All Forum Posts by: Matt Herbert

I'm trying to understand how capex reserves factor into NOI, Cap Rate, Debt Service Ratio, and other metrics. Lets assume the following yearly numbers for a Single Family Residence (these numbers are made up, try not to get hung up on the minutia)

• $200,000 - Total price of property (purchase + rehab; aka ARV)
• $24,000 - Gross Income (from rents, no other income)
• $1,200 - Vacancy (5%)
• $3,000 - Property Taxes
• $1,000 - Insurance
• $1,000 - Utilities
• $2,000 - Maintenance/Repairs (1% of total property value)
• $8400 - Debt Service

As I understand things, my Operating Expenditures (Opex) will be:

      Property Taxes ($3,000) + Insurance ($1,000) + Utilities ($1,000) + Maintenance ($2,000) = $7,000

Now to calculate the Net Operating Income (NOI):

      Gross Income ($24,000)  - (Vacancy ($1,200) + Opex ($7,000)) = $15,800

Once I have my NOI, I can go on to calculate the Cap Rate (Net Operating Income / Total Price of Property = 7.9), the Debt Service Ratio (Net Operating Income / Debt Service = 1.88), etc.

What I am missing, is my capex reserves. I know someday my property will need a new roof, so I set reserves aside for each property. I typically set aside between 10% - 15% (depending on the age, condition, location, etc). I don't understand if the capex reserves should be excluded from these types of calculations, or if it should be included somehow?

Thanks

@Scott Smith, wow ... that post is a gold mine of information. Thank you. I'm especially interested in Series LLC's - I've never heard of those. Looks like I've got myself yet another research topic.

This is where I am now. I know what I don't know. And I know that I simply don't have the bandwidth to be an Investor, and a CPA, and a Lawyer, etc.

Thanks again Scott, and I'm looking forward to your DM.

@Ellen Morrison, you should consider talking to the lender and see if they will let you do your own escrow. My lender lets me manage all of my own escrow accounts, which has the dual benefit of reducing my upfront costs, and allowing me to earn interest on my escrow dollars.

Also, my insurance agent is usually more than happy to send the bank a binder saying I've paid my 12 months of insurance, but then put me on a regular monthly payment plan. Again, this saves me a bunch of upfront costs.

@Richard Dale-Mesaros, I'm not often up in the whites any more (I used to be an avid hiker). If I ever find myself back in that neck of the woods, I'll be sure to look you up. Thanks for the invite. Ohh, and I'm always looking for deals, so if you come across something, feel free to reach out.

@Marie Fries Thanks for the warm welcome. Long distance real estate investing is something that intrigues me, but I haven't had the fortitude to research yet. All of my units are less than a 15 minute drive from my home. Best of luck in your journey!

@Scott Mac, thanks for the advice. Getting my business structured for asset protection is a requirement I've set for myself this year. As @Richard Dale-Mesaros points out, It's tough to know who to talk to first.

I've been a software engineer for a long time. I've built some pretty complex stacks. I know from hard earned experience that a faulty decision early in the design can lead to years of problems. I may be wrong, but the design of a Real Estate business feels similar to me.

This is why I've turned to BP. I'm hoping I can leverage other experts who've already solved these problems.

Hey @Basit Siddiqi, yes, the 4 properties are buy and hold.

I'm not sure if this changes anything, but this year, I'm planning to buy 5 more properties. And, my wife is getting her Realtor license and will be doing that as her primary job.

@Joe Pearson and @Lucas Knowles, welcome to BP. I'm also a software engineer going down the Real Estate path. I can say the first one is always the scariest. But IMO, it's totally worth overcoming the fears and anxiety. I'll be attending the next meetups in Manchester and Nashua (weather permitting), hopefully I'll see you there!

@Parker Fairfield, another nice benefit of pro, is access to a host of legal documents specific to each state (including NH). 

A great guide to help being an effective landlord is @Brandon Turner's "The Book on Managing Rental Properties: A Proven System for Finding, Screening, and Managing Tenants With Fewer Headaches and Maximum Profit". You can get it here on BP for $19.99, or get the kindle edition on Amazon for $9.99.

Hey @Lance Alonardo and @Parker Fairfield, I really wanted to go to the NH Real Estate Investors Mastermind in Nashua last Wednesday night, but sadly the weather that came in that night dissuaded me from making the long drive down there. They do have meetings every month on the 3rd Wednesday in Nashua. Weather permitting, I'm going to the next one.

I'd also be interested in a more 'centralized' meetup. Timing is tricky for me at this time of year, because I tend to get busy making maple syrup. Parker, if you are planning to organize something, I'd be keen on attending.

Hello all,

I'm relatively new to BP, but I've been dabbling in Real Estate for 5 years now. I've decided this is my year to become more intentional. I own 4 properties, and am under contract for a 5th. Currently I do all my business as a sole proprietorship. No LLC's at all. I also work in a stable full time high income job (that I'd eventually like to escape).

I know that for liability reasons, I should probably get the properties into LLC's. However, I have this nagging feeling that how the LLC's are structured could affect my tax strategy. I've had a couple of CPA's in the last few years, and none have been able to help me figure this out (they were more number cruncher's, and not strategists). I'm looking for any advice around how to structure a small but growing real estate rental business. Or, suggestions on how to find an amazing CPA that can really help me maximize my situation.

Thanks

-Matt