All Forum Posts by: Nick Baldo

Our experience has been ~$1,250 for upgraded electrical service. This assumes no change to existing wiring. 

Wiring can cost up to $4.50/ sqft. 

@Pradeep Tiwari,

The 50% rule certainly DOES NOT apply to all properties. The rule is simply used as a quick tool to analyze potential rental properties. You should take a deep dive into every analysis you do to uncover what the actual operating expenses will be. As you point out, newer properties will most likely carry less operating expenses. In addition, your market will have a big impact on your operating expenses. 

Use the rule as a starting point. If the rule shows a property that might be valuable...take the next step and perform a thorough analysis. 

Hi @JohnMark McCord,

First, 18 is not too young to get started in Real Estate. There is a lot you can do as you prepare for and actual execute your first few deals. 

However, my advise would be not to drop out right away. Start by treating real estate as a "project". You have had an interest in it for a long time. That is great...your passion will push you to success. However, there is no way of knowing how you will feel about real estate once you get into it. You interests may change as you learn about operating the business. 

As you are in college, a neat idea might be to try to get yourself into some kind of "house hacking" situation. @Brandon Turner coined the phrase and there is a lot of talk regarding house hacking on the forums and podcasts. See if you can find a property (potentially a multi-family) that you can purchase, live in, and rent out the other units/ bedrooms to friends and other students. This is a great way to get started in real estate. You will get to learn the ins and outs of property management while drastically reducing your living expenses (potentially turning a profit). 

As someone who quit a great paying, full time job, I am not one to discourage "taking the leap". However, I spent 4 years doing real estate as a part-time project before I had the knowledge and confidence to pursue as my full time career. 

Make every attempt to take action while maintaining your studies. Feel free to reach out privately if you would like to discuss further. 

Good Luck!

@Beau Romstedt,

The 50% rule is a quick rule of thumb to help you estimate the potential operating costs of a rental property. Operating Costs = 50% of total Rents. 

This number is a starting point to help you quickly analyze deals. If you are thinking seriously about a particular investment (which in this case you are) you would want to dive deeper to obtain more realistic cost estimates for running the property. 

You mention you are a general contractor. I'm guessing this means you can do some of the work to get the property performing and/or to handle maintenance requests and repairs. While this is a great skillset to have at your disposal, you want to be sure to account for your costs in your analysis. Imagine that you were paying someone else to do the work you will do. How much will it cost? The main reason for this is that you do not want to skew the attractiveness of an investment. Imagine in 7 years you go to sell the property. Your management fees are low b/c you manage the property yourself. A potential buyer will recognize this and increase the property management figures in their analysis. This will lead them to a lower valuation of your property than you have in mind. Its just strong practice to "Pay yourself" and account for all costs....even if not fully realized. 

I sent a colleague request with a link to a rental property analysis. This should help you get started analyzing your deal. Feel free to reach out if you have any questions. 

Strategy Consultant at IBM Global Business Services

Brandon, 

On the surface, this seems like a decent idea. Lowering your interest rate by over 1.5% is a huge deal...especially over the 18 to 23 year term we are considering. 

Just keep in mind that refinancing typically has an up front cost. You will need to pay attorney fees, mortgage taxes and other closing costs. However, to lock in that 4.25 rate, it is most likely worth the cost. If we assume closing costs are ~$2,000....you would recoup that amount in a little over a year with your lower payment. 

You may shy away from this because it will take 5 more years to pay off the loan. However, as long as there is no pre-payment penalty, nothing is stopping you from accelerating your payoff to save on long term interest. You could run an 18 year amort schedule on your new loan amt. and interest rate to find what that payment would be (of course a bit more than the 23 year amort the bank is offering). You could then pay that difference each month to ensure your loan is paid off in 18 years. 

This seems like a win for you. Let me know if you have questions...or if you would like further explanation on running the amortization on a different loan term.

@Robert Farris,

Yes, the costs you indicated are some of the factors to be considered. Basically, we need to boil down your expected "profit" for rehabbing the property and compare it to your expected annual "profit" for renting the property. We can consider that the rehabs for each would be a bit different. Very good of you to recognize that a rehab to sell is different than a rehab to flip. 

I will reach out via colleague request and we can dive into the details. We'll then update the forum w/ some of the figures and conclusions we hash out. 

@Robert Farris,

To determine which approach is more "profitable", you will want to look at your Internal Rate of Return. Overtime, it is probable that renting the property would provide more "profit". That is, you will make more than you put in. However, you must take into consideration the time value of money. 

For example, let's say that rehabbing your house and selling it will give you a net profit of $20,000 over the course of one year (You sell the house for $20,000 more than your Purchase + Rehab + Closing Costs + Holding Costs). Now compare that profit with the potential to rent the house out and make ~$4,000 per year. On the surface, it seems that renting the house out will become "more profitable" than selling after year 5. However, take into consideration how you might be able to use that $20,000 profit. You could use it as a down payment on another house...hence taking advantage of leverage. 

To complete this analysis, you need to understand your opportunity cost of capital . That is, what rate of return can you expect to gain on your money. Renting the house out will force you to "wait" for your profits. 

Do you have any real numbers as to how profitable you expect each approach to be? We can then use an assumed "discount" rate to try to figure out which approach makes more sense. 

@Ben Bakhshi,

Upon discussing this exact issue w/ my CPA, we were instructed to go the route of a current asset account. You then deduct the expense during the 1-2 times per year your taxes and insurance are paid. 

While your P&L will not reflect this "monthly expense", your cashflow should. The dollars going into Escrow should represent negative cash. On a monthly basis, your cashflow is more important than P&L. At the end of the year, all expenses are in as expected. You can then divide by 12 to get your AVG P&L per month. 

I agree its a bit annoying not to get the most accurate picture every month. This is just the advice we were given. 

@YOLANDA JEFFERSON,

If you are really serious about getting into RE Investing and growing your portfolio, I would suggest starting an LLC or S Corp.

The obvious reason for owning your property with a business is that it limits your personal liability. Having a stand-alone entity also makes it so much easier to keep the operations of your rental property(ies) separate from your personal finances. 

However, keep in mind that as you are just starting out, it will be difficult to obtain financing for your business. You may need to utilize cash and/or private financing to build a track record for your business. After a few years of successful operations, you can look to banks' commercial lending department for future loans. 

If purchasing under your personal name makes financing easier, it's not the end of the world to purchase outside of a business entity. You can always refinance and transfer the property to a business later down the line.