Buying Rental Properties?

[Arraya]

Thank you everybody for you input. I completely agree. If the can go down this far now who knows what another 12-18 months will bring.

BTW, I am new to this site and all the posts are tremendously informative!

Thanks

[Arraya]

Thank you everybody for you input. I completely agree. If the can go down this far now who knows what another 12-18 months will bring.

BTW, I am new to this site and all the posts are tremendously informative!

Thanks

[blue_sky]

Please keep in mind that my comments are based on multifamily commercial property, not SF used as rental, but here goes.

I wouldn’t touch it as a long term hold, maybe as a fix and flip. Negative cashflow is poison. Here’s what makes me go through a deal:

Begin with gross rents.
Subtract all of your expenses EXCEPT interest. This includes but is not limited to:

Property Taxes / HOA if you have it
Insurance
Any utilities you pay (water? trash? gas? electric?)
Vacancy & tenant bullshit (bounced checks, etc) allowance (highly variable based on area and property quality vs rental rate. My vacancy rate is very close to 0%)
Property management fees
Maintance allowance (typically allocate 1% of purchase price here annually for a building in decent shape)

the result is your net. Divide your net by your cash in the property (with commercial buildings I’m typically in for 25% down, plus closing costs, plus some float), this gives you your cap rate. If you don’t get at least a 10% cap rate, walk away.

This nets you 20-30% annual ROE, most of which is the difference between your cap rate and your mortage interest rate.

[blue_sky]

Please keep in mind that my comments are based on multifamily commercial property, not SF used as rental, but here goes.

I wouldn’t touch it as a long term hold, maybe as a fix and flip. Negative cashflow is poison. Here’s what makes me go through a deal:

Begin with gross rents.
Subtract all of your expenses EXCEPT interest. This includes but is not limited to:

Property Taxes / HOA if you have it
Insurance
Any utilities you pay (water? trash? gas? electric?)
Vacancy & tenant bullshit (bounced checks, etc) allowance (highly variable based on area and property quality vs rental rate. My vacancy rate is very close to 0%)
Property management fees
Maintance allowance (typically allocate 1% of purchase price here annually for a building in decent shape)

the result is your net. Divide your net by your cash in the property (with commercial buildings I’m typically in for 25% down, plus closing costs, plus some float), this gives you your cap rate. If you don’t get at least a 10% cap rate, walk away.

This nets you 20-30% annual ROE, most of which is the difference between your cap rate and your mortage interest rate.

[Author]

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