All Forum Posts by: Nathan Hui

@Nathan Hui

Simple...

Buy for $30k cash, rehab for $15k cash, rent for $995

Repeat

No, I don't think that but my calculations are meant to be fairly conservative. One of my PMs charges $200/year for lease renewal, which comes out of the vacancy loss allowance. They also have a 90-day guarantee that if my property goes vacant for 90 consecutive days, they pay me full market rent on day 91. I could probably use a much lower, maybe even half, vacancy loss allowance, but while I'm new to REI and still figuring out the long-term averages, I'd rather be safe than sorry. I plan to buy/hold for a long, long time. As rents increase (hopefully at a rate faster than expenses like insurance and property taxes), these numbers get better over time as the P&I payment stays fixed.

Irr is the only metric.. cash flow is just that .. IRR is a measure of the whole project Cash flow is just one component.

take the example of a home like what was posted above that never goes up in value or goes down in value.. its cash flows but at exit unless you can 1031 and you probably wont do that because you don't really have any equity to 1031 .. the exit results in a capital loss and a negative IRR

@Nathan Hui

I buy turnkey, fully rehabbed (new roof, new HVAC, new/updated plumbing and electrical, etc.) without any deferred maintenance in Memphis, TN at 1% rule or better.

I set aside 8% for vacancy, 5% for ongoing maintenance, 5% for eventual cap-ex which is 18% total.

I use conventional financing with 20% down, 30-year fixed rate mortgages. So, my formula is:

Rent - 8-10% PM fees - PITI - 18% reserves = cash flow.

I average about $160/month per unit. The range is about $120/mo to $200/mo depending on the property. So far, these are all SFRs. Hope this helps.

I focus on 10% CoC. I'm buying in C class areas right now and I know I'm in for a ride. Why? I want to focus on real estate full time ASAP. I like my job but I love real estate. If it doesn't work out in C class long term, no problem I'll sell, learn my lesson and change my strategy. Cash flow gives me income to live off of.

I use income  - (10% management, 5% vacancy, $100 per door per month for repairs, +1500 for other expenses + mortgage/insurance/taxes).  

@Nathan Hui

$500-$800 per door

@Ben Zimmerman

You nailed it. Couldn’t say it any better. Folks on here scoff that I cashflow $200/door on a $350k property, but it appreciates 5% per year. $200/month is practically meaningless to me; that’s noise for me at this point with 6 properties and a good paying job. $17k/year in appreciation? Yes please, more please.

The haters will say that you can’t bank on appreciation, but that’s like saying you can’t bank on the stock market going up at an average rate of 7%. I have a $200k property that loses $100/month, but has appreciated $60k in the 5 years I’ve had it. You do the math.

Personally I don't care about cashflow.  I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth).  Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth.  I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.

For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:

If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.

Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home.  While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases.  At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.  

Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years.  Expand this horizon to 20, 30 or 50 years and the numbers become insane.  

People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.

Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything.  But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.  

Cashflow allows you to retire, but growth rate lets you build an empire.

IRR 25+%

What would you do in my position to acquire another income producing property of any type. Land? SFR? Commercial? Long Distance? ( I know what I want to do, but would like to see how other people would approach this situation):

I’m in a linear market where appreciation is around 1.5% a year. We do not bake appreciation into our numbers when analyzing deals.

I have one rental fully paid off worth $95K. Cash on cash return is 7%. $95K equity.

Second rental i bought for $70K. Traditional 30 year fixed rate at 5%. I have $17K of my own cash in the deal. Cash on cash return is 8% and 11% if you include principal paydown. House is worth $80K (sweat equity and added a bedroom). 25K in equity.

My primary residence is a zero down 30-yr fixed rate VA loan at 3.875 APR. worth $130K. Only $8K in equity.

I have the ability to save $20k a year from W2 income and rental income. $20K is more than enough to buy one property a year in my area with 15/20/30 yr fixed loan with 20% down and cosmetic rehab prior to renting.

I’m going to assume answers will vary depending on personal investment philosophies and where people conduct real estate activities globally. I’m in Northwest Illinois or as Brandon Turner would say..... ruuuurrwwaaallll United States.

Penny for your thoughts! Best Regards!