[QUOTE=nuffgreed;4300821]ohh - no i didnt include that in my calculations.

The thing is i do 100% of the stuff myself (except lawncare where my tenants do) I guess when I get 5+ properties then I will be calculating that cause it'll just be to much for myself.
[QUOTE]

My advice is to read through this thread carefully before going any further. I've addressed the problems with your thinking earlier.

Are you referring to my questions - or the fact that I do pretty much everything myself and dont include 45% for expenses?

All of these are included in my ROI's ratios - do you guys think 15% and 20% are to much?

Advertising
management
cleaning & maintenance
repairs & improvements
trash & utilities
Insurance
taxes
landscaping & lawn care
miscellaneous - supplies, equipment, etc.

If you haven't included the cost of your time in your ROI calcs, then your ROI is lower than 15%. And for the record, I do not think that 15%+ ROI is too high. If you can't even get a 15% ROI in REI, then I'd advise you find a different investment vehicle.

Ive had both my properties for about 3 months now (just bought my second one, close in 1 week) On my first property I havent spent more than 5 hours a month on it.

Advertising - NOTHING
management - picking up check
cleaning & maintenance - done by tenants
repairs & improvements - changed a lightbulb in the laundryroom 5 min
trash & utilities - done by tenants
Insurance
taxes
landscaping & lawn care - done by tenants
miscellaneous - supplies, equipment, etc. - nothing so far....

Also - for my first property I had to put down 35% which obviously brings down my ROI. I had nothing in my name, didnt make 80K a year like the bank wanted - so they told me I had to put down 35%.... if it was upto me I'd do 20%...

On this second one, I just had the money - so I decieded to put down another 35%.

I am trying to build some equity so I dont have to put down so much for my other properties.

How much ROI did you make on your first investment? My main thing is honestly finding a mortgage, next property I will goto a private/smaller bank and see what happens there.

For cash-flow investing, is it a good idea to have more equity in each property or more properties -- assuming each property is cash-flow positive after expenses and debt?

One way is not better than another. if you are considering pulling equity to do another deal, IMO, as long as the deal will improve your overall cashflow, then I'd say go ahead.

Like for instance, say you've got a property that cash flows $200/mo with $30k of available equity. If you pull that $30k to buy another property, you're cash flow on property 1 will go down to $100/mo. But if your cash flow on property 2 is $200/mo, overall, IMO, I'd want to have two properties with a $300 cash flow than one property with lots of equity and a $200 cash flow.

That is just my opinion. This issue is very much up to the individual investor.

It seems like you are saying that if the expenses stay where they are you'll make a 20% ROI. Unfortunately, the expenses won't stay where they are. They'll go up. 3 months is not enough time to really know your ROI.

what numbers did u use to calc ROI BEFORE you bought the property? That is the question.

Purchase price: $196,000
Downpayment: $68,600

Mortgage: 4.25%

Mortgage paments: $447.67

Renting out the property: $2200 (upstairs $1300 - downtrairs $900) - All inclusive

Utitlies cost: approx $300/m
Property tax: $242/m
Insurance: $48/m

$2200 - $447.67 - $300 - $242 - $48 = $1162.33 (cashflow)

ROI: 20.3%

Why is there no maintenance figure in this? I always plug in 8% of gross rent less vacancy. You should be putting maintenance reserves away every month to be prepared for anything that needs fixing.

Like I said, ive only had my two duplexs for 3 months now. After my first year I will see what my averages are. At the end of the year if I needed to fix something up - then I'd subrtract that from my ROI obviously...

I put away about $300 a month for an emergency - if the furnace blows etc.

It seems to me like you bought this property without knowing how it was going to perform. Normally what you would want to do is understand the profitability of a property before you buy it. I understand that over 3 months you've had very few expenses. What I want to know is how much you are planning to spend on maintenance, repairs, management, etc. over time.

Anyone can have a good three months. But if you make 20% ROI your first two years, then lose $50k in the third year when the foundation fails, that is NOT a 20% ROI over three years. So what numbers did you use to determine the expected ROI on this property BEFORE you bought it?

I'll reiterate that the issue of how to analyze properties has been discussed at length earlier in this thread. I know the thread is long. But it is important to respect my time and not ask me to repeat stuff that has already been covered. After you read it over, I encourage you to ask questions or for clarifications.

Yea, I am on page 40 - thanks for taking them time to re-answer some of the questions you've already addressed.

What I want to know is how much you are planning to spend on maintenance, repairs, management, etc. over time

- Can you accurately plan for something like this? Whenever something happens, i.e.: foundation fails, roof needs to be re-done, furnace blows - just take care of it then?

So I am starting to think that ROI has very very little to do when purchasing a property. (Sounds weird I know)

Yes you can. Roofs last about 15 years. If it is going to cost you $5k to replace shingles in 10 years, then you need to save $41.67 per month in order to pay for the roof. It doesn't work to just pocket the extra $42 now and count that as positive cash flow. Sooner or later that money is going to come out of your pocket. IMO, each property needs to pay for itself. That means that the property should be paying for its own repairs. Whatever is left over after those repairs - even if the repairs are several years out- is positive cash flow.

Thats why you need to take 45% off the top of rents for expenses. Normally, you'll have about 8% for management, 10% for repairs and maintenance, 8% for vancancy, and 20% for taxes and insurance.

I can't imagine where you got this idea from. You couldn't be more wrong. ROI has everything to do with REI. You just don't know how to calculate your ROI. That is the problem.

I'll go over the numbers for you.

First of all, I'll point out that the mortgage you describe doesnt' make sense. You say above that your mortgage is $128k ($196k - $68k). $128k at 4.25% for 360 months would make your payment $625. If you got a 40 year mortgage, your payment would be 550. I'm not too sure where you got $447 from. If your payment is correct, then your mortgage is only $91k, not $127k, which means that you only paid abotu $140k and put down 35%.

In any case, I'll assume that your payment is $625 per month.

So you've got gross rents of $2200 less 45% expenses ($990/mo) = $1210 NOI. $1210 - $625 gives you $585 positive cash flow. $585*12 = $7020, which is roughly a 10.2% COCR on the $68k that you've got into the property. To figure your overall ROI, add the amount of the principle paydown and projected appreciation. You're probably somewhere in the realm of about 15% ROI overall. Personally, I would've passed on this deal. But different strokes I guess.

Hmmm - this is all such a shock for me... not sure in a good way or bad way...

I can see planning for a new roof - i guess - but if the foundation fails, or someone vandalizes the **** out of your property and breaks all the windows - how would you plan for that? I mean there is only so much that you can....

Thats why you need to take 45% off the top of rents for expenses. Normally, you'll have about 8% for management, 10% for repairs and maintenance, 8% for vancancy, and 20% for taxes and insurance.

8% in managment - please elaborate, is this the time it takes you to do whatever needs to be done?

10% for repairs - a given, understand

8% for vacancy - ok, fine

20% for taxes and insurance - this is a big one, why wouldnt u just figure out your EXACT amount for this instead of assuming its 20% I know EXACTLY how much my tax and insurance is per month for the year and included it my calculations

First of all, I'll point out that the mortgage you describe doesnt' make sense.

$196,000 - $68,600 (35% DOWN) = $127,400 x 0.0425% = $5415.5 / 12 months = $451 pure principal mortgage payment - am I missing something? (I have a 5 year mortgage by the way - not sure how smart of an idea this was...)

My numbers are still the same caluculating my ROI - except now I am adding 20% expenses for basically repairs/vacancy and management.

Another question - why am I supposed to take "45%" of the gross rent? Please explain. Wouldnt it be better to subtract that from the positive cashflow at the end?

Again - if I put down 20% downpyment, my ROI would be around 40% - if I put down only 10% it would be around 60% i believe - but since I didnt have anything in my name, no car, no house, no job... I had to put down 35% (THANKS POKER) which brang my ROI way down.

On my next properties I will be putting down preferrably around 15 - 25% which will obviouly bring my ROI to atleast 30%


P.S. Please dont take any of my comments/questions in a negative way, it might come off as me being rude - but im not - honestly I really appreciate your time answering me - i promise you I am taking in ever single bit of it - thanks again.

I've learned two simple rules that i use to calculate whether a deal is worth doing further analysis.

Rule #1: "The 2% Rule"
Monthly Rent/Final Purchasing Price (or Purchasing Price + Rehab Costs)
This number must be around 2% or greater.

Rule #2: "Cashflow"
Typically, You would want at least $100 positive cashflow per door.
Cashflow = NOI Monthly - Mortgage Payment(Principle + Interest)

NOI=Gross Rent - Total Expenses (Typically around 45-50% or Gross Rent, I use 45%)

Now looking at your deal and using these 2 rules we have:

1. Monthly Rent($2200)/ Purchase Price (196,000) = 1.1%.

You would want 2% here.

I can pretty stop here since this is a bad deal already. The fact that you put down 35% is just not wise. You would want to put down 10% or the minimum amount required. Save you cash for reserve or buy more properties.

Let's come back to Rule number 2 and apply the typical 10% down at 7% for 30 years.

You would have a mortgage payment of $1173
NOI Monthly (55% of $2200)-Mortgage Payment ($1173)=$37.

Since you have 2 units. 37/2= $18.5 per door. That's not good at all.

Rule of thumb is that you want at least $100 per door

There are also Cap Rate and COCR calculation that you can do as well.

-Nathan

The repair expense is for replacing carpet, appliances, painting, scooping snow, fixing plumbing, replacing roofs, etc. Normal maintenace, repairs, and upkeep. If you get vandalized, you make an insurance claim. Your DD should have uncovered any potential foundation problems, that was just an example.

I use 8% because that is the market rate to hire a professional property manager in my area. If I'm doing all the management then I stick that 8% in my pocket. Even if I do stick it in my pocket, its still not positive cash flow though. Its compensation for labor provided. There is a big difference. Positive cash flow is passive whereas mangement fees are not passive.

You would use the exact numbers if you have them. 45% is a guideline that you can use to quickly analyze the strength of a property. You should be aware also that in most cases the tax rate will increase by quite a lot after you buy the property. Thats because for the most part - in my experience at least - county assessors don't raise valuations quite in line with actual market value. I've had tax rates increase by 20%+ after purchase.

That situation is likely to be quite variable by market though. What I do is just look up the county assessment and then figure the difference between assessment and PP. I then apply that ratio to the current tax rate to guess at the new rate.

Another issue is that you an actually have taxes lowered on a property if you buy a true fixer. You have to scream like hell to get it done, but I've done it a few times. Mostly its not worth it though, and I'd rather have a higher than fair tax rate upfront in order to get a lower than fair tax rate after I fix up the property. Drawing attention to the property doesn't help keep your taxes down after you make repairs. That is my experience at least.


I'm having a hard time following you. What is a 'pure principle' mortgage payment? I've never heard of such a thing. Don't you have to pay interest? And what is a 5 year mortgage? Do you mean its a 5 year ARM? Or do you have a 5 year balloon? Neither of those would be smart. I expect that the 5 year balloon is a default waiting to happen. If you have a 5 year balloon, you better start shopping for a refi now and dump the property if you can't get one.

I'm not sure what the difference would be between those two. Can u elaborate using numbers?

Yea, I've been putting away about 14% per month for maintance ($300) which I currently think is more than enough for my property (it is in solid shape overall)

OK - understand about the 8% now - thank you. I do this myself cause I only have 2 properties - I would like to ask you though when do you think is it a good idea to hire an property management agency to take care of your properties. I think I'd be able to handle atleast 4-6 - but I could be wrong again. Do you think they are a good idea in general?

About the property tax/insurance - I live in Canada so not sure if there is a big difference here - but the property tax doesnt rise much. There is going to be a 4% increase for everyone very soon (if it hasnt happened already) - and I am fairly certain they dont get raised after purhase though - atleast here.

Interesting issue about lowering taxes - but again, I dont think they'd do that here - maybe someone in Canada with experience can clear this up. Cause my next property I want to buy a true fixer upper, and then rent it out....

Pure Principle mortgage payment I just made up - lol - sorry - its jus the exact amount I need to pay for my mortgage. My bank told me my mortgage payments would be around $650 I believe, but with some going towards the princial ($200).

My 5 year mortgage is an open variable mortgage (that I am going to lock up within 2 weeks - at 4.25%) What do you mean default waiting to happen? I was planning to pay off the properties within 5 years (on the optomostic side) but obviously thats not a very good idea at all I guess.

Hey Nathan thanks for your input as well - couple questions for you:

Can you elaborate on your 'Rule #1' - I mean properties you have that are more than 2%. I would need to get $4000 rent per month to get the MINIMUM % that you require - and this is for a $196K property - that is not right lol... please help me understand (Where/who came up with this rule? Again, I am fairly new so dont get me wrong...)

Rule #2 doesnt apply to me cause I have a 5 year mortgage, and dont use 45% for my expenses - I do everything myself and save atleast 25% MIN by doing so...

Also, I basically had to put down 35% I had no equity - if I put down 10%, I'd be getting 60% ROI - not bad....

If you save 25% by doing it yourself you're not saving anything because you're doing the labor yourself. DUCY?

If you save 25% by doing it yourself you're not saving anything because you're doing the labor yourself. DUCY?

lol - thats where you are wrong sir - thats saving TONS of money 101... basic stuff.

Many questions if not all questions on here are very basics questions that you will find in dept answers on REI forums. I know spex probably mentioned 100 times and i'll say it again, it's so full of great information from noobish questions to in depth analysis. It's biggerpockets.com. There are so many subforums that cover from creative financing to deal analysis. Use the search option. Just do it!!


Nuffgreed,
sign up with biggerpockets.com and click on this link . it should answer your question in depth.
http://forums.biggerpockets.com/view...=100+financing

Brons' point was that you should be paying yourself for the labor. You are, in fact, saving yourself money by doing this, but now you are making the money by being a laborer, rather than by making a good real estate investment.

When a BWM needs an oil change and you can do it yourself for $20 - why would you goto a shop and have someone else do it for $120?

A good real estate investment requires some labour work sometime- why would I here someone else to do it for me - if I am uncapable and not handy, maybe - but if that was the case, I wouldnt get into RE...


Obviously I note the time it took for this and 'pay myself' accordingly. You dont have to be a genious to realize your saving alot of money.

That is one way to look at it. Your notion seems to be 'why pay someone to do something that I can do myself? I'll save some cash if I just do this work myself." There is nothing wrong with doing things yourself to save money.

But there is a basic flaw with your logic. You are assuming that your time is free. Its not. You could be spending the time that it takes you to manage properties in other more lucrative pursuits where you have more expertise.

Personally, I'm an expert at buying income producing property in my market. I feel that my time is better spent looking for more properties so I can get richer. One more property will make me hundreds of thousands of dollars over time. Why would I want to waste time manageing property when I could spend that time making hundreds of thousands of dollars? Seems like a dumb way to spend the limited time I have. By your logic I should be spending my time managing my properties so that I can save a thou or two a month. But then I'd be spending all my time managing properties, and I wouldn't be able to grow my business. Not to mention that I'd constantly have to deal with tenants. That would suck.

hmmm - I guess you haven't been really reading my questions/posts/comments carefully cause you would clearly see I only have 2 properties. I highly doubt anyone would hire a mangement agency for this.

But when you have 5-6 or 100+ units like urself - lol -then it would be the obvious/smart/logical thing to do... not sure where you got the idea that doing everything yourself would be a good idea if you had 100+ units.

On that note - when did you hire an agency to take care of your properties and what do they charge? I have briefly looked at one company (for the future) and thought it was expensive. They take the first month from a new tenant - and charge $120 per month after that $60/m for a second unit.

Also, I am still waiting to hear an explination about the 2% rule I would like to see how that would work if you had an agency taking care of the property.

This is not obvious to many people. Also, even if you're paying yourself, that's (property manager nuffgreed) paying (laborer nuffgreed) because the property needs repairs or maintenance. These expenses, for which you're paying yourself, should be included when you're doing your ROI calculations. It would probably be wise (for purposes of deciding whether or not to buy a property) to assume that you'll hire out all the necessary work. Then, you'll make money whether you decide to pay yourself to do the work or not.

Clearly.

Reading comprehension ftw.

In fact, this is pretty offensive. Spex has done a great job with this thread, and you didn't even have the decency to read the whole thread before posting questions. Now Spex gives you good advice and an example of why he adopts a philosophy, and you tell him he's not reading your posts? That's both ridiculous and out of line.