Author Topic: 50% rule analysis for first time RE investor  (Read 6550 times)

Mister Fancypants

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50% rule analysis for first time RE investor
« on: February 13, 2014, 05:14:38 PM »
So we are looking to buy our first investment property and I'm not sure what to bucket into the expenses category for the analysis.

The property we are looking at is priced at $494k, it is a single family home that has been converted into a multi-family home legally with 3 apartments.

All 3 units are leased 2 for 5 years, the 3 for 8 years; the total monthly income is $4,800.

The annually taxes on the property are $12k.

We will handle property management tasks ourselves as the property is already rented for multiple years and is local and we have a reliable reasonable contractor who can handle any maintenance issues that arise for us.

So I am not sure how much time I should be allocating towards PM of the property, and what other costs need to be included to see if I am forcing cash flow or not.

Let me know if you need any other information.

Thanks,
-Mister FancyPants

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #1 on: February 14, 2014, 09:24:31 AM »
Start with the pro forma the seller gives you, then delve into the numbers.

Utilities will be one thing.  Even if tenants pay some, you'll have lighting for common areas, potentially heat, trash removal, maybe snow removal (depending on the area), landscaping, etc.

Find out how much management in your area typically runs - definitely don't want to be "cash flowing" only because you're doing the management yourself, rather than paying someone.  Glad you realize that, cause many people don't get that fact.

You'll need to figure out how much needs to be put away monthly for CapEx (future capital expenditures).

Maintenance expenses.

Insurance.

Taxes.

Pest Control.

Bookkeeping.

Advertising.

Cleaning.

That's off the top of my head.  I'm sure there's more, and if you google it, you'll probably find some.  Hope that helps.  :)
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lakemom

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Re: 50% rule analysis for first time RE investor
« Reply #2 on: February 15, 2014, 11:35:36 AM »
The 50% rule is just a quick way to determine if a property will cash flow.  Simply said, expenses run about 50% of gross income.  So If expenses are 50% of 4900 they would be 2450 per month leaving 2450 per month for mortgage (principal and interest since taxes and insurance are accounted for in 50% expenses).  Will this property actually have any positive cash flow?  It seems priced quite high and your taxes are 1k per month. 

Letj

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Re: 50% rule analysis for first time RE investor
« Reply #3 on: February 15, 2014, 03:57:09 PM »
I don't think this is a good deal.  For a rent roll of $4,800, you should pay no more than $240K for this (if you plan on doing all the maintenance and this is a high priced, high rent area no more than $300K.  At $494K run don't walk.

Left Bank

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Re: 50% rule analysis for first time RE investor
« Reply #4 on: February 15, 2014, 04:16:14 PM »
Letj,
Does your market area really have properties that get 4.8k/mth from a 240K house?  If so, where?
Never happen in here in Boston. 

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #5 on: February 15, 2014, 06:27:15 PM »
Letj,
Does your market area really have properties that get 4.8k/mth from a 240K house?  If so, where?
Never happen in here in Boston.

You probably won't see a 2% rule in a single family in that price range.  You will in the 30-50k price range in certain areas.

To get that return, you'll likely need multifamily (small apartment).  Something that would match Letj's numbers, for example, would be a 10-unit apartment priced at 20-25k per unit, renting for 450-550/mo.
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Mister Fancypants

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Re: 50% rule analysis for first time RE investor
« Reply #6 on: February 17, 2014, 07:56:39 AM »
The property in question is in my local market a suburb of NYC, the price is fair market value. Based on historic property appreciations (long term, normalizing for the recent housing bubble) the future values look promising as well.

The property is well maintained and of course things will break but I am not expecting any catastrophic expenses in the short term all the appliances in the units are new and the HVAC systems are new and well maintained, the roof is also in good condition. So CapEx should not tremendously high, insurance is about $1500 a year.

I know it is close to breakeven on cash flow, but I am looking at my local market as I don't want to deal with remote properties not at first anyway, also just looking at5 a single property to get our feet wet. We will probably bank all of the cash flow for a 2nd property if it runs smoothly.

This is by no means a done deal, still in analysis, in fact there are many properties available with roughly the same specs in our market, and it is a fairly common rental property.

Thanks for the feedback thus far.
-Mister FancyPants

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #7 on: February 17, 2014, 08:28:05 AM »
The property in question is in my local market a suburb of NYC, the price is fair market value. Based on historic property appreciations (long term, normalizing for the recent housing bubble) the future values look promising as well.

It may be worth going with little to no cash flow if this is your strategy.

I know it is close to breakeven on cash flow, but I am looking at my local market as I don't want to deal with remote properties not at first anyway, also just looking at5 a single property to get our feet wet. We will probably bank all of the cash flow for a 2nd property if it runs smoothly.

If it's close to break even, what cash flow do you expect to bank?

This is by no means a done deal, still in analysis, in fact there are many properties available with roughly the same specs in our market, and it is a fairly common rental property.

This is the biggest red flag for me so far.

If it's just an average deal, why the heck would you buy it?  Spend some time looking and being patient waiting for a good deal in your market, not an average one.
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Letj

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Re: 50% rule analysis for first time RE investor
« Reply #8 on: February 17, 2014, 08:35:17 AM »
Letj,
Does your market area really have properties that get 4.8k/mth from a 240K house?  If so, where?
Never happen in here in Boston.

Yes, everyday of the week.  I have 30 SFRs and they've met that criteria.  I bought them all distressed between $20K and 40K and put a bit of work in them to make them rent grade.  They are mostly low income but cash flow is very important to me at this point. My plan is to sell in 10 years and 1031 exchange into stronger areas.  Right now I manage all of them myself but once I exchange them for stronger areas, I will give to a management company since I'll be retired and don't want to be bothered with day to day management.

Left Bank

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Re: 50% rule analysis for first time RE investor
« Reply #9 on: February 17, 2014, 08:42:34 AM »
Hi Letj, 
Thanks
Two questions:
1) Where?
2) 30 properties with this kind of flow and you're not retired?

Letj

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Re: 50% rule analysis for first time RE investor
« Reply #10 on: February 17, 2014, 06:25:13 PM »
I have cashed out from those properties by refinancing but still have a great cash flow.  I could have retired a while ago but I have children in very expensive prep schools and I still have college ahead of me.  I will be retiring in four years when the the oldest starts college.

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #11 on: February 17, 2014, 07:26:45 PM »
Buying run down properties in low income areas and fixing them up and cashing out the equity is a great strategy, but not viable for most people, and is closer to a job than investing while in the acquisition and rehab process.  Every one of those properties should easily hit the 2% rule though, if not 3%.
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Left Bank

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Re: 50% rule analysis for first time RE investor
« Reply #12 on: February 17, 2014, 08:00:23 PM »
OK Letj
One question now:
1) Where?

Letj

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Re: 50% rule analysis for first time RE investor
« Reply #13 on: February 17, 2014, 08:14:55 PM »
In the interest of remaining anonymous I can't post my exact location.  Suffice it to say, what I have done is hardly unique.  This can be repeated in just about any area of the US; just stay out of expensive coastal cities.

Mister Fancypants

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Re: 50% rule analysis for first time RE investor
« Reply #14 on: February 19, 2014, 09:24:12 AM »
I know it is close to breakeven on cash flow, but I am looking at my local market as I don't want to deal with remote properties not at first anyway, also just looking at5 a single property to get our feet wet. We will probably bank all of the cash flow for a 2nd property if it runs smoothly.

If it's close to break even, what cash flow do you expect to bank?

The forced cash flow, can't buy the property for cash so there would be cash flow based on a down payment, not going to pretend it is profit, but cash flow all the same.

This is by no means a done deal, still in analysis, in fact there are many properties available with roughly the same specs in our market, and it is a fairly common rental property.

This is the biggest red flag for me so far.

If it's just an average deal, why the heck would you buy it?  Spend some time looking and being patient waiting for a good deal in your market, not an average one.

Like I said doing analysis, not pulling any triggers, this is actually one of the better deals, most of the others have much higher taxes, but I agree I am not dying to jump into this, I posted this to get some feedback on the idea we are toying with.

We would like to get into owning some rentals and local seems more practicle then remote management but we live in an extremely pricey area and that is what makes it prohibitive, so we keep going back and forth, on an approach.

We won't make any moves until we have a much more solid plan and understanding of our goals and objectives.

Mister Fancypants

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Re: 50% rule analysis for first time RE investor
« Reply #15 on: February 19, 2014, 09:36:39 AM »
In the interest of remaining anonymous I can't post my exact location.  Suffice it to say, what I have done is hardly unique.  This can be repeated in just about any area of the US; just stay out of expensive coastal cities.

@Letj I would be interested in hearing more about your approach to real estate investing, at this point we have just been considering our local market as it seemed more logical so we can keep an eye on things etc., but based on your posts I would consider looking outside as my capital can go a lot further.

I live in a suburb of NYC clearly a coastal city and real estate here is very pricey, when you mention whole houses for $20k to $40k I don't even know what to think, from my perspective that can be a bathroom renovation (Face Punches welcome :p )

Anyway, if wouldn't mind giving me a little more insight into your property criteria and demographic I would greatly appreciate it, feel free to do it via private message as I know you mentioned you would prefer more anonymity.

Thanks,
-Mister FancyPants

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #16 on: February 19, 2014, 10:20:56 AM »
Suffice it to say, what I have done is hardly unique.  This can be repeated in just about any area of the US; just stay out of expensive coastal cities.

I completely agree - but, IMO, usually it can only be done locally - in other words, it's tough to do remotely.  Do you agree?  Are you local to all your investments, or have you been able to do your model long distance?
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Letj

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Re: 50% rule analysis for first time RE investor
« Reply #17 on: February 19, 2014, 04:15:56 PM »
In the interest of remaining anonymous I can't post my exact location.  Suffice it to say, what I have done is hardly unique.  This can be repeated in just about any area of the US; just stay out of expensive coastal cities.

@Letj I would be interested in hearing more about your approach to real estate investing, at this point we have just been considering our local market as it seemed more logical so we can keep an eye on things etc., but based on your posts I would consider looking outside as my capital can go a lot further.

I live in a suburb of NYC clearly a coastal city and real estate here is very pricey, when you mention whole houses for $20k to $40k I don't even know what to think, from my perspective that can be a bathroom renovation (Face Punches welcome :p )

Anyway, if wouldn't mind giving me a little more insight into your property criteria and demographic I would greatly appreciate it, feel free to do it via private message as I know you mentioned you would prefer more anonymity.

Thanks,
-Mister FancyPants

I don't mind at all.  It is a very simple approach.  I live in a part of the country where properties in  low income/working class neighbors that need work can be picked up at foreclosure anywhere from $15K to $75K.  I picked up most of them during the market crash in 2008 through 2010 and continue to pick up foreclosures.  I renovated them up to rental grade and put tenants in them for between $650 to $1,400.  Approximately 40% of the properties (those located in the inner city on the bus route) are rented to section 8 tenants.  They require more intensive management due to the socio economics of the renters but the cash flow is worth it.  Many successful landlords, whether they admit it or not, make most of their money renting to low income and almost always have some low income property in the portfolio.  After all, poor people need a place to live.  There's no magic to this; you need to buy right, be a good landlord (no slumlord) and be hands on.  I would not recommend owning where you do not live.  I live in the same city most of my properties are located and can be at any one of them within 15 minutes.  I don't believe you can replicate my model in NY.  However, it can be done in Texas, Midwest and just about anywhere in the US.  Check out biggerpockets and learn from the Landlords on the forum.  I highly recommend sticking to the 2% rule, especially if you do low income.  You can become very rich with real estate but also lose your pants if you don't know what you're doing.

Mister Fancypants

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Re: 50% rule analysis for first time RE investor
« Reply #18 on: February 24, 2014, 11:21:06 AM »
...I don't believe you can replicate my model in NY.  However, it can be done in Texas, Midwest and just about anywhere in the US.  Check out biggerpockets and learn from the Landlords on the forum.  I highly recommend sticking to the 2% rule, especially if you do low income.  You can become very rich with real estate but also lose your pants if you don't know what you're doing.

@Letj - Thanks for the insight we appreciate it. We actually have very good friends in the DFW area, and one of them happens to have a real estate license, we have been considering doing something with them in Texas, perhaps that is a better approach for us, I was just hoping to be more hands on and less remote. I guess however in the end it makes more sense to go where the best chance of success is and partnering with our friends who are local in an area where it can be far more profitable seems like a better approach.
Thanks again,
-Mister FancyPants

Letj

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Re: 50% rule analysis for first time RE investor
« Reply #19 on: February 25, 2014, 05:11:19 PM »
I would not own real estate remotely nor partner with anyone.  The risks are just too high.  Unless you are planning on high end properties, I don't think you can successfully invest in real estate remotely.

Cassie

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Re: 50% rule analysis for first time RE investor
« Reply #20 on: February 25, 2014, 06:17:56 PM »
We had 3 rentals and rents dropped a lot, prices dropped more, we ran out of savings and had to short sale all of them.  We had put 20% down on 2 and much more on the other & lost our pants!  I would definitely be cautious.

arebelspy

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Re: 50% rule analysis for first time RE investor
« Reply #21 on: February 25, 2014, 07:20:49 PM »
I would not own real estate remotely nor partner with anyone.  The risks are just too high.  Unless you are planning on high end properties, I don't think you can successfully invest in real estate remotely.

I disagree with the latter two sentences.  The risks are higher, yes, but too high?  Depends on how you mitigate that risk.  I think you can successfully invest in other than "high end" properties remotely.

The thing that I think is difficult to do remotely is vacation or other short term rentals.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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