All Forum Posts by: MATT WARDEN

Ask for justification/documentation for the charge before paying it.

What is your purpose for the parent company?

You can't put a dollar amount on these, really. The trick is to go off of historical expense ratios rather than try to estimate each expense (if you did the latter you would either be wrong or need to be so conservative in estimates that it would be impossible to make the numbers work).

The general number is 40-50% of gross rents will come in and go right out in expenses. Again, this is a long run average.

So, if you are renting out at $800/month, on average $400/month will go to all of your expenses (minus debt service). Thus, to cashflow $100/month your debt service cannot be more than $300/month.

But it's not better than waiting to find a property that cashflows. I think that's the real point here.

I get what you guys are saying, but if you purchase a negative cashflow property and live in one unit, you are effectively just overpaying rent. If it would lose $100/mo if rented at market rent of $500/month, then you're just paying $600/month for a place that is only worth $500/month.

Fees that are usually not included in most calculation (but should be!): evictions (expensive!!!), lawsuits, general legal fees, asset protection (business entity structuring), insurance, large capital outlays (e.g. new roof), etc. Something to remember is that expenses could be 500% of gross rents for certain months. The 50% number is a conservative average.

Not to speak for him, but when MikeOH uses the 50% number, he is basing this on the long term over many properties. It is the expected cost of operation and does not necessarily hold true for one property for one month. In fact, in his book, he suggests (and I agree) that one is most vulnerable with few properties, because cash flow from other properties cannot serve to soften the blow of large expenses on one property (again, going back to the idea of an average cost).

So, in other words, in infinite time (or over infinite properties) he is estimating operating expenses will cost around 50% of gross rents. The shorter the time or the fewer the properties, the more variance that is possible. This might mean you have expenses at 1% of gross rents or 100% of gross rents. But the average (given unlimited time) would end up being 50%.

I believe Mike is accounting for some of this possibility for variance by using a slightly more conservative number than most. This is definitely a good idea that you should replicate.

As long as you're aware that you should expect significant negative cash flow here (to the tune of -400/month to -500/month) and are fine with that given your residence in the other unit, then it sounds fine.

I'm not sure it looks good as an investment once you move out, though, unless you can rent the unit you were living in for $750 to $800 per month.

Buy Mike's book. The answer to your question is there.

If your searching skills are good, you can perhaps find the answer in this forum, as MikeOH has provided it many times, and it has been corroborated many times (even by once-nonbelievers).

I didn't say anything was wrong with it. Some may read what you wrote and assume that biweekly 1/2 payments are equivalent to full monthly payments and I just wanted to point out that it isn't.

You also end up making one extra payment per year.