All Forum Posts by: Rafael Ro
Rafael Ro has started 8 posts and replied 52 times.
Quote from @Drew Sygit:
Quote from @Rafael Ro:
There is actually a big difference.
The reason is that you cut out the middleman and their margin. So if you buy a turnkey property (they buy, fix up, rent and sell) for 150k you're looking at 1200/month rent, versus 150k directly through a broker can get you 1400/month.
There will be no difference in the rent - unless the TurnKey provider threw in a desparate/bad tenant to get the higher rental amount.
With a TurnKey provider, you'll pay more for a property that they have rehabbed, versus hiring your own crews to rehab something.
In other words, if the turnkey provider is selling the rehabbed property for 150k, they're giving it to you tenanted at $1200/month (they price them based on rent), but if you buy a property for 150k direct then you can most likely rent it for $1400/month (since you would likely get a more attractive property [bigger, slightly better location, etc] since there is no middle man). Of course that's assuming you do your research and get a good deal, in all cases.
With that in mind, are you seeing any assumptions that look off to you, with any of those strategies?
Quote from @Drew Sygit:
@Rafael Ro Why are your numbers different for options #1 and #2?
The only real difference is when you start collecting rent after purchase.
How have you weighed this against the probability of tenant nonperformance?
REALITY: not much of a difference.
Just wanted to follow up on this one to make sure I understand. Are you implying that a "turnkey company that also PMs" would be better to manage tenants then a regular PM company? And thus we would see less tenant nonperformance with a turnkey company?
In both scenarios a PM company would be managing the properties.
The difference is that in the one case you're buying it turnkey and in the other case you're buying it direct.
Is there something else that I'm missing?
Quote from @Joe Villeneuve:
Quote from @Drew Sygit:
@Rafael Ro Why are your numbers different for options #1 and #2?
The only real difference is when you start collecting rent after purchase.
How have you weighed this against the probability of tenant nonperformance?
REALITY: not much of a difference.
If you say the assumptions are good - great. And if you say that they're incorrect - that's good too. My goal here is to learn and to understand.
I did try to create a "one size fits all" type of setup in order to compare the strategies. Obviously not all properties are going to be $150k -- some may be 125k and others may be 175k.. but they would average around there. And the rates will of course fluctuate over the years.. but if they go up or down then that would apply to all. Same with the other numbers. They would all be the same "type" of property.
Some of these numbers are not going to be completely accurate - I understand. But if my "assumptions" make sense, then they should get fairly close, on average.
This is not meant to be for 1 property - it's means to apply to scale.
If not this, then what's a better way to accurately model a long term projection?
I've been stashing up cash for a little while in a HYSA and I really want to make a move, but I want to do it gradually instead of going all in. So I'm trying to evaluate the best method to do this.. I feel like right now is one of the hardest times to find deals, but I still want to start asap and go slow and steady, with a long term plan. Thus the projections and the model.
Another approach would be to just keep my eyes open for all sorts of deals of any type, and to try and go for it when a great one comes up.. I understand that this can make sense since every deal is different. But in this case I'm trying to zone in on a specific type of deal so that I can focus on that and try to specialize in it.
You're one of the most experienced people on this forum, and maybe you've seen this one too many times... but if this is not the way then what is? Isn't focusing always better?
There is actually a big difference.
The reason is that you cut out the middleman and their margin. So if you buy a turnkey property (they buy, fix up, rent and sell) for 150k you're looking at 1200/month rent, versus 150k directly through a broker can get you 1400/month.
Quote from @Andrew Kubik:
I think the strategy depends on what kind of time you have. If you're going to work a stressful w-2 job while investing go with number 1. If you're going to work in a low stress w2 job, go with 2. If you're looking to jump into real estate full time, go with number 3.
In theory (and I understand that this may be wishful thinking), but if you find a trustworthy broker and contractor, then wouldn't they do most of the heavy lifting? This would be an out of state investment so I wouldn't have boots on the ground.
If I were to pad the trustworthy broker's suggested ARV by 10%, and the trustworthy contractor's quote by 20%, would you say that I would likely be within realistic range, on average?
Quote from @Joe Villeneuve:
Quote from @Rafael Ro:
Quote from @Joe Villeneuve:
I got about 1/4 of the way down and realized you were just putting in guesses for numbers based on percentages of things with no identification of how you arrived at those numbers. You appeared to be using arbitrary percentages. How you came up with those percentages, you really didn't say. In other words the basis for any analysis you did here ultimately was just guessing. REI is nothing like that.
RE analysis is based on actual numbers using dollar signs, not percentages. The specific market you find properties in defines those numbers, and they are NOT specific to a general size. They are specific to a specific market, actually micro-market. Properties don't define the market, the market defines the properties. Properties a pieces of the market they are in.
The strategy you use should be based on the market. Never decide on a strategy ahead of time. Let the market decide what strategy works in that market. This means you need to learn how to analyze markets.
Thank you Joe. The numbers are not really arbitrary, and they are based on a specific market - Memphis.
The reason I used percentages for most items was so that I would be able to do as close to an apples to apples calculation. For example, I used 5.9% of purchase price per year for mortgage, which looks random as a way to calculate a loan payment, but if you look at a 150k property with 25% down and a 6.85% interest rate, then your principal and interest would be $737 x 12 months = $8844, which is 5.9% of 150k. So it works out.
I used arbitrary and small numbers for rent increases and appreciation because the same applies to each of those strategies so I didn't want it to affect things too much.
And then I used maintenance, tenancy based on what I'm reading makes sense for long term, and a little bit of padding.
That said, I can totally be off in any of those assumptions - that's what they ultimately are.. guesses.. but they are guesses based on reading a lot, researching, talking to people, and adding a padding that I thought would be "fair" for the items that are not actually factual (ie. insurance/loan/etc).
This is the reason I made this post. I look at these numbers as somewhat pessimistic -- that's why I'm showing negative cashflow on the first strategy, which is obviously presented as a positive cashflow from several leading turnkey firms. Not saying that they're lying or anything. Just that this was my effort to get as close to realistic as I could.
Please let me know what looks wrong - I would welcome that.
Also, not all properties in a market are the same. If you are using what you might think is one market, it may be more than one. You may have overlapping markets too.
Just stop using percentages. Work with dollars. You can use defined percentages, like taxes, because they are a product of a specific percentage applied to property value. You can use interest rate, because it is specific as defined by the lender, but that's about it. Everything else should be in dollars, and those two percentages I mentioned above produce dollars,...as in mortgage payment and taxes. If you calculated the mortgage payment already, then using a percentage in your analysis, you're going backwards.
That's fair. The reason behind the percentages was mainly in order to create a model that I could feed into ChatGPT, which helped me create these projections.
It would be very difficult for me to keep track of dollar amounts but as %s I was able to have ChatGPT adjust those values as needed... particularly as it relates to items that were calculated based on rent.
I hear what you're saying though. My goal here is to get more feedback like this - especially as it relates to my assumptions.
I also understand that everything ultimately depends on every individual situation. It's easy to create a model assuming that all is equal, but when done at scale I'm sure there will be winners and losers. So with this I'm just trying to create a decent average point of view really.
Quote from @Joe Villeneuve:
I got about 1/4 of the way down and realized you were just putting in guesses for numbers based on percentages of things with no identification of how you arrived at those numbers. You appeared to be using arbitrary percentages. How you came up with those percentages, you really didn't say. In other words the basis for any analysis you did here ultimately was just guessing. REI is nothing like that.
RE analysis is based on actual numbers using dollar signs, not percentages. The specific market you find properties in defines those numbers, and they are NOT specific to a general size. They are specific to a specific market, actually micro-market. Properties don't define the market, the market defines the properties. Properties a pieces of the market they are in.
The strategy you use should be based on the market. Never decide on a strategy ahead of time. Let the market decide what strategy works in that market. This means you need to learn how to analyze markets.
Thank you Joe. The numbers are not really arbitrary, and they are based on a specific market - Memphis.
The reason I used percentages for most items was so that I would be able to do as close to an apples to apples calculation. For example, I used 5.9% of purchase price per year for mortgage, which looks random as a way to calculate a loan payment, but if you look at a 150k property with 25% down and a 6.85% interest rate, then your principal and interest would be $737 x 12 months = $8844, which is 5.9% of 150k. So it works out.
I used arbitrary and small numbers for rent increases and appreciation because the same applies to each of those strategies so I didn't want it to affect things too much.
And then I used maintenance, tenancy based on what I'm reading makes sense for long term, and a little bit of padding.
That said, I can totally be off in any of those assumptions - that's what they ultimately are.. guesses.. but they are guesses based on reading a lot, researching, talking to people, and adding a padding that I thought would be "fair" for the items that are not actually factual (ie. insurance/loan/etc).
This is the reason I made this post. I look at these numbers as somewhat pessimistic -- that's why I'm showing negative cashflow on the first strategy, which is obviously presented as a positive cashflow from several leading turnkey firms. Not saying that they're lying or anything. Just that this was my effort to get as close to realistic as I could.
Please let me know what looks wrong - I would welcome that.
Hello all,
I'll start by saying that I tend to overanalyze things, but after a ton of analysis I've come up with 3 strategies and they all look interesting for different reasons, and I broke them down in detail.
I believe and hope this will help everyone that's starting out, especially if some more experienced people pitch in and correct any assumptions I made that appear inaccurate.
I'm including the complete breakdown below, but for those scanning through it goes like this. All strategies start with buying 1 property and adding $10k cash every year.
Strategy 1 - Buying tenanted turnkey properties. By Year 15 we'll have 4 properties valued at $690k, with a loan balance at $391k, and constant slight negative cashflow.
Strategy 2 - Buying vacant properties through a broker and getting them tenanted. By Year 15 we'll have 5 properties valued at $847k, with a loan balance at $470k, and constant slight positive cashflow.
Strategy 3 - Buying fixer properties through a broker, fixing them, tenanting them, and refi - BRRR. By Year 15 we'll have 6 properties valued at $1mil, with a loan balance at $555k, and constant positive cashflow.
Going by numbers alone, there is a very clear winner, but I would really appreciate your input in vetting those strategies - long term.
These calculations were done with the help of ChatGPT so take them with a grain of salt, but they should be fairly accurate.
We can start with the following facts --- I have $50k to invest, I have more cash on the side to use "temporarily" (ie. rehab and pull back out through refi), I run a biz with a healthy income, and I can get credit.
For the purposes of simplifying this, let's assume that everything below would happen in Memphis and it would be about C+ class properties.
With that in mind, I'm making the following assumptions (which could be wrong - please lmk) -- I'm trying to use mainly % for everything, so that it's easy to calculate numbers for the different strategies.
One time costs:
25% of purchase price downpayment
$4k loan closing costs
Ongoing costs:
10% of rent property mgmt
10% of rent maintenance
5% of rent vacancy
5.9% of purchase price per year for mortgage
0.85% of purchase price per year for property taxes
0.55% of purchase price per year for homeowners insurance
Variable costs:
Half a rent + $2k repairs for every tenant change.
I'm assuming tenant turnover every 2 years.
Final assumptions:
To keep things simple and given the Class and location of these properties, let's assume a 1% increase in rent per year, and a 1% appreciation. I understand that these numbers are low, but I'm trying to be conservative. The idea with all this is to focus mainly on the cash flow.
Finally, for simplicity, we'll assume that in every strategy the price (or ARV) of the property is $150k, that we're starting with $45k, that we can invest an additional $10k every year, and that we can use any remaining cash reserves to continue purchasing more properties.
Strategy 1)
Buy tenanted properties through a reliable turnkey provider/property manager. These properties will be completely remodeled and will come with a new roof, new floors/carpets, appliances, etc -- all the big stuff. This means that we would likely see much less maintenance costs during the first couple of years. But it also means that we're overpaying for the property upfront.
This property would cost $150k and would rent for $1200/month. It would cost us $42,500 for downpayment and loan costs (+ home insurance/property taxes) upfront.
Based on the above assumptions, this will give us a negative cash flow for most years, but because of our cash injections we'll be able to purchase another property by Year 6.
By Year 15 we will have acquired 4 properties. We would have put in $192.5k cash (42.5k to buy the first property + 10k/year). The total property value of our 4 properties will be $690k. Our loan balance will be $391k. Our cash reserves down to barely anything.
Strategy 2)
Buy properties through a broker and work with a property management to run them. These properties would not be completely remodeled, but will be ready to rent, possibly with $2500 in repairs. For that reason, I also included $0 rent for the first month. Some properties may need 1 week others may need 6 weeks, so I believe 1 month is a decent average.
This property would cost $150k (147.5k + 2.5k repairs) and would rent for $1400/month. It would cost us $44,375 (+ home insurance/property taxes) upfront.
Based on the above assumptions, this will give us a positive cash flow for most years, and because of our cash injections we'll be able to purchase another property by Year 5.
By Year 15 we will have acquired 5 properties. We would have put in $195k cash (44.5k to buy the first property + 10k/year). The total property value of our 5 properties will be $847k. Our loan balance will be $470k. Our cash reserves will be $35k.
IMPORTANT -- This strategy really flourishes in the years that follow. At this stage we would have gotten to a point where we're cashflowing nicely and can add 1 property almost every year that follows!
Strategy 3)
Buy properties through a broker, work with a contractor to remodel, and work with a property management to run them, and refinance - BRRR. These properties will require work. We will assume that we would buy them at 100k and put in 35k in remodeling, with the goal to ARV at 150k. At that point we would refinance to pull our capital back out. For that reason we will include $0 rent for the first 3 months.
NOTE: I'm in contact with a reputable broker and the numbers they're claiming for repairs and ARV are SO MUCH better than what I'm using here, but I thought it's fair to pad the suggested numbers as I have done with the above also.
This property would cost $135k (100k + 35k repairs) and would rent for $1400/month. It would cost us $67.5k (downpayment, repairs, loan costs, refi costs + home insurance/property taxes) upfront BUT we would then pull money out.
Our first loan balance would be $75k. Let's assume we refi 70% of 150k value ($105k), so that would give us 30k back, bringing our cost down to $37.5k.
The way I calculated the projections here was that I set it up to only acquire new properties when we have $37.5k PLUS a $25k minimum cash reserves, meaning that we cannot buy a property until we have a cash balance of $62.5k. I also included an additional $7,500 starting balance at Year 1, since we would have money leftover from our first property, compared to the original investment of the previous strategies. Between skipping rent for 3 months, new loan amounts, cash reserves, etc -- these are very complicated calculations for ChatGPT, so there is a margin of error here. I tried to dig in and uncover any errors I could and this is what I came up with.
Based on the above assumptions, this will give us a positive cash flow for most years (better than #2), and because of our cash injections we'll be able to purchase another property by Year 6.
By Year 15 we will have acquired 6 properties. We would have put in $187.5k cash (37.5k to buy the first property + 10k/year). The total property value of our 6 properties will be $1.04mil. Our loan balance will be $555k. Our cash reserves will be $62k.
IMPORTANT -- This strategy flourishes BIG TIME in the years that follow. At this stage we would have gotten to a point where we're cashflowing great and can add 1 or 2 or even more properties, almost every year that follows!
-----------------------------
Based on the above, it appears that this BRRR strategy far exceeds anything else. Then again, it's also the strategy with the biggest unknowns by far.
It's clear that the more risk - the more returns.
Assuming that every vendor involved is experienced and legitimate, then the turnkey house seems to have the least "risk" but also the lowest returns.
Then the broker route has a little more risk, and better returns.
And the BRRR has a bunch of risk (repairs could be more expensive or take longer, ARV may not come in where we need it, etc) and it pays so much better.
I know that this is a long read, but I would be very appreciative to anyone that can pitch in, especially to challenge the assumptions I've made here. I tried to be realistic, based on what I've read in these forums, and to use lower tenancy periods, higher maintenance costs, etc.. Obviously no model will be perfect, but do you see anything that just looks way off?
If not, then assuming that someone is in a financial situation that can afford a potential mishap, then would you say that BRRR is hands down the way to go, or am I missing something? It appears that even if remodeling costs a little more, or takes longer and you miss even more rent, there is enough room to cover that and still be the winning strategy.
Thank you in advance and hopefully this is a helpful post to more people too.
Post: What are some realistic tenancy terms and maintenance costs (turnkey)?
- Posts 52
- Votes 13
Thank you so much both of you!
I think there is a weird balance here, among professionals, where people may not want to bad mouth fellow professionals, particularly from the same areas, which can create a skewed picture.
Specifically here, I've considered a few of the things that you both brought up, but the word "average" has a very specific meaning... It's one thing to say that "a typical tenant would likely stay for X years" and another to say that "on average, across our properties and thousands of leases, we see that tenants stay X years" -- the first one is a bit of an assumption and the second one is a stated fact.
If we take that fact for granted -- that, for example, the average tenancy is 6 years -- then that means that some tenants stay 1 year and others stay 10 years, but when you're running numbers for a property as such then the realistic scenario is that you won't have any vacancies or turnover costs for about 6 years. To me - that sounds outrageously optimistic, rather than realistic.
Would you agree? In general, for a B or B- class neighborhood.. of course there are exceptions here.
Same question for the 3.8 years for the C class neighborhood.. if you're running numbers, would you think that "realistically" your tenants will stay for 3.8 years?
None of the turnkey companies I've talked to offer any type of tenancy guarantee (outside of guaranteeing that they'll re-tenant the unit within a couple of months) -- if you know any that offer guarantees of tenancy that would sound very interesting! I don't see how they could, since things happen... but again, granted there is no guarantee, these companies are claiming such high averages and they have such huge portfolios and good reputations, so it makes me wonder. Maybe I'm crazy.
Post: What are some realistic tenancy terms and maintenance costs (turnkey)?
- Posts 52
- Votes 13
Hello all,
I'm trying to analyze deals by plugging in the numbers into a spreadsheet, but I'm struggling to figure out what numbers to use for vacancy and maintenance?
Specifically, some of the deals I'm considering come from established turnkey companies (very reputable in these forums) that have been around for a long time and they claim very long tenancy terms.
One of them is claiming an average of 3.8 years (they deal in C class neighborhoods), and the other one is claiming 6 years or more (B- class neighborhoods). They're saying that's "average".
Furthermore, since these are turnkey companies and praise themselves on their renovations, the B class turnkey is using only 2% of rent (which averages around $1500/pm) for maintenance, and the C Class turnkey is using 7.5% of rent (avg about $1000/pm) in their calculations. They argue that the first few years maintenance would be insignificant since the properties are renovated, and so you're essentially stashing that money away for the future maintenance needs.
Do these numbers sound at all realistic?
Obviously every market is different, but what have you seen in your experience? Consider that a few big expenses (ie. roofs, HVACs, etc) are often taken care of for a little while, since they are replaced as part of the reno in a few of these example properties.
Thank you all in advance!