All Forum Posts by: Ryan Sasscer

Buy and hold investors (like myself) know that an investment property produces a Return on Investment (ROI) in 4 ways:

1. Cashflow (acknowledging a property could potentially have negative cashflow)

2. Equity building (the tenant is essentially paying off the mortgage for you)

3. Tax advantages (deductions for both "depreciation" and for dollars paid in interest on a mortgage)

4. Appreciation (potentially, but not guaranteed.  A property could also go down in value pending market conditions)

How do we calculate these four sources of return to quantify the total ROI for a particular investment property?

1. ROI from Cashflow is calculated by taking the Cashflow (Income minus expenses) and dividing it by the amount of cash invested in the property (usually in the form of a down payment). This will produce a decimal that can be represented as a parentage to indicate the APY (Annual Percentage Yield) due to cashflow. An example would be a property with a $20,000 down payment that produces a positive cashflow of $100 per month would have an APY of 6% ($100 per month x 12 = $1,200 per year divided by the cash invested as the down payment of $20,000. $1,200 divided by $20,000 = .06 or 6%)

My question for the other investors out there is: How do we quantify equity building and tax advantages in terms of ROI and/or APY. These ones (equity building, and tax advantages) are a little more difficult to quantify probably because they are dependent on the individual investors circumstances (loan terms for equity building, and tax bracket for tax advantages for instance), and thus they don't get discussed as much, but I am interested to hear what methods can be used to quantify these sources of ROI from an investment property.

It is important be able to quantify the ROI of an investment to ensure we, as investors, are achieving the highest and best use of the money we invest. In order to do this we need to be able to compare the rate of return (usually in the form of APY or IRR) of an investment to another potential investment (Including stock dividends for example).

The first three returns are realized while owning the property, but the forth (appreciation) can only be realized by selling the investment property. After selling it is very easy to calculate the ROI due to appreciation by simply comparing the purchase price to the sale price. What I am really interested in discussing is methods to calculate an APY for returns from equity building and returns (in the form of tax savings) from tax advantages from owning an investment property. I look forward to hearing your ideas.

Ok, so the limit is 10 loans per individual, but refinances still count as loans right? So, I could plan on doing 10 refinances in my name using the BRRRR strategy before having to look elsewhere for lending. But, after 10 in my name (and potentially 10 in my wife's name), I would have to find some other source to continue pulling out equity in the form of refinances. Basically, refinances are counted as loans the same way a mortgage for an initial purchase would be right?

Thanks for the response Natasha!  I'm just asking a few clarifying questions to make sure I understand this correctly.

When using the BRRRR (Buy, Rehab, Rent out, Refinance, Repeat) strategy, what kind of loan is the refinance?Is it just like getting a loan for the purchase of a house and thus count toward a maximum number of Fannie Mae Freddie Mac loans an individual can have at one time (I believe 5 is the limit).Or would a refinance not count toward this number?

I currently only own one property (closed last week) with a conventional loan, so I know I can still use conventional lending for another 4 properties, but as I look ahead to the future, I am thinking about using cash to purchase my new properties by pulling our equity from other properties with refinances.Will refinancing in this manner allow me to be able to get more than the limited (five) conventional loans, or are loans from refinances considered the same as purchasing with a conventional loan?

Good point. I was initially concerned about mold due to a report (from HUD) of a plumbing leak and evidance of water damage to the current flooring (lamiant wood that is curling). But, it now appears the flooring is damaged from dog urin (this is the smell issue mentioned), instead of a plumbing leak. This is good because dog smell is easier to fix than mold and I aleady knew I had to replace all the flooring anyway. I will not sign off on a scope of work untill I have it inspected for mold though.

Adam, this is exactly what I was thinking when I read through this scope of work proposal from this GC.  Yes, this is the entire scope of work as proposed by the first GC I walked the property with.  From my reading and knowledge of what others have spent on similar sized projects and the square footage of this house, I roughly estimate spending $30k to get it completed, but I also think there is a lot more work necessary than just what is listed in this scope of work.

For some more context: This is a HUD purchase so I will have a hard time getting utilities turned on before I close, so I plan on waiting till after closing to get a professional home inspection (with the utilities on). My plan is to use the home inspection report to generate a complete scope of work for the GC I decide to hire. I anticipate more work to be discovered than what is listed above, so I will have to find ways to reduce the costs listed above to allow room in my budget for additional work.

Thank you Marian, Joel, and Patrick for the info and recommendations.  It is worth my time to use a CG because I am currently working full time and don't have the time to do all the coordination of subcontractors myself.

Thanks for the advice Jim, Stanley, and George!  This proposial does include the cost of materials, and the contract also specifies the GC is responsible for getting any necessary permits included in the costs listed.

This was my first bid.  I am in the process of scheduling some more.  Are there any other costs that jump out as red flags other than the $800 cost to find the pluming leak?

I have fixer upper under contract with a $30,000 budget to rehab the property with my own cash.  I am scheduled to close in about 30 days, and am now in the process of getting cost estimates for the scope of work from general contractors.  Below is an estimate I received.

1. Demo existing flooring throughout residence and install new laminate flooring. ($3,800.00)
2. Remove siding on exterior of house up to 4 runs high and reinstall new cement board siding. Address bad siding above garage area on half gable wall as well. ($1,500.00)
3. Clean walls and ceiling with TSP to remove some of the odors. ($1,200.00)
4. Repair and or replace 4 window sills due to rot. ($900.00)
5. Repaint walls and ceilings. ($3,500.00)
6. Repaint kitchen cabinets. ($1,800.00)
7. Install new cabinethardware. ($400.00)
8. Incorporate more countertop space, approximately 3 to 4’. ($800.00)
9. Install new laminate kitchen countertops. ($900.00)
10. Re-pipe fireplace lp line to run overhead in attic. ($850.00)
11. New plumbing fixture allowances. ($400.00)
12. New ceiling fixture allowances. ($400.00)
13. New kitchen sink and faucet. ($300.00)
14. Re-screen damaged area on back porch only. Minor wood repairs and repaint. ($850.00)
15. Install 2 roof turbines for attic ventilation. ($800.00)
16. Created an additional bedroom by dividing and building a wall in current bedroom. Need to install door opening and window opening for egress/entry. Separated lighting and install separate light switches, et. ($4,900.00)
17. Relocate vanity to inside guest bath and configure area to a closet for new bedroom. ($3,500.00)
18. Attempt to locate existing plumbing leak in house. Location is unknown at the present time. ($800.00)
19. Haul of all construction debris to certified landfill. ($250.00)
20. If mold or fungus is found in walls or ceiling we will remediate area. Cost will be additional.

This is my first time hiring a general contractor, so I do not yet have a good feel for recognizing a reasonable cost verses a rip-off. I would love to get some feed back from those with experience working with general contractors on complete house rehabs.  The house this estimate is for is 1,280 sqft.  It is currently a 2 bed, 2 bath, but has enough square footage to convert it into a 3 bed, 2 bath.  Thank you for the feedback.

I am an investor working on an investment in Cumming GA right now.  What are you trying to find?

Perhaps I should clarify:  I am not still seeking financing for this property.  I actually, have a loan with a very good rate set up for this deal already, and I have a competitive homeowner's insurance quote as well.

What I am really looking for from this post is feedback from other investors on how the numbers look (as an investment).  Are there additional expenses I have forgotten to factor in?  Are there other factors I should be considering when analyzing this property as an investment?

Last week I bought my first investment property!  After looking at the property, I made an offer below asking price, and we ended up settling on a price between my offer and the original price.  Closing is schedule for mid August, so here is what I understand I need to accomplish between now and then (let me know if I've forgotten something):

- Complete financing

- Get a home owner's insurance quote

- Review the property inspection (scheduled for this week)

- Interview/Higher a manager (since I will not be managing it myself)

- Market the property and have my manager take over the current lease (it is a duplex.  One unit has a signed lease, the other does not yet)

Here is how I analyzed the property to determine the cash on cash return of 11% (let me know if I'm doing this correctly):

- Purchase price: $140,000

- Loan payment: $509 (principal and interest only). With financing at a 4.125% rate and 75% LTV ratio.

- Property tax: $78 per month

- Insurance: about $90 per month (I do not have an exact quote yet)

- Management fee: $160 per month (10% or gross monthly rent)

- Maintenance/repairs (reoccurring): $160 (estimated 10% of gross monthly rent) 

- Vacancy: $133 per month (calculated at a vacancy rate of 8.33% or one month of vacancy per year per unit)

- Landscaping: $100 per month

- Total monthly expenses: $1,230

- Rental Income: $1,600 (2 units renting for $800 per month)

- Cash flow: $370 per month ($1,600 - $1,230 = $370)

- Down Payment: $40,000 (including closing costs and cost of inspection)

- Cash on cash return: 11% ($370 x 12 = $4,440.  Then $4,440 / $40,000 = 0.111 = 11.1%)

I value the feedback of those who have done this many times before to help me avoid pitfalls I may have not considered.  If you see any please call them out!