Crunching numbers

[jimcurran]

Just wondering at what point does owning rental properties become profitable from a monthly cashflow standpoint. When analyzing properties are investors looking at fully mortgaging a property (100%) from a numbers standpoint or are they figuring that any cashflow is a return on their downpayment? I'm looking at a few properties and obviously the numbers look better to me when doing calculations if say a property is selling for 100K and I use the 80K mortgage(20%)down for my calculations. Just say the property is a single family home and mortgage for the 80K would be $400, taxes $100 and insurance $100, for a total of $600. Says it is renting for $750/month that would leave $150 cashflow/month for me. Would this be an ok return? Or since I have 20K downpayment, closing costs, and any repairs that need to be done this would eat up my cashflow and only be a return on my downpayment?



Thanks



Jim

 

[Thomas Beyer]

The overall return needs to consider at least 6 variables : true cash-flow after all expenses, mortgage pay down , gain on sale, taxes on ongoing profit or eventual sale, and value of your time invested .. And then divided over the cash invested. Thus, run a spreadsheet with all variables and you will find all sorts of answers. For example, that the best cash on cash return is usually achieved with high leverage, especially in a fast growing market, but with the worst or often negative cash flow.



If you want true reliable monthly cash flow your mortgage should be less than 60%. That is why most REITs have mortgages rarely exceeding 50%, but if cash-on-cash over a 5 or ten year horizon should be maximized with no particular cash flow goal in mind, then higher leverage (or gearing) is better, especially if you buy in high demand, in-migration, job-creating and thus, rising markets.

 

[invst4profit]

I personally always base my mortgage payments on 100% financing. This at least provides a minimum return on the cash invested. I always believed a income property has two sources of income, one is the property itself the other being the cash invested. For this reason when crunching the numbers always pay yourself first. I also do not count the principal pay down as positive cash flow nor do I ever consider appreciation when evaluating a properties potential. Appreciation, as many have learned in the past decade can vanish in the wind, I only view appreciation as the gravy if there is any at time of sale. My approach is based on the fact that I need cash to put groceries on the table so any money I can't spend if I need to doesn't count for much in my day to day world.



You also need to get your head around the real expenses a income property experiences, advertising, legal , accounting, taxes, repairs both major and minor, vacancies, evictions, utilities when vacant, insurance etc etc. It is not uncommon for a rental property to eat up 50% of your monthly income before dept repayment. You don't say what provence you are in but if it's Ontario expect tenant related expenses to be higher than other provinces. Since we have no damage deposits, no control over tenant pets, three months or longer to evict and a very pro tenant LTB the costs can be crippling when things go bad.



Your $100,000 property example could easily see a negative cash flow of $100 - $200 per month at a rent of $650.

 

[Rickson9]

From my perspective. If a property generates $750/month I would want to purchase it at a price of $36k to $45k to ensure satisfactory cash flow.



At a price of $100k you would be running negative cash flow. IMO.



The expenses you listed are $100 (taxes) + $100 (insurance). You haven't included maintenance, property management, vacancy, utilities (when unit is vacant), legal and accounting.



Unless you do your own maintenance, property management, tenant screening, evictions, legal work and accounting, I would personally suggest allocating money for those items.



Speaking for myself, I have absolutely no desire (or ability) to do any of those things and only invest in assets that increase my wealth and decrease my workload.

 

[franmike]

$36K - $45K? Bear with me here, being a relative newbie, I'm trying to understand this all.

Am I correct in assuming that for the price range you refer to that you're talking about a multi unit property and breaking down the cost per unit? $750/mos here gets you a decent apartment or a smaller house, no utilities included.

What kind of cash flow would you require for the $100K example originally used?

 

[Thomas Beyer]

[quote user=jimcurran]say a property is selling for 100K and ... is a single family home .. mortgage 80K


Where is that ?



Add the following expenses: vacancies (say one month a year on average or 8%), utilities when vacant or "forgotten" when tenant is leaving, R&M (repair and maintenance) of $1000 to $1500/year [ more in some years] and property management of 12%.



Thus 80% levered you'd be negative cash-flow over an average 5 year hold, unless you do not count the value of your time AND it is self-managed, self-painted and self-repaired !

 

[Rickson9]

[quote user=franmike]$36K - $45K? Bear with me here, being a relative newbie, I'm trying to understand this all.

Am I correct in assuming that for the price range you refer to that you're talking about a multi unit property and breaking down the cost per unit? $750/mos here gets you a decent apartment or a smaller house, no utilities included.

What kind of cash flow would you require for the $100K example originally used?




I wasn't talking about a multi-unit property. I was talking about the property that the OP put up for discussion.



With regards to what I would be looking for when paying $100k. I would be looking for gross rents of $20k to $25k per year or roughly $1650 to $2050 per month.



If I pay less, I know that I will have to put in either my time or labour. Likely both. This will take away time from my wife, newborn daughter, family and friends. I'm not interested in putting in much time or labour into my investments after they're purchased. A phone call or email or two per month is about as much as I want to deal with.

 

[Thomas Beyer]

[quote user=Rickson9]With regards to what I would be looking for when paying $100k. I would be looking for gross rents of $20k to $25k per year or roughly $1650 to $2050 per month.
That does not exist in the real world, except in small high risk markets or special situations (like furnished suites or short term price-demand imbalances in the remote oil/gas patch)

 

[Rickson9]

If you can't find $100k properties that will rent for $1650 to $2050 per month then look for $50k properties that will rent for $850 to $1000 per month.



... or a studio apartment in Boston ...



http://www.theglobeandmail.com/report-on-business/economy/housing/americans-caught-by-rental-credit-squeeze/article4392820/

 

[Thomas Beyer]

[quote user=Rickson9]If you can't find $100k properties that will rent for $1650 to $2050 per month then look for $50k properties that will rent for $850 to $1000 per month.


,, and look and look and look .. and look some more ..

 

[Rickson9]

[quote user=ThomasBeyer],, and look and look and look .. and look some more ..




This is true. It took me awhile to find them. The wait was worth it. $$$

 

[jimcurran]

Thanks for all the replies. To clear things up I'm located in Sarnia, Ontario. The property is currently rented and for sale. I don't find that the #'s work for me at such low rents but was wondering what others thought. In my area the max you would get for a property like this in rent is $900/month.



Houses in my area generally rent for 700 for maybe a 2 bdrm to 2500 for a lakefront home. There is no way to get rents of 1650 or near that for a 100K home. They generally rent for 750-1000. This home is in a lower class neighbourhood and thus has lower rents.



I just wanted to know how most calculated their numbers assuming like myself that they are using the 100K on a 100K home. Not doing calculations after a 20% deposit.



On another note when using the 10% method for evalulating properties is that using gross or net rents? I would assume that is net after property taxes, insurance, property management, vacancy, maintenance, and utilities??



Thanks for your help



I'm just getting started and only experienced in my area for rents and prices so jusst looking to stay close to home.

 

[jimcurran]

I'm just wondering where you are located or finding properties that can get such great rents??

 

[jimcurran]

Thanks for your help. This is how I figured my numbers but just wanted to check to see how others do it. I work too hard at this to not pay myself a decent amount in the end.

 

[Rickson9]

[quote user=jimcurran]On another note when using the 10% method for evalulating properties is
that using gross or net rents? I would assume that is net after
property taxes, insurance, property management, vacancy, maintenance,
and utilities??


I'm not sure what you are referring to when you mention the "10% method". However, I generally assume that expenses will take away half my gross rent. So, in order to come out with 10% after operating expenses, I need to have a gross yield of 20% of higher. I hope that makes sense.



[quote user=jimcurran] I'm just wondering where you are located or finding properties that can get such great rents??




Phoenix, AZ. One of the last 'fringe', small towns with illegal up/down bungalows, no water, and 4m people.



Some of my experiences and my interview in MoneySense magazine are here:

http://myreinspace.com/public_forums/forums/public_forums/Real_Estate_Discussion/62-17378-126449-Canadians_Snap_Up_US_Properties.html#126449

 

[Thomas Beyer]

[quote user=jimcurran]There is no way to get rents of 1650 or near that for a 100K home. They generally rent for 750-1000.
That does indeed not exist in the real world.

[quote user=jimcurran]

On another note when using the 10% method for evalulating properties is that using gross or net rents?
Gross usually. Most healthy cities would have a gross rent of 6-8% .. and a net of sub 5%. There are exceptions, like (frequently illegal up/down bungalows) or small towns in US or remote Canadian places. In the US, on average, you can find better numbers than in Canada.



Keep in mind please that rent is only one factor to consider; there is the future value of the asset, too - and it may be up, down or sideways, and in many small places that is a big big risk i.e. a bigger likelihood to the downside then up.

 

[bellaswan]

You can make arrangement first to a real estate agent... So that you can make a cashflow/month

 

[bellaswan]

Its great reading every post you all posted here in forum... it gives me knowledge on it... it enlightens me.. I really hate # but with all your post thank you...