All Forum Posts by: Michael Le

Remember that positive cash flow is not the end-all-be-all. While negative cash flow is a deal breaker, positive cash flow doesn't necessarily mean it's a good deal. If you put 90% down on a house, it will (hopefully) cash flow. That doesn't mean it is a good deal because if the cash flow is too low, you could have made better use of your money elsewhere. That's when you have to consider other numbers, like cash on cash return.

Imagine a $100k house. If you have to put down $90k to get $100 cash flow a month, that only comes out to 1.3% return on your money ($1200/$90,000). But if you put down 20% ($20k) and the property cash flows $300 a month, you return is now 18% ($3600/$20,000). Very nice. Both of them are cash flow positive, but the former is obviously a bad deal.

As for anything that stands out in a listing, you really have to run the numbers. You will get the general range of numbers you will need to make it work after you've done it many times. If the house or price/unit is $100k but the rent for the area is only $500/m then quick calculations tell you 'No'. Using the 50% rule as a quick shortcut, you will see that half of the gross monthly rent of $500 should be reserved purely for expenses. So that leaves you $250/m for debt service. With the 50% rule, debt service should be just the PI (principal & interest) portion. Even so, $250/m doesn't leave you much to pay for the mortgage. You would have to put down more than 50% to make it cash flow.

Granted the 50% rule is very broad rule and you need the real numbers to see if something is a deal or not. Sometimes these rules can make you skip on properties that could work or buy properties where it won't. So eventually you have to plug in real numbers. But if it's not close I won't even bother to go that far.

Hi @Allan Maerina, VA loans do have occupancy rules but I believe if you've lived in it for one year you can then rent it out. As @Charlie Fitzgerald, mentioned you have at least a couple of options depending on whether you want to keep the VA loan with your current house or move it to the new one. I don't have any advice on which one would be more beneficial.

Hi @Erik E., I assume you're talking about the Rental Properties Calculator in the Analyze section of BP or a similar spreadsheet. And I'm assuming you're asking what to put in for Vacancy percentage or Repairs/CapEx/Management/etc? In that case it's really a matter of knowing yourself and knowing the property you want to analyze.

For vacancy you should have a pretty good understanding of the rental demand in the area and what the likelihood of vacancy would be for your property and for the type of tenants your property would draw. A typical percentage would be 5-10%, with 10% being a more conservative approach. With that assumption you would have a little more than one month of vacancy a year.

For repairs I think your tenant base is important. If this is in a C & D area, your tenants are more likely to beat up your property so you will incur more repairs. Higher end neighborhoods that is less likely.

For CapEx it would depend on the condition of your property. Is it old? Did the previous owner take care of it? Has the roof/HVAC/water heater been replaced recently or has there been a lot of deferred maintenance? If you're picking up the property and the roof is 25 years old, be prepared to replace it very soon.

For property management, I see most people put down 8-10%. I think that's an average of how much companies charge. You will want to put down this number even if you're going to self-manage. For one, you should value your own time. Two, one day you might want to hand this responsibility off (maybe even just temporarily for vacation) and you don't want to go from positive cash flow to negative.

I hope that helps.

Very nice, @Matt Motil. Given your ability and expertise in rehab and construction, is that why you decided to do it yourself? If you had more leads/projects, would you then start outsourcing that and start working on the business more - managing the projects or finding more work?

Hi @Helen Kolton, your expenses should take into account - VIMMTCC (I pronounce it vim tic... lol). That's Vacancy, Insurance, Maintenance, Management, Taxes, CapEX, Common.

Vacancy - physical and economic vacancy... most people estimate 5-10% of gross income

Insurance - ranges too much to have percentage, just get a quote

Maintenance - also called repairs... also 5-10%

Management - property management even if you're self-managing.. 8-10%

Taxes - be sure to base it off what the tax will be when you will pay when you it, might have been depressed for years or discounts for owner's age, etc

CapEx - for future major repairs (roof, HVAC, boiler)... 5-10%

Common - common area costs or any you don't pass on to renter... water, gas, trash, lawn maintenance, etc

Congrats @Kadidia Cooper. You were one before you realized it. If someone was living upstairs for the last 6 years, you were house hacking likely before that was even the term for it. Keep the momentum up!

If you need cash now then wholesaling or flipping will probably better meet your current needs. Once you have enough cash then you can keep the good deals you find as a buy & hold.

Hi @Jarrod Askin, have you tried running your numbers through the BP Analyze Calculators? Since these are properties you already own and know the real numbers for, the calculator should give you accurate information. At the end it allows you to save the analysis into a very nice looking PDF that you can present to your lenders. You should be able to do 5 analysis documents with the account you have. You will need to upgrade to Plus/Pro accounts to do more.

Hi @Cy G., the question comes up quite often but it usually boils down to where you are at right now in your financial career and what you want to do. If this is all the money you have and you need it to do your next one, then maybe flipping will be the way to go. If this is your only income, then flip it so you can pay your own bills.

But if you can wait and want to have passive income in the long run, I would say keep it as a rental. A year from now you can refinance and pull the money out if you need it then.

As for your numbers, I don't see anything in there for insurance. Also, I don't know if it's relevant to this property but is there an HOA, garbage collection costs, lawn maintenance, etc, that might not be paid by a renter?

Hi @Mil Sanghvi, congratulations on your purchase. It looks like it should cash flow very well for you. I did have a question regarding your numbers. You have repairs/maintenance at below 5%. Most of the conservative estimates I see are usually higher than that. On top of that, I don't see anything for capital expenditures. At $30k/door I'm assuming it's an older property in perhaps a C area. Do you have contingencies for the older roof, older HVAC, older water heaters, etc?