Spex can explain it much better than I, and I'm not sure exactly what he meant in that quote.

My understanding is it's usually 2% agency, 2% listing agent, 2% buyer's agent, unless it's a one off negotiation.

I'm guessing, from top of the head math, that him saying he paid a 60k commission on a 1.4M house means she got closer to 56k in reality, or the 1.4 was the asking price not the actual sale price.

It's been my experience that with a 6% commission, 3% goes to the listing broker and 3% goes to the selling broker. How the brokers share that with the agents depends on their agreement. New agents usually split 50/50 with the broker. A more experienced/successful agent my get a 90/10 split in their favor.

I am in the process of buying a 2 unit rental house in NJ. Will cost me $305K, collects $2,900 rent a month with established tenants, property taxes $480 a month.

Do the numbers make sense?

Also, for this deal there's both a seller's realtor and a buyers' agent (realtor on my end who found me the house). They are splitting the 5%, with each one grabbing 2.5%. In this case, is the standard for the seller to be responsible for the entire 5% or for me to be responsible for 2.5% for buyer's agent and the seller to be responsible for 2.5% for their primary realtor who listed the house?

Thank you!

i've read that if...

$Buy / $Rent_1yr < 15, then buy, otherwise, rent.

for example, toronto ratio is about 30, and for the above two posts, the ratio is 8 and 12, respectively. if those numbers are correct, then buy?

is this too simple?

eh, typo. it was around $80k

Total expenses should be around $1160/mo. If you put down 25% and get a 25 year term at 6.5%, your mortgage pmt will be $1,647/mo. So that's $2900-$1647-$1160 = $93/mo cash flow. You'll be getting a COCR yield of 1.86% per year, plus principle pay down on the mortgage (assuming the value doesn't decline), plus possible appreciation, plus possible rent increases, plus tax benefits (which there won't be any unless you spend more than 400 hours per year on active investing activities).

So....if things go well, you *might* be able to match TBill returns with this investment. Essentially your return is likely to be at or under the general inflation rate. How does that feel to you?

As to the commission split, the seller pays it in total you don't have to come out of pocket for any commissions.

I think selling it is the best course of action. I am not an advocate of holding investments hoping for general appreciation. I believe in making investments where you can influence the outcome using skill. You cannot influence the outcome of appreciation. You got lucky with the appreciation so far. Lock in your gains and put the money to use elsewhere, into something where you can benefit from your expertise.

Honestly, making money in real estate isn't rocket science. Just buy for good *cash flow* yields and/or where you can profitably add value to the property. If you just focus on one or both of those strategies you are ahead of 95% of the investor market. Obviously, your outcomes are still subject to the vagaries of market value fluctuations, tax law, the city government going crazy, interest rates, monetary policy, and all the other things that can destroy the value of your property but you don't have any control over.

Spex,

My apologies if you've explained this before:

You commonly use 40% of rent as anticipated expenses. I was wondering why this would make sense, as opposed to some percent of property price. I get that those two are pretty well related.

My question is prompted by the above $300k property with $2900/mo rent. That seems like a nice fat rent: price ratio. Maybe that's because I've never been an investor but have loved in a $300k condo that could never have rented within 20% of that.

Similarly, from living there, $13k+ of annual expenses seems high.

But if the message is that amenities and tenant expectations vary with rent, that's pretty intuitive too.

Idk, just seemed odd. Like, he'd have to get his rent to what, $3500 to get 7% cocr? I should probably simply your equation to examine.

It would seem somewhat intuitive that lower absolute price points are much more likely to yield these kinds of returns? Or maybe sweet financing deals are the lever I should be looking at, since with 25% down, rates are around 4, not 6?

Well the 40% is an average over time, not necessarily the amount you'll spend each and every month. But take something like a roof. Let's say the house has a 20 year shingle on it, and you bought the house 10 years after the last replacement. You have 10 years to go before the roof needs to be replaced again. To operate the property profitably over a 10 year time horizon, you'll need to factor in the future replacement of the shingles at a cost of, lets say, $6,000. $6k / 120 months is $50 per month for roof replacement. That $50 comes out of rents each month and goes into a repair reserve account so that you have the money when you need it.

That's the calculation you use for everything in the house that will eventually wear out. Siding, roof, flooring, windows, plumbing, etc. Basically everything. Then add to that the regular repair costs that always come. Sewer line issues, frozen pipes, closet doors falling of hinges, and all that stuff. Then on top of that you have regular maintenance items. Paint, broken windows, holes in drywall, etc.

What I've seen in my portfolio (actual results from operating actual properties), is a 40% expense ratio *over time*. And no, you don't get out of that by purchasing a condo. If anything, condo fees end up being *higher* in the long run, generally because of incompetent management by the condo association. (I would never entrust my financial wellbeing or investment outcome to a board of volunteer laymen, that's for goddam sure). The only real estate investment I've seen that *doesn't* follow the 40% expenses rule is mobile home parks, which I love, and which I might get back into someday.

Does that answer your question?

It's not necessarily about price per se. It's about the price:rent ratio. Most investors consider it good if they can get 1% of the purchase price in monthly rents. Where did they get that information? Their realtor told them that's what a good return looks like and that it's impossible to do better. What qualifications does the Realtor have to make this assessment? None, they don't know wtf they're talking about. Most investors lose money in real estate over time, just like most poker players. If I used such a ratio, it would probably be something closer to 2.5% of the purchase price in monthly rents. I don't use it because it's a bit too back of the envelope, and it's not very hard to determine a something closer to accurate.

In the markets I invest in, rates for investment property with 25% down are 6-6.5%. This varies to some degree by market, but generally not that much.

Where do you find properties that are rented out at 1% of the purchase price? Is there a limit to how long you should keep the asking price if property isn't selling?

Like almost every market in the USA! But don't buy them unless you like losing money

As for selling, honestly what I do is just set my bottom line and take any offer that exceeds it. If you don't have an offer within 60 days, I'd probably drop the price. If the price drop would take you below your minimum then unfortunately you have a problem with no good solutions. When it comes to selling, don't get greedy. Just sell it and put the money to work in better investments. The saying "get the fast buck not the last buck" applies well here.

spex,

Very interesting. I'm still not sure why the expense ratio would be tied to the rental price of the property as opposed to the value of the property. I'd assume that things like "price of the roof" are more directly related to the value, not the rent. But maybe many other things that drive the rent/price ratio are related to upkeep beyond these large fixed cost things that get amortized. Just seems odd.

IE,
I buy a $300k house. I rent it for $3000/month.
I buy a different $300k house. I rent it for $6000/month.

Why would the expenses of house 2 be 100% higher than the expenses of house 1, in general?

Having not followed the rest of the thread a ton, it seems intuitive that the prices of the homes you tend to invest in must be on the low side. I can't quickly imagine anywhere where a $300k single unit property would rent for $7k/mo, or a place where a $1m single unit property would rent for $20k/mo. But I can imagine places where a $50k property could rent for $1k, or where multi-unit stuff makes the math work.

As an aside: I hadn't realized that rates would be so highly determined by market and/or whether something is an investment property. My frame of reference is driven by having recently bought a home in a large market and, thanks to relationships between my employer and the bank, putting down 5% with no PMI and paying 4%.

The 40% is just a general guideline and is what has been proved to be an optimal building. Very few people are capable of running a building optimally.

Btw as far your example goes, you'd still have 40% expenses on the 6k house because to get 6k in rent, you will need to offer more services which will make your overall expenses higher. Otherwise you will never rent it.

In my market in canada, I know that if you want to keep it simple stupid: NO buildings runs under 40% expenses ratio unless they are brand new (even brand new they will eventually go up to 40% naturally overtime). If someone is selling you a building and it only has 30% expenses, they are not putting all expenses in the pro forma. Seems be somewhat similar to the usa from what spex is saying.

Kekeeke,

Sorry, I'm not sure you have helped me progress in my understanding beyond the possibility that services are a large component of the model.

Statement: in order to have an acceptable return on renting real estate, you have to charge 2-2.5% purchase price.

Reactions: 1. wow, I've never seen that rent ratio in any price range * market I've looked at buying for my primary residence, and only saw it in brief research into mobile homes. 2. Wow those down payment * payment sound very high too, why?

On 1:

My thought was that for a certain price of home, there's probably a band of rents that relate something close to lineary to the purchase price. For instance, a $300k home might rent anywhere from 2-3.5k, depending on specifics. Probably not linearly because (I'm guessing here, and tried to ask this question previously), there's a fixed cost to "a residence" and likely a similar flattening out at the high end that makes this curve more s shaped.

You bring up services, which I suppose is true. But services are something that you bundle with the property. So we could consider the property and it's rental price and then the services and it's marked up price as a decomposition. Only certain properties could support certain bundled services. It seems intuitive that it's great to bundle services with 200% markup as much as the market supports.

But in the reduced example of a 300k unit that rents for 3k as a base property, are there really 3k+ of services one could bundle with markup? Or am I basically misunderstanding. Like I said, I have never seen a 6k rental on a place that could be purchased on 300k. Maybe this would happen in a coop with high fees, but there wouldn't be markup charged on those fees for rental.

But again, maybe this is something where the price point is hugely determinative? Like either low purchase price properties that sit in the bottom of the s curve or low average purchase price multi unit buildings where providing certain services scales well? I don't know. This is what I'm trying to figure out.

2.

Would seem natural to figure out how to drive the carrying cost down so the ratio of rent to payment + service cost + upkeep costs is as high as possible. I don't know the basics here. Are investment mortgages that much worse than primary residence?

Spex are you talking about 1% of the 25% down payment or the full 100% purchase price, $300k in citanul's example?
Great discussion btw.

He is talking about the full purchase price. I suggest if you live in a major city to look elsewhere though.

I live in Miami, its tough to find 1% here because all of the demand. But I'm sure within 2-8 hours drive of my market is some smaller town where 2% rents are standard.

Are you counting the mortgage as an expense? The mortgage is not considered an expense when analyzing rental properties, otherwise paying cash would screw with the math lf the deal.

And yes you could muster up 3000 expenses. Cable included, wifi included, cleaning lady once a week, ac/heat/electricity included, lawn care, snow removal, phone, I think you guys even get charged for water? Include it... Arguing about that is pointless tought. Spex is using 2% because his market is probably around 1-1.5 and he wants to beat the market.

The basic expenses are : taxes, insurrance, maintenance, capex, administration, vacancy and from there you add stuff like snow removal, lawn care, etc. Take the bundle of the basics expenses of your market and it will be around 40% of the market rent. Sometimes it will be lower, but then the market adjust and owners have to include more service to stay competitive, like here in quebec if you don't offer snow removal, you will not rent. Thus pushing us to 40% average anyway

Sometimes you pay 50k and rent it for 1k, but your maintenance is higher, your vacancy is higher, you will need to put in more time because you got not so good tenants. IN GENERAL so a good RE investor needs to find the exception. That's why knowing your market is key, which road to avoid, what kind of tenants live there, what do they want.. to reduce your expenses (vacancy) and not do useless renovations they don't care about.

Bring a real life example with numbers and we can discuss it. If I talk about a deal from my market spex will say the numbers dont work.. but if all goes well in a few months I will have built enough equity to refi and start a new deal. When I bought it it didn't even reach the 1% rule.

As an appraiser in MN, I dont see apartment OPEX ratios under 40% very often except in new or very well kept, well managed properties. 45% or more is very common.

Except for special circumstances, you don't really find houses that rent for more than about 1% of the overall purchase price. Why? Because if that were the case purchase prices would quickly be driven up by investors charging into the market to capture superior returns. Rental prices are generally speaking about the same as the mortgage payment, taxes, and insurance for the house. You will almost always find this is almost every market that you look at. That ends up being about 1% of the purchase price. Pick 5 markets and look for yourself and you'll see what I mean.

All you're doing in your example is manipulating one variable, the acquisition price. Yes, if you take two $300k houses that are exactly the same and next door to each other, and for whatever reason one of them rents for $7k and the other rents for $3500, then you would not expect the expenses to be higher for the $7k property. You'd expect the expenses for both properties to be the same. But it doesn't matter too much because this is the real world, and that deal doesn't actually exist. What you'd actually see in the real world is the $7k rent house selling for $700K and the $3.5k house selling for $350k. And they'd be in different neighborhoods, which accounts for the price difference. You wouldn't see both houses selling for the same price.

Sooo how does that factor into expenses? First, most of your expenses are variable, not fixed, and based specifically on acquisition price. If you buy a $700k house that rents for $7k, you pay much more in taxes, insurance, and management fees than the similar $300k house. So yes, to your point, the cost of repairs of two similar houses in the same MSA would be the same assuming you're using the same materials. But that alone isn't the total of a rental property's expenses. Plus, usually the finishes of a $700k house are much more expensive because the person paying 2x more for rent will have different expectations.

True, you don't get those returns at that price point without buying for significantly under fair market value (like 20% or less under). I don't do that, I buy properties at retail and my properties are cheap with good rents and good cash flow.

Yep, investment properties are much higher risk so you pay more for financing.

To be clear, I didn't make that claim. for me *personally* I would need to get that to hit my COCR targets. But my COCR targets don't need to be the same as anyone else's. There is no "right" return, there is just what is acceptable to any given investor.

Yeah, if it was easy everyone would be doing it! This isn't the type of return you get looking at homes in the suburbs, unless you are excellent at sources and closing under market deals. That's a whole skillset that certain investors focus on. It's a good skillset to have. It isn't really what I generally focus my time on, but I do know how to do it and I've done it before.

True. But there are certain confounding variables in there too. LIke for example, if you buy a property in a low income area for $50k, the market rent might be only $600/mo. But from a voucher program you can get $900/mo. Why? Because the voucher programs use HUD's fair market rent analysis to determine the rent they'll pay, and HUD generally gets fair market value right in aggregate (at the MSA level) but very wrong in specific neighborhoods. For example, the voucher program will pay the same $900 in the suburbs, where market rate is actually $1,500. This is *part* of the reason why people on voucher programs are concentrated in low price point neighborhoods. Landlords in the burbs don't care to take $900 for their $1,500 property, and landlords in the hood like taking $900 for their $600 properties. Simply put, there are all kinds of micro-level inefficiencies in the market, and successful REI is really about identifying and focusing on a couple of those inefficiencies. Those inefficiencies are not necessarily obvious just by looking at the MLS.

These deals definitely exist. But you have to *find* them. They're highly situational and usually covered in muck and complexity such that the properties are not marketable in the normal fashion. This happens when the seller is in financial trouble, there is a death, there is a disagreement among partners, there is a cloud on the title, there is a fundamental issue with the structure, poor management, etc. It's not like these deals are just sitting there waiting to be picked up. You pick a strategy, or several strategies, gain expertise in that strategy, then put in the legwork to get deals done. Professional investors that focus on these types of deals work full time and *maybe* do 1-2 deals in an average year.


Obviously everyone tries to lower costs. You can't find a cheaper bunch of bastards then a group of landlords. Goddam it drives me nuts how cheap these guys are. Take my example of a house that costs $50k but rents for $900/mo on a voucher. My tenants are hard on properties. Much harder than a suburban family. My expense ratio ends up being the same overall as the guy that owns suburban $300k houses that rent for $3k. But I make more profit and better returns because what matters isn't the expenses, but rather the ratio of cash profit to cash outlay (that's what the COCR is).

In terms of repair costs specifically, it's really easy to figure out for yourself and you'll see exactly what I mean. Just make a list of every major component of the house. Flooring, roof, hot water heater, appliances, windows, etc. Figure the useful life of each and the replacement cost, including labor of the item. Divide the total cost of each item by the number of months of useful life remaining. If your list is comprehensive, you will see for yourself that the cost of repairs is much higher than a 1% rental rate can support and still provide a positive return that beats the general inflation rate.

Here here. Preach.



I've gotten so predictable.

That's easy to figure out. Just get one of those magic 8 ball toys and ask it. That'll give you as reliable a prediction as anyone else could.

I thought I'd post about a deal that I just closed to respond to some of the inherent doubt that I usually get about finding properties that can cash flow. About a year ago a property came on the market that is in a neighborhood where I own several single family homes. The neighborhood is working class, average property value is probably around $50,000. It's not a high crime neighborhood, but there is a high crime area to the south, and to the west there is a nicer neighborhood with avg values closer to $100k.

This property was a 4plex, which was made by chopping up an older large house into several smaller units. It's a 2x2br, 1x3br, 1x1br (which was formerly a separate garage that was converted into a living space). It came on the market for $250,000, and total rents of $2,000 per month. Landlord pays all utilities. Not a deal for me at all. Over a year the price dropped and dropped. My Realtor had a client that got the property under contract, but he backed out of the deal because this was his first investment and he got scared off. A month ago, I got an email alert that the property had been reduced to $99,000. So I went to look at it.

By this time, only two units were occupied, both 2br, one for $650 and one for $415. The empty 3br needs paint, some flooring, a bit of electrical work, a window or two, and a real good cleaning. The 1br needs paint, flooring, new cabinets, a couple windows, and exterior door. All in all, I estimated about $10,000 in work. From voucher programs I can get about $870 for each 2br, $$780 for the 1br, and $1280 for the 3br. That's a gross operating income of $3,780.

I looked at the county records and saw that this house is owned by a corporation. I looked up the corporation, and it's registered in California. I looked up the information on the CA state website and learned that it appears to be a subsidiary of a larger real estate investment company focused mostly on medium sized commerical investments. Perfect. Corporations are easy to deal with because they have no emotion in the deal at all.

I also looked up the last sale price. It had sold in 2014 for $70,000. So I offered $75,000, cash with a 4 week closing, contingent on them starting the process of getting rid of the tenant that is paying $415. $75k+1.4k closing costs+$10k retrofit = $86.4k all in. At 50% expense (remember I pay utilities), that's a cashflow of $1,890/mo. After I refi 75% of my money back out, that's a cash-on-cash return of 57%. They accepted with no counteroffer.

A week before closing I got a call from my realtor. The 1br former garage was broken into and squatters burned it down. The sellers wanted to know if I'd still go through with the transaction at a lower price. The gross income is now lower so I gave them a reduced price of $45,000, assuming that they would be more motivated than every to get this off their books. With the remaining 3 units, and a bit higher of repair costs to $15,000 (for getting rid of the burned structure), my COCR is now 127%, or about $1,285 per month in positive cash flow after taking off 50% of gross for expenses.

The deal just closed and the guys are over there getting it rent ready. To be fair, this isn't an every day deal. Most of my deals are closer to the 35% COCR range. But deals like this are out there in the world.

Wow, that is a great deal. Good story, congrats!