All Forum Posts by: Rabih El-Khoury

@Andrew Johnson solid points right there. You're right, the math doesn't pan out, or at least, for the numbers to work out at $24k (without impact of inflation) it's going to have to be clockwork. The $120k comes from a combo of savings and other investment payouts. Thanks for your input -- makes total sense. 

@Thomas S. Agree, ultimately one can pull all the wrong stops and end up broke. However, assuming one follows a diligent path, what's the probability that $24k happens? In my estimate: not high, unless one hits 1.5% in rent on every property. I guess what i'm wanting to see is whether, from a numbers/math P.O.V how practically realistic is that goal.

In your experience, could one possibly hit the $24,000 monthly net-after-tax rental income mark in ten years time if: (1) they had $120,000 at their disposal every single year to invest for the next 10 years; (2) they could re-invest all the rental proceeds generated during those 10 years? 

Assume they could invest in any property type and in any state but could only do buy and hold or buy-rehab-refinance-hold (i.e. no flipping). 

The short of is: it really boils down to your financial goals in determining whether you should pay for properties in full or use leverage (mortgage). The truth is always in the math.

My business partner and I are just starting out in REI and while we have a clear goal in mind we dabbled endlessly with the leverage vs. 100% down question until one day we crunched the numbers. The findings were interesting.

The defacto approach we’ve heard countless times on BP and elsewhere is to use leverage to scale property investments as a means for building wealth over time. We have a 10-year window where we will pump, starting today, $200,000 every year for 10 years buying property. Our (ambitious?) goal is to achieve $24,000 in monthly net after tax cash flows by the 10th year.

With the above variables, we modeled (in Excel) two sets of investments—one at 100% down and one at 60%* down—and looked at the cash flows (and particularly cash flows after tax) for 11 years (2017 to 2027). We kept everything else apples-to-apples starting with assuming we’d look at houses valued at $125,000, to capex %, rent %s, annual appreciation all being the same. To further level the playing field, cash flows we would generate from rentals would NOT be used for property purchases; meaning, every year we would only use the $200,000 we have to buy new properties.

*given our lending rate and the NOI (Net Operating Income) we were getting, 60% down was the minimum needed to achieve the debt-to-coverage ratio required by the lenders we've been talking to (we are foreign nationals, so options are limited and rates start at 6%).

The results – How many $125k properties can $200k every year for 10 years buy us and what cash flows would we generate if?

Model 1: We’re paying 60% down:

No. of properties: 22

Sum invested by 2027: $2,161,084

Sum of property values: $3,695,780 (we assumed 3% growth every year)

Net worth: $1,391,394 (sum of property values less sum of mortgages)

Sum of Cash Flows: $263,240 (from day 1 investing to end of 2027)

Sum of Cash Flows of year 2027: $50,209
Present Value (of future cash flows): $158,107

Model 2: We’re paying 100% down:

No. of properties: 14

Sum invested by 2027: $2,167,891

Sum of property values: $2,351,860

Net worth: $2,351,860

Sum of Cash Flows: $459,477

Sum of Cash Flows of year 2027: $83,368
Present Value (of future cash flows): $284,567

It’s a no brainer: for our particular case, where cash flow at 2027 is the target, 100% down gives us $33,000 more every year than paying 60% down. Of course, over time as the mortgages get paid out, the 60% down properties will close in and start returning higher annual cash flows. The time frame for the 60s to catch-up with the 100s is too long however given our financial goals. .

We could’ve stopped there but we haven’t. Why? Because the $3.696m property value in Model 1 compared to $2,352m in Model 2 is too big to neglect. For pretty much the same dollars invested over 10 years, paying 60% down produced a whopping $1.3m more in property value (granted once mortgages get paid in full). When you think of your kids and what you could leave behind, $1.3m that will continue to appreciate is a helluva lot of money.

This exercise has prompted us to find a way to combine both goals. We’ll have to make that $200k, $300k or $400k a year so that our 60% down properties return the cash flows in 2027 that we want. To do that we’re going to seek private investors.

If I could extract one learning from this exercise—and one message to share—it's that crunching the numbers not just on a property you’re analyzing but on your portfolio as a whole, looking at it over a time frame that’s relevant to you, and in context of your non-monetary goals is crucial.

I'm a foreign national who together with my business partner are just starting out in REI in the U.S. There's a lot of paperwork foreign nationals can provide to help your decision, in the event your tenant can't pay the full 12 month rent in advance. First, ask for a full year of bank statements--you're looking for whether they generate enough income. Check the Standard & Poor rating of the bank (online) to validate bank credibility. Second, ask to see any savings accounts and/or property deeds. That's your fall back plan/insurance. Have them sign a paper that allows you access you to those funds. The trickiest part is determining whether they have loans. People can be making money but may have loans, some to financial institutions others to the neighbor down the street. There's no way to find out for sure but anyone with a savings account with funds in it most probably doesn't have an unmanageable loan. If you see the savings account balance consistent or increasing over time it means they're cash flow able. If they're receiving pension, ask them to show pension payment slips for the past 12 months. Finally, you can always ask them to appoint a U.S. citizen as a guarantor (their son/daughter for example).

@Eric James totally agree... in fact, from the numbers i've been crunching, and given that property management, capex, maintenance costs are pretty much even across markets, the three biggies that impact cash flow are rental as % of property value, property tax (what a killer this one is), and insurance. And that's precisely why Dallas isn't cash-flow friendly 0.8% with 2.4%-2.6% property tax = thank you and... good night :) 

Hi. Drop Hans Bos from Davos Real Estate Group an email and see if he can help. We're foreign nationals looking for mortgages in the U.S. and he's been quite helpful. Good luck. 

Thanks guys for your input. I'm investing with cash flow in mind, appreciation is a secondary target and i don't mind it be as low as 1% to 3%. I'm looking at anywhere in the country, preferably in B areas. Question is: how does one go about finding those 1% markets? Is there an online tool perhaps or does I have to talk to tens and tens of real estate agents across different states?

Hi - I was wondering whether there is any market/city/town that's seeing the 1% or even 0.9% Rule apply? Was looking at the Dallas Forth Worth area and the averages are 0.7%-0.8% rent vs. property value. When you factor in Texas property taxes (2.1% - 2.8%) your cash flow takes a hit. Thanks! 

My goal is to make net after-tax (take-home) $10,000 monthly from renting out properties. My goal is to achieve that income level by the 10th year of my investment plan. During those 10 years, all positive cash flows and any funds from property sales will be re-invested in the business (e.g. re-invest in property, accelerate mortgage repayments, put in an escrow to raise interest etc.). The strategy is to buy-and-hold and/or buy-fix-hold. 

I'm trying to figure out the math of this plan, working it backwards from my goal, and using simple (but smart) investment benchmarks, to guide and determine what is it I need to buy (as expressed in property value, NOIs, IRRs, PVs...) over the course of the 10 years. 

There's a ton of great literature that teaches you how to analyze a particular property. I have yet to come across literature that helps you build a plan to achieve an income goal over time. This, of course, can be complex given the many possible scenarios and opportunities: you can hold for long term, hold until peak IRR, do 1031 exchanges or choosing to pay the tax etc. Still, as with any business plan, one must be able to set guidelines. For example the math could point out to: you need to buy properties worth ~$250,000 every year for 10 years, having capitalization rates of no less than 7%, and ensure that each property has a positive cash-flow after tax. 

Any advice would be appreciated. I'm going round in circles :)