SFHs–Costs, Income, and an oxymoron? - Posted by Ronald * Starr (in No CA)
Posted by Ronald * Starr (in No CA) on December 19, 2002 at 21:51:40:
Eric–(GA)-----------
It can be difficult to get positive cash flow single family properties, depending upon the type of property you have and the location, which determines prices and rents.
The 45% figure is a general rule of thumb and is, I think a little conservative. However, even saying that, there can be properties with greater than 45% expenses at times.
If you manage the properties yourself and don’t consider what you pay yourself for the management, you can probably do it for about 30-35% or a little more. The expenses are sometimes “lumpy”–coming in chunks rather than a certain amount each month. So, you can go for many months with few expenses and then have a big bill to pay all at once.
The National Association of Realtors has a sub-group for property management, called the Institute of (or “for”?) Real Estate Management–IREM, located in Chicago. The organization gathers statistics on expenses of apartment complexes for something like 150 cities around the country each year. They have totals and categories broken out by cost per square foot and by % of revenue for three categories of apartments: Garden, Low-rise, and high-rise. They show the high, low, and middle values for actual apartment complexes in each city. It is a very valuable resource for studying costs. They publish it in a book which they send to their members. You might be able to find some property nanagement firm in your area which has a copy of a recent issue and will let you look at it. The IREM also will fax you the page for a individual city for a fee, $5 last time I knew.
I know of no source of similiar information for single family residences. So their statistics are about as good as you are likely to find, I would guess.
I tend to think that single family houses do not require quite as much maintenance as multi-families, but I don’t have personal experience for that comparison. But some of us just prefer single family investments and some, who want more cash flow for their investments, gravitate to multi-family properties.
There are a lot of factors that effect the overall cost of operating a property—whether multifamily or single. Here are some that come to mind immediately. Turnover-llow turnove is good, high turnover is bad. Type and quality of construction–some properties are just better designed and some better built. Age–older usually require more work and it may be difficult (hence expensive) to find replacement parts for doors, windows, appliances, etc. Prior maintenance–if there is deferred maintenance, it might take a while to get a property up to rentable conditiion, and money, too. Ongoing preventive maintenance. If you go through the property three or four times a year, you can spot problems as they are developing and fix them so that they do not become bigger and more costly. Also, the repairs can be done at your liesure or when a service person is readily available, thus cutting down on emergency calls at high rates (Oh yes well I remember the flooded house on a national holiday. Well, maybe not too well as I don’t remember if it was Labor Day or Memorial Day.) Whether you do the repairs or call in high-priced professionals, such as plumbers and electricians.
Then their is the “cheapskate factors.” Buying parts at the flea markets on the weekends, even when you don’t need them right away. Being organized enough to find the bargain parts you bought at the fleamarket 29 months earlier. Buying paint when it is on sale. Buying the “opps” or “mis-mixed” paints for $3-5 a gallon. (Not good for interiors unless you are going to sell the house, but good for exteriors.)
Tenant selection–some are hard on the house, some are not. Possibly neighborhood–low-end neighborhoods may cost more if you get your house vandalized while it is vacant–usually does not happen in higher-priced areas, I believe–although my experience is limited in the average and above average neighborhoods.
Oh, and I don’t understand where James Strange is coming from. Jack Reed has a lot of good information about managing properties. You are smart, in my opinion, to read what he says. Maybe he just dislikes Jack and was taking an opportunity to put in a potshot at Jack.
Now there is a curvilinear relationship between the value of a house and the rent you can get for it, with higher-cost houses getting lower rents as a percent of the value of the property. Hypothetical examples (not too far from reality): $25K houses rent for $350-$400 a month. $50K ones for about $500. $100K houses bring in maybe $800 a month. $200K gets you $1400 perhaps. $400K gets you–well, I haven’t owned one, so I’d guess maybe $2500-2800. So, to get the highest rents, below-average neighborhoods are where it is at. However, some people do not like to own properties in the poorer parts of town. I recommend buying in as low down a neighborhood as you can stand to own in. Most of my curent and previous rentals have been in below-average neighborhoods and below-below average neighbhoods.
Since loan costs can be the biggest on-going expense, if you can cut that down, you will help your bottom line. That is why people like to have low-interest owner-carry loans and why some of us buy properties at bargain prices, to have low (or no) loan costs.
Your management can also influence things. A good property manager should be pretty hard-nosed, otherwise s/he will not collect all the rents due and may not kick out destructive renters before there is significant damage. (Speaking with the voice of experience here, you bet.) Not getting out non-paying renters is a big blow to the cash flow, I can tell you.
It can be a struggle to get good positive cash flow from single families. That is why many property owners get a reputation for not spending money to keep up their properties, I feel. And the reputation is not undeserved.
Oh, and I encourage you to not just look at cash flow. There are three categories of financial benefit of owning long-term rental proeprties, remembered by thinking “CAT”–you want to make your CAT fat. C= Cash flow, A= Appreciation, and T= Tax benefits. There tends to be a trade-off between cash flow and appreciation.
Here in Coastal CA, where I live, it is extremely difficult to find properties that will have positive cash flow, especially single family homes. But, those who bought years ago are not complaining, the appreciation here has been spectacular. And has encouraged what people call “speculation,” driving prices up to the point that the cash flows are negative.
In contrast, in OK, where I invest for cash flow, it seems to me that prices are about the same now as they were in 1990. That is impressionistic, not based on statistics. But, I am sure that the appreciation is not much. So, if you seek maximum positive cash flow, you might want to invest somewhere other than where you live, it there is not good cash flow there.
But you might also consider that owning properties with not-good-enough cash flow might lead you to tremendous appreciate profits down the line. My impression is that, where there is some reasonable appreciation and you have big loans on your properties, you will make far more money on appreciation than you take out as cash flow. Of course, when you get the money is a factor, as you can figure out if you do some sort of discounted cash flow analysis.
Actually, when you think about it, positive cash flow single family houses are pretty much an oxymoron. You have to charge more rent than the costs of ownership. But, if the renters bought a house like your rental property, they would only have to pay the costs of ownership. Thus, it costs more to rent than to own–at least for comparable houses. So that is a paradox of sorts. Why don’t all the single family house renters buy houses? These days, with low interest rate mortgages and low down payments, that is happening. The rate of homeownership is now higher than any time in history. Or it was a few months ago. I think it is starting to drift down a little because of the weak economy.
So it is harder to find good renters today in a lot of the country. The good ones have bought houses. Maybe from you and other rehab and retail flip folk.
Now you know all I know about cash flow with houses.
Good InvestingRon Starr***
