All Forum Posts by: Michael Rossi

Dean,

Here is how I see it (without having the exact numbers).

Gross Rents: $1,100 per month
Operating Expenses: $550 per month
NOI: $550 per month

Cash flow = NOI - mortgage payment (P & I)
Mortgage payment on $85,000 (30 year, 7%) = $565

Cash flow = $550 - $565 = -$15 or $15 negative cash flow per month

Therefore, this will be a slightly negative cash flow property with all the real world expenses considered.

Mike

I think you're right. Putting the money in a money market at 5% might be the smartest thing to do until you have time to do more research and studying. By my calculation, 5% is exactly the same cash on cash return that you would get with those $250K apartment buildings. Your risk would be much higher with the rentals than the money market and I don't think the risk is justified without any big increase in return.

Make no mistake, you could get a MUCH higher return with rentals, but not without doing a lot more work, buying at a bigger discount, and taking on some risk.

Good Luck,

Mike

beekrock,

If you are talking about Section 8, there is certainly no guarantee that you will receive 8 rent checks each month. Section 8 tenants are no different than any other tenants. In addition, Section 8 normally only pays a portion of the rent and the tenant is responsible for the other portion.

Section 8 tenants do all the same stupid things that other tenants do. They get involved in drugs, they drink, they don't pay their bills (including their portion of the rent), etc. They get evicted with the same regularity as Non-section 8 Tenants.

I do accept Section 8 and have many Section 8 tenants. Accepting Section 8 helps fill my rentals, but it is no panacea.

If you weren't talking about Section 8, what program are you referring to?

Mike

Parrotletlover,

NOI (Net Operating Income) is determined by subtracting the operating expenses from the gross rents. The fact is that throughout the entire Unites States, operating expenses run 45% to 50% of gross rents. Therefore, NOI is really about 1/2 of the gross rents. It is just that simple.

It is impossible to get an accurate view of NOI by subtracting individual expenses from the gross rents. The reason is that you don't know all of the specific expenses you will incur in a given rental in a given year. For example, how many vacancies will you have in a particular rental this year? Will a tenant sue you? Will a tenant do extensive damage? How many evictions will you have?

It is far more accurate to simply consider the operating expenses to be 50% of the gross rents.

Good Luck,

Mike

Why not start with your goal and work backwards. Be specific and include a time frame. For example, I want to make $10,000 per month and have a net worth of $1,000,000 in 5 years (or 10 years). Or, I want to have a net worth of $2,000,000 in 20 years so that I can retire. Or, I want to make an extra $2,000 per month in 3 years so that my wife won't have to work. Put together a realistic business plan that will allow you to reach that goal.

What is your goal?

Stop working at a 9-5 job?
Build something for retirement?
Make relatively fast cash but pay a lot in taxes?

Now, how can you realistically meet that goal?

Good Luck,

Mike

NickA,

I started with rentals a little over 3 1/2 years ago. I now own and operate my rental property business full time. It can certainly be done. Whatever you do, just be sure that you understand the realities of the business. Both rehabs and rentals require more work, time, and effort than is portrayed by the gurus. Expenses are also dramatically higher than are protrayed by the gurus and on TV. Be sure to learn the reality before you do your first deal.

BTW, if you get into rentals, you ARE getting into rehabs. The rental business consists of the tenants tearing up the properties and the landlord fixing them up.

Mike

BreitlingUT,

The simple formula for cash flow is to subtract the mortgage payment from 1/2 of the gross rents. If you have no mortgage payment, then the cash flow would be 1/2 of the gross rents (the other half goes to operating expenses).

If $500K is a lot of money to you, then I would do some SERIOUS STUDY of the rental property business before you buy anything. The rental property business is VERY UNFORGIVING and the vast majority of new rental property owners fail in a short period of time.

If you buy a property that has gross rents of $25,000 per year and no mortgage, then your cash flow would be about $12,500 per year or $1,041 per month. Buying two of these properties will only give you a monthly cash flow of $2,082, which is about half of what you want.

I think that you would be better off leveraging your $500K into downpayments and buying a lot more units. Even with 20% down, you should be able to buy about $2,500,000 worth of property which could easily provide $4,000 per month if you buy correctly.

You've got a LOT more studying to do before you spend that $500K! I would also suggest joining your local REIA. Doing this right is going to require a LOT of effort on your part.

Good Luck,

Mike

bs73,

You hit the nail on the head! That is exactly what happens and their mistake forces them out of business. One bad deal is often all it takes.

I don't think flipping is necessarily the answer. It won't be a lot easier finding a good property to flip. You'll still have to buy at a big discount if you are going to be successful. Finding good deals is hard in every market.

What have you been doing to find a deal?

Mike

Dean, I agree that you need to focus on the initial profit. Unfortunately, if you don't understand the business that will probably never happen. Real estate investing is not a difficult or complicated business, but failing to understand the realities of the business, cash flow issues, expense issues, etc will lead to almost certain failure (which is exactly what happens to the majority of new real estate investors).

For example, I get stuff in the mail almost every day from one guru or another. It is typical to get literature that says something like this: "Buy a rental property which rents for $500 per month and has a mortgage payment of $400 per month -- you've made $100 per month. Could you use another $100 per month or $1,200 this year in passive income?" That sounds great, but it is ABSOLUTELY WRONG! When you use the real numbers, this property would be LOSING $150 per month. Combine that with the reality of dealing with tenants and most people throw in the towel very quickly.

Understanding how to do a proper cash flow analysis isn't only important - IT IS CRITICAL. This is MUST-LEARN STUFF if you are going to be successful in real estate investing.

Mike

I'd like to see the numbers on that! I've never seen a property with gross rents of only 1% of the cost that will cash flow (unless you put a bunch down).

Unfortunately, most of the books on the market don't discuss how to calculate cash flow and those that do don't discuss all of the real world expenses.

Mike