that outgrows the interest you would be accruing otherwise.

It gets kind of technical, but it boils down to how much do you want to leverage your debt? Some people may not be comfortable with a lot of debt, some may love it. But be careful, not all debt you leverage is good either.

Like all things REI-related, there isn't a clear answer. Just keep in mind your goals and you'll eventually come to a conclusion about what you can "afford".