Rental Property Cash Flow Analysis

I recently saw a question on a forum that asked, "What percent of positive cash flow do you want on a rental?"

I'm not a big fan of percentages or yields when it comes to investing in single family houses. Reason being, most investors talk yield, but it is on such small amounts of money, a daily trip to Starbucks would wipe out all the profit. Therefore, I don't have a percentage for you, but in my office, we shoot for $300-$400 per door. I just can't get that excited about dealing with a tenant for $200 or less a month. The only way I would consider less money is if the financing is extremely favorable, such as zero interest. However, even on those zero interest deals that I have negotiated, I am still going to get my $300+ / month cash flow. We just put together a $60,000 seller carry back on a $70,000 house. No money down, no interest, and this little 2 bedroom house will still generate $340 a month in cash flow once it is rented.

I talk to so many investors who think they are making money because they use 30-40% for expenses (taxes, insurance, vacancy, repairs, management or overhead). Too many new investors leave that last one out. They think it is free to drive out to their properties and do inspections, lease ups, put signs up, type up and run ads. Big mistake!

40% is even too low. One large capital expenditure and all of the cash flow for 2-3 years is wiped out. I think the best number to use is 50% for expenses. I have a friend who owns over 100 houses and has managed those same houses for 20+ years. He told me his expenses run about 44% over the long term. Everything seems fine and dandy until that roof needs to be replaced, a water heater fails, tree roots destroy the sewer line, and don't forget about those lovely 'acts of god'. I just had a tree branch crash down on a roof and the HOA fixed the outside, but said the inside was my problem. That is when you discover if you have been budgeting for repairs or pocketing the money and calling it cash flow.

After you lop off 50% of your gross collected rent for your expenses, you still need to deduct out what your financing costs are from the remainder 50%. Whatever is leftover after financing is your real cash flow (which you  may still have to pay taxes on!). If you make the decision to join us lunatic landlords and hold a house instead of flipping it for a big fat check, shoot for a minimum $300-$400 per unit on your average rental property and you'll be a much happier lunatic. Otherwise, you may get one of my marketing pieces and decide to call me to get you out of the trap.

I don't like yields when investing in SFR. The numbers are just too small to waste time punching them into a calculator. If you claim you get a 20% COC (cash on cash) return, but you only have $15K into the house, you are making a whopping $3,000 a year. Trust me, $250 a month isn't worth the thrill of management and the loss of your $15,000. Especially if the underlying financing isn't 100% amortized! Too much risk for way too little cash flow. There are much easier ways to make an extra $250 a month without having to deal with a tenant and maintenance and keep your $15,000 cash in your pocket. Now, if you are consistently getting 20%+ on your $500K, you are starting to grab my attention and we should schedule a dinner, not lunch. (Your treat though since you're making all that loot!)

Not that I'm down on rental properties. A lot of my friends have become exceptionally wealthy holding houses. But in this market, it doesn't make much sense for me to do so. I wholesale almost all properties that come across my desk. I'd rather have $5,000-$25,000 in cash today than a $300 a month income and a long term liability with some short term financing. Until better financing options are available, or unless I negotiate favorable seller financing terms, that property is off to escrow and I'll be looking for my check. Next!

Just off the top of my head, I cannot think of one single family house investor billionaire. Coincidence?

Consistent & Persistent Action!

A coach/mentor cannot force people to get a return on their investment. That is what the cost of entering a coaching program is, an investment. Most of them truly enjoying teaching others how to make money investing in real estate, but if they offered their expertise for free, they know nobody would ever use the information. They'd show up, be entertained, and go home and do just what they did yesterday; The actions that made them no money. By charging a reasonable amount, but enough so that it creates some pain, it should inspire the heck out of those students to get their money back plus a return.

In my program, we are telling everyone exactly what we do to get deals. We are not keeping any secrets. Mike is consistently buying houses month after month and so are Ryan and I from a variety of sources. I share with our students all my exact MLS searches. The same searches I look at every day. Not just once a day M~F. I looked at them multiple times every day, holidays included. I never stop looking for an opportunity. I even took a seller call on Thanksgiving day. 

We make offers on the properties that come up in those farms I share with my students. If my offers are getting accepted and other investors' are not, then they need to relook at their numbers and figure out why they are offering what they are. Maybe they are over budget on their rehab expenses. Maybe they under estimate ARV so their offer comes in lower? However, just looking and thinking about what one should offer won't put any deals in your pipeline. The deals are out there. Looking at the MLS doesn't get agents banging on your door begging you to sign an offer. Agents are notoriously lazy people. Some of the laziest I have ever met. I'm a licensed Broker and 99% of the agents out there make the rest of us look bad! They don't work until noon, then they immediately go to lunch. They don't ever answer their phones. As an investor, we need to be hounding them. We need to force them to look at and submit our offers.

The one thing every student should learn from a coaching/mentoring program is that this business is not easy. If you believe the late night info gurus who tell you it is while they are sitting next to the ocean front pool (that they rented for the infomercial shoot) with some other person's  yacht in the background, then maybe real estate is not for you. It is simple, but it isn't easy. It takes work. Lots and lots of work. That is why I have a constant reminder on my daily planner that says "Consistent and Persistent Action!" They are simple actions, but if I am not doing them, nobody else is going to care... Well, except maybe my wife! My mom doesn't care. My neighbor doesn't care. The people I run into at the local monthly meetings don't care. The agents certainly don't care. It will only be reflected in MY bank account. (I guarantee you I start making a lot more offers when my checking account starts falling below 6 figures!)

If you want another great motivational blog to read, I invite you to check out my friend Steve's blog. www.buildbankroll.com. I think I'm his biggest fan! Steve is buying houses in many of the same neighborhoods I do business in, yet we never cross paths. (There truly are a lot of fish in the sea.) He shops straight out of the MLS. If you go back to his earliest posts, he said it took him 4 months of writing offers to get his first contract accepted. Now, just 3 years later, he has done over 100 houses and has somewhere around 40 or 50 rental properties. Hard to keep up with him as he moves so fast! All these deals were acquired locally in just the last 3 years and the majority of them bank owned listed properties.

Get your nose into the MLS. Search Craigslist. Post ads. Send mail. Put up bandit signs. Try running an ad in the classifieds. Wear a t-shirt that says "I Buy Houses!" DO SOMETHING!!! Then, take the incoming calls, screen out the losers and dump them. Don't get hung up on a lead just because they called. If there isn't any equity, on to the next one. Find the winners and keep writing those offers. Those who grind it out will have measurable results and see a return on that investment. 

If you would like to sign up for my next mentoring group with Mike Cantu, myself, and my business partner and marketing genius Ryan Skalla, I encourage you to take the first step and apply at www.callwithaaron.com/apply

Good luck to you and Happy Investing!

Avoid These Top 5 Mistakes of Landlording

Since the title is Top 5 mistakes of landlording, I am taking financing out of the equation. I will assume the property was purchased correctly and now we are dealing specifically with management (or lack thereof) issues:

1. Renting to family or friends.This is the biggest mistake I see in the business. I don't know how many properties I have purchased from people who didn't want to kick out Jr. because he hadn't paid rent in the last 10 years. (I have one in escrow now and sis hasn't paid her $250 rent, on a $1,200 rental in the last 15 years.) I once went to inspect a house where a nephew was living. It was lunchtime. He was drunk. After about 20 minutes in the house he pulled a handgun out of his surf shorts and pointed it at his pet goat.

2. Treating your tenants like friends and/or commingling tenants and relationships.This goes right along with #1. Being a landlord is being in the people management business. Being friends with your tenants shows them you are weak. They will attempt to take advantage of you. Our philosophy; Rule with an iron fist and a smile! Treat them fairly, but if the rent is late, it is time to start thinking about moving to another place. I know a few landlords who have started relationships with their tenants. Hands down, they all agree this is the biggest mistake they have made. A great motto you can use: Pay the rent or don't pay the rent. Just don't park the car with the oil leak in the driveway!

3. Not raising rents for fear of tenants contacting you.
When I contact a private seller of rental property I always ask three question;
1. How much is the rent?
2. How long have your tenants lived in the property?
3. When is the last time you have been inside?
When the rent is way under market, I bet you can already guess the answer to the next two question! The #1 reason landlords don't raise rents is because they don't want to deal with their tenants. They keep the rents low in hopes the tenant will not contact them about the property needing repairs. What ultimately happens however, is that the property slowly starts to fall apart. The landlord won't raise the rent for fear of the tenant complaining about things that need work or moving out. The tenant won't contact the landlord about things that need work for fear of having the rent raised. Don't be a part of this double edge sword. If the rents are going up in your area, raise them accordingly.

4. Not inspecting your properties annually.
Not inspecting your properties leads to them accumulating massive deferred maintenance or shabby repair work by the tenant. All the money the landlord thinks he is saving every year by not fixing things or having his handy tenant fix them compounds annually and the repair bill becomes so high they end up selling the property for pennies on the dollar to investors like me.

5. Unnecessarily paying utilities for your tenants. I don't pay any utility for any of my properties. I look at this as subsidizing my tenants lifestyle at the expense of my financial freedom. If they can't afford to pay their own utilities, they can't afford to rent from me. Even with our housing clients, they all pay their own utilities. If you are giving away free gas, electricity, trash pick up, or water, I highly encourage you to send out notices today, that your tenants will be required to switch service into their own name.