All Forum Posts by: Ed L.

If you are comfortable with taking on the added debt then absolutely right!

With interest rates being so low I feel kinda crazy for not gobbling up more.

Honestly, my biggest problem has been finding solid 2% deals on a regular basis. I scour the market daily looking for deals and seldom do I find 2%. ( That said I just closed on one that will do about 3.4%!)

I probably come across 5-6 a year that will work and that are in areas I'm comfortable with. I'll bid on all of them and may win 1-2. Typically it's a multiple offer situation with the bids going over asking price.

Some markets are different and good rental deals are more plentiful.

And there's all kinds of different tactics investors employ... Right now the big boys on wall street are gobbling up homes that probably aren't even 1% deals in hot markets. They are gambling purely on price appreciation and they are doing it BIG TIME!

That's correct..

Things change pretty drastically when you involve financing.

The cash on cash returns will be higher, but there will be higher risk due to the leverage involved.

Using the $35,000 house. $750 x 50%= $325 in cash-flow if cash purchase.

Let's look at the deal using financing.

$35,000 Investment
Bank requires 15% down payment. Actual cash in the deal is $5,250
I like to use a 15yr term & assume a 4% interest rate.

Total payment is $220 per month.

$325-$220= $105 in cash flow once the note is paid.

$105x 12=$1,260 in annual net income.

Cash on cash return would be $1,260 / $5,250 (Down payment)= 24% Cash on cash return.

I would probably do this instead of paying cash if I could find more 2% properties in my market. It's about like looking for a needle in a hay stack.

Basically a 2% property will yield a 12-16% return on investment.

A 3% property will net about 18-20% ROI...

Pretty good by todays standards.

You also get to write off depreciation to off set rental income. SFR is depreciated over 27.5 years. $35,000 / 27.5= a write off for $1,272 per year.

Then there is appreciation of the asset. Housing prices tend to rise with inflation in a normal market.

It's not a path to get rich quick, but when compared to the available option today I think it's a pretty solid path to building wealth..

That would be gross income before expenses.

I'll give you one of my properties for example.

Bought home for $27,000 did a basic rehab for $8,000. Total investment is about $35,000.

Home rents for $750 per month.

I have the home insured for $75,000 with a $5,000 deductible and the annual premium is $350.00

Property taxes run about $1,000.00

I provide yard care which cost about $600 per year. (Most don't do this, but it drove me crazy driving up to my properties with the grass knee high)

So $750 x 12= $9,000 in Gross Rental income - ($1,950 FIXED COST) =$7,050.

Of course there's maintenance: It's hard to estimate a cost that can vary so widely from property to property. I like to budget $100 per month x 12= $1,200 in annual maintenance reserve.

Last there is Vacancy and this also can very widely. In my market SFR is highly desirable and will only take a week or so to rent. Apartment's tend to take much longer. Commercial is a joke right now, there is unrented commercial space all over town that has been vacant for over 6 months.

So for SFR I would budget $325 per year as a expense for vacancy. Basically half a month per year to fill a vacancy. This is the most important variable in any income property equation. A vacant commercial or multi property is basically worthless imo unless there is something obvious that can be done to make it more desirable. Actually it's worse than worthless because the fixed cost will continue to suck funds even when the property has no income. This is one of the reasons I like SFR having a 2nd exit strategy in case the rental market sours.

So Back to the numbers
$9,000 Gross - $1,950 (fixed) -$1,525 (Variable)= $5,525 in net income on this property.

To recap $35,000 investment with a $5,525 net= 15.7% annual return on investment.

This is assuming I paid cash and have no loan. Also I manage my own properties so that saves 8-10%.

If a property manager were involved I would back out $9,000 gross x 10%= $900 annual

$5,525-900= $4,625 with a property manager= 13% annual return with PM

A easier way to calculate all this is to use the 50% rule. Basis of this rule/guideline is that 50% of gross rents will go towards expenses (fixed, variable, PM, vacancy)

So $9000 in gross rents x 50% = $4,500... or 12.8% annual return when using that method to estimate income..

Amazingly that is only .2% difference than my prior calculation.

I mean monthly rent = 3% of purchase price.

for example use a $30,000 home.

1% deal will yield $300 per month (Barely Breaking even)
2% deal will yield $600 per month (Great)
3% deal will yield $900 per month (Superb)

It's just a very basic guideline for evaluating prospective properties.

I'm in a very similar situation so here's my strategy...

Buy 1-2 single family rentals per year. That's assuming you are in a market where homes can be bought for $30-40K in decent neighborhoods.

In my market I see absolutely no positive aspect to buying multi family when I'm able to buy SFR for about the same price per door.. (Other than slightly reduced operating cost)

Much less desirable product than SFR... I had a duplex under contract for a couple months but the deal eventually soured due to title issues.. I advertised it prior to closing to gauge demand, and it was nothing but sleaze and section 8 applying. Every inquirer that spoke proper english was immediately turned off once they verified that it was a duplex vs a SFR.

Buying SFR for way below reconstruction cost prevents another conglomerate from going down the street and building the latest and greatest apartment complex and putting downward pressure on rents..

Multiple exit strategies with SFR... If there is a market shift towards home ownership vs renting then rental rates will decrease thereby reducing the value of Multi properties. At the same time there will be price appreciation in SFR homes due to increased demand.

You can start investing after 1 yr with SFR vs saving for 5-10yr with multi... The sooner you put money to work making returns the faster it grows.

Easier to learn the ins and outs of owning property starting with 1 tenant at a time vs many...

Last but most important, it's not such a life altering commitment to buy a SFR and try the rental business... Rental property definitely isn't for everyone.. Worst case scenario you hate it and flip the SFR property to another investor or homeowner.

This is just my 2 cents... It all comes down to the individual deal.. If I came across a multi in a good area that was a 3% deal I would jump all over it... Maybe I just haven't found the right deal yet!

BP is a great place to start learning about Real Estate investing.. Best of luck and greetings from Hattiesburg!

Thanks Guys! Exactly what I was looking for!

Mind throwing out some ball parks on doing built in cabinents wall to wall top and bottom along a 12' wall and then a 5' bar. Really appreciate the help.

We usually try to salvage this stuff but this house is down to the studs throughout.

I'm looking for some ball park figures on installing, float, finish drywall for a 1200 sq/ft 3br 1ba ranch home with 8ft ceilings.

Home is already gutted down to the studs.

Trying to help a friend prepare a budget for a remodel and the drywall is the only thing I've never really dealt with.

Page Huyette

Hardest part is finding someone that knows what they are doing locally. I didn't have much luck in finding anyone who could economically move the little house from the original post, so I passed on it in favor of pursuing easier projects. Finding specialist in larger cities would probably be much easier.

Plaster repair is pretty expensive compared to drywall repair from what I understand. It's a speciality trade and is not very interchangeable with drywall repair tradesmen.

Best of luck and be sure to post any details and quotes you receive on this post. May help others down the line.