Posted by Matt on June 14, 2009 at 17:31:47:
Wow!! Thanks it does help. As I read your response through the first time I felt like I have no clue what I am getting into. Sometimes being naive can be a blessing! As I reread your post I realized that I could understand what you were saying so I am encouraged. Hopefully I will get out of this office and start making some deals soon! I will keep the forum posted.
Thanks again,
Matt
How much cashflow do you look for in a property? - Posted by Matt
Posted by Matt on June 13, 2009 at 22:34:09:
I found a couple of properties that have tenants that pay anywhere from 600-725 per unit that cost 25,000-30,000. As you can tell I am new to this. I would also like to know what else to look for when looking at potential deals. Any help is greatly appreciated!!!
Thanks
Matt
Re: DCR and What You Look For… - Posted by David Butler
Posted by David Butler on June 14, 2009 at 13:54:01:
Hello Matt,
Your second question is quite broad, and perhaps better asked on the main Real Estate Forum at this web site. You can also find a number of very inexpensive real estate investment books that can help you immensely in that area. At the same time, you’ll also want to engage in heavy tracking of the current issues in the real estate and financial markets - along with becoming particularly knowledgeable about the area where you intend to do your deal making.
As to cash flow… a minimum ideal standard, which up until recently has been difficult to maintain on a broad scale (in many areas) for residential income properties of less than five units, is generally a minimum Debt Coverage Ratio of 1.2.
This is determined by taking the annual Net Operating Income (Gross operating income less operating expenses, not including debt service), and dividing that amount into the annual mortgage payments. For example, your NOI is $12,000 for one of your rental properties. The annual mortgage payments (principal and interest) total $10,000. $12,000 / $10,000 + 1.2.
If you can achieve this kind of cash flow without using unusual financing vehicles to get there (best to measure your debt service against a benchmark, such as current investor rate pricing for conventional 30 yr fixed mortgage as your baseline), you are off to a pretty good start.
BTW… on the surface, the income streams you describe in your situation here look extremely good, even on the low end. Generating $600 per month against even the $30k per unit cost indicates a sensational cap rate of 24. And measured against investor financing of 7% fixed, shows annual debt service of only $1,916 on $24k 80% LTV senior loan.
Even if your expenses (including property taxes and insurance) run as high as 56% of gross operating income, you would have your 1.2 ratio. All things being equal, and if your expenses include some form of property management allowance that is fully accounted for in your calculations - that’s a great start.
Hope that helps, and Many Happy Returns.
David P. Butler
National Equity Solution