Posted by Todd(AZ) on November 03, 2009 at 16:34:39:
Well Said JT!
Where’s the Money? - Posted by Dr. B. (OH)
Posted by Dr. B. (OH) on November 03, 2009 at 08:06:14:
Looking at a fourplex, duplex, triplex and SFH.
My background:I have been doing mobile homes for 7 yrs. I looked for my answer in the archives and couldn’t find it.
I’m having trouble making sense of the rent at 1% of purchase price rule of thumb. This doesn’t seem to fit with the 50% operating cost that is industry standard.
Here’s an example:
150,000 PP
20% down
120,000 loan at 6.78% for 30 yrs
780.71 loan payment
1% of 150,000 = 1500/mo rent
50% of 1500 = 750 operating expense
So I’ve got :
750.00 operating expense plus
780.71 P & I
1500 rent minus 1530.71 loan pymt and expenses = (30.71)
Where’s the money for me?
Steve
Re: Where’s the Money? - Posted by Ben T
Posted by Ben T on November 05, 2009 at 20:34:22:
Alot of this is going to depend on where your property is located. It’s
also going to depend on the type of property.
But I will say this: I generally figure 40%-50% expenses on house
rentals. When I say expenses though, Im including taxes and
insurance. I’m also assuming some vacancy, legal costs, advertising,
repairs, etc etc. But that figure is also meant to include the cost of
things like new roof, HVAC, exterior paint and so forth. Because if you
own the property long term, you’re going to end up replacing each of
these things. The money spent is not a “repair expense”, but rather a
capital expenditure. It won’t be an accounting deduction from your
income. Rather it will be amortized over the subsequent 27.5 years.
Nonetheless, I have that factored in when I say 50% expenses, because
part of that is the monthly amount that you would set aside to
eventually repair the roof.
I will also say that low end properties rent for higher numbers, as
someone below said. However, they also require higher expenses
typicallly, at least that’s how it’s worked for me.
I noticed JT used an expense ratio of 20%. I would highly doubt that
this percentage includes taxes or insurance. When you get the taxes
and insurance in there, along with deferred maintenance, it’s quickly
going to be 40-50% in my opinion.
So here’s the bottom line…if your rents happen to be 1%, you’re
probably not going to cash flow. I need more than that. I have to
believe that in Ohio you can get 2-3% in the lower end areas. Start by
looking at the rental comps in the area, not using some rule of thumb.
You can die with rules of thumbs.
Ben T
Re: Where’s the Money? - Posted by BTI
Posted by BTI on November 04, 2009 at 10:22:39:
B
The investors I’m familiar with in Ohio use the 2% rule for rents. In California the norm in the areas I deal in is 1/2% and I would fall over if I found 1% or greater, so my buy and holds are only commercial properties.
Suggest you find recent purchases by old timers and see what they are paying now days and follow suit.
BTI
Re: Skewed Money - Posted by Dr. B. (OH)
Posted by Dr. B. (OH) on November 03, 2009 at 13:11:59:
Thanks Kristine and JT.
As a MoHo investor, the main thing that has been clear to me is to buy at 10-50% retail, sell on a note at retail or slightly above and money will be made.
I guess I may have been mixing my “industry standards”. The “rent at 1% of purchase price” seems to be common among real estate agents and other likely non-investors.
I’ve read “figure 50% expense ratio” for investment property. In retrospect most of those books were about multifamily properties.
So, forget the “standards” and rubrics and just figure out if it will cash flow, right? Got it. Back to crunching the numbers in my usual way.
Thanks again,
Steve
Skewed numbers - Posted by JT-IN
Posted by JT-IN on November 03, 2009 at 11:06:45:
You’ve no doubt heard the saying; Figures lie and liars figure. And that has nothing to do with your question but we get all hung up on numbers and ratios, and so the question is, where did you come up with those suppositions…?
The 1% thing is an old standard, but usually applies to SFH’s. However on SFH’s you are NOT going to have a 50% expense ratio, at least you shouldn’t have. So in SFH’s, if you can get 1% rent… and that usually only works to a certain price point, like under 100K, and your expenses are say not more than .15 or .2%, then you can make a small monthly c/f and hopefully with less headache than a 3 or 4 unit bldg that is more mgmt intensive.
If you have a 4 plex with a 50% expense ratio then you simply need a greater than 1% c/f. OR, how about buying the unit for 50% of FMV, then get 1% c/f of FMV, so now you have 2% c/f…
Coming from mh’s you will have difficulty making sense of the smaller returns on bricks and mortar, but what you don’t have on the wobbly boxes is long term appreciation; (which in theory you will have with real property). The profit is all in how you buy the property. If you go in and pay too much (retail price) you will be sitting with a dog for many years in this mkt. Mh’s are no different, really. You gotta buy em right and the numbers will take of themselves.
Re: Where’s the Money? - Posted by Kristine-CA
Posted by Kristine-CA on November 03, 2009 at 10:58:19:
Since I live in CA I know nothing about the 1% rule…is that a rule? Are
you in an area where a 150K house gets a $1500 rent?
Is 50% the industry standard. I use 40% in all my calcs and the
numbers don’t provide cash flow with that either.
The old time landlords who make cash flow work where I am start with
much lower numbers. They want a 20-30K house with a $600-750
rent. As you can imagine, they didn’t buy much the last 7-8 years.
They are buying again now though. As you can imagine both the
neighborhoods they work and their tenant pool is what you would call
challenging. They are able to do way better than 40% on expenses,
because they provide way less for a tenant pool that will accept less.