YellowFever
New member
.
Rental cashflow in Irvine
- Thread starter YellowFever
- Start date
NEW -> Contingent Buyer Assistance Program
Hi Magic,
Here is an example of a real new construction SFR investment that can be purchased in my market in a solid 9 school zone area with great capital appreciation potential. I have not put in any vacancy in my calculation or property management fees. You can see that this property cash flows nicely without any tax benefits or amortization being factored into the calculation. Over a 7-10 buy and hold duration, capital appreciation is how wealth is built and you will see over time that the return you make on the appreciation will be much larger than the than cash flow and amortization of your loan. In my market, I forecast a steady appreciation of 5-6% in 2016 and 2017 like we had in 2014 and 2015. Inventory levels for homes in the metro Atlanta right before the housing crash (July 2007) was around 140k, today our inventory level sits right around 45k.
Cash-flow properties are like, buying an older SFR in Riverside County for $100k with 20%-30% down payment, monthly mortgage of less than $400 (excluding property tax), $50 HOA (or none), no mello roos, and rents for $1250/mo.
After you pay the property manager, annual property tax, various repair bills, etc., you'll find how quickly the "cash flow" gets eaten by expenses.
On the plus side, it's a nice drive out there to go fishing (assuming DVL has water), visit winery in Temecula (great baked cheese bread), eat buffet at the casino, etc.
I'm not sure it will be THAT easy to find the perfect tenant. You are assuming that you will have a nice pool of applicants to pick from and one of them will be a hard working student who always pays his bills. The pool of tenants will not always have such an obvious choice.
Also, you should really do your analysis in current market conditions for all components. Meaning, a recent sold example with current rental prices. It's a bit unfair to choose an example with a property purchased in 2013 and then rent from today.
panda
Well-known member
Magic,
I do not calculate the tax benefits or the principal reduction in my cash flow proforma analysis. Tax benefits vary with every individual. If your monthly cash flow is negative with 20% down, one should run away from the deal.
One metrics I use to evaluate a deal is the gross cap. In your case ($2000 rent x 12) / $340,000 (purchase price) is a Gross Cap of 7.05% (C-/D+) This is not a good rental investment, especially If the asset is over valued with very little appreciation upside potential. How do you know if the asset is over valued or under valued? First find out if the investmet property is under or over rental parity. Is it cheaper to own than it is to rent? Also just like determining the PE ratio on a stock, what is the HI ratio? (Median home price vs median household income) for the demographics of the area?
A good investment property will provide good appreciation potential and gross cap of 9-10%. Anything above 10% with a 15% cash on cash return in a good solid A/B+ class area is an excellent investment for long term buy and hold.
I do not calculate the tax benefits or the principal reduction in my cash flow proforma analysis. Tax benefits vary with every individual. If your monthly cash flow is negative with 20% down, one should run away from the deal.
One metrics I use to evaluate a deal is the gross cap. In your case ($2000 rent x 12) / $340,000 (purchase price) is a Gross Cap of 7.05% (C-/D+) This is not a good rental investment, especially If the asset is over valued with very little appreciation upside potential. How do you know if the asset is over valued or under valued? First find out if the investmet property is under or over rental parity. Is it cheaper to own than it is to rent? Also just like determining the PE ratio on a stock, what is the HI ratio? (Median home price vs median household income) for the demographics of the area?
A good investment property will provide good appreciation potential and gross cap of 9-10%. Anything above 10% with a 15% cash on cash return in a good solid A/B+ class area is an excellent investment for long term buy and hold.
I skimmed... but 7% cash on cash seems low for an "ideal" scenario. You're basically banking on an appreciation play. also, your maintenance #s look low for a 10 year old property. tenants aren't going to treat the property as nicely as an owner would so I would allocate more $ towards maintenance. and it looks like your numbers assume you'll be managing the property yourself... that should be factored in... your time = money.
Now all tax situations are different, but you won't get any initial benefit on those taxes as an individual. Ultimately in your basis of the property, those losses will be factored in if you eventually sell (or if you have other gains to apply it to) but the mortgage interest deduction doesn't work the same on rental properties (where it is just part of your profit / loss factor along with amortization, etc) than it does on a personal residence.
Somewhere you should factor in actual principal reduction which is paid for by the tenant of course. Cap Rate is clearly a focus if your goal is income production from the property vs. appreciation. My overall understanding was most savy real estate investors focused far more on Cap Rates on commercial and multifamily housing than they did on SFR housing (not saying they didn't analyze cap rates, just that multifamily and commercial tended to be easier to ultimately compare cap rates and thus determine appropriate values / returns). Than again, I don't know how many savvy real estate investors invest in SFR's vs. multifamily units.
Somewhere you should factor in actual principal reduction which is paid for by the tenant of course. Cap Rate is clearly a focus if your goal is income production from the property vs. appreciation. My overall understanding was most savy real estate investors focused far more on Cap Rates on commercial and multifamily housing than they did on SFR housing (not saying they didn't analyze cap rates, just that multifamily and commercial tended to be easier to ultimately compare cap rates and thus determine appropriate values / returns). Than again, I don't know how many savvy real estate investors invest in SFR's vs. multifamily units.
yeah, not to dissuade you, you can do whatever you want with your money and investment, but the numbers work if everything works out and no contingencies.
Need to remember rentals follow the principle of supply and demand, rents can go up or down into absolute negative territory after all deductions.
For example, you can have use that $75k and almost buy 3 houses in Syracuse, LOL:http://www.trulia.com/property/3223633298-1108-Wadsworth-St-Syracuse-NY-13208
that $26k house estimates monthly payment of under $200, I'm pretty sure you can rent out that house more than $200 after everything and cash flows positive plus all the whatever small deductions
Need to remember rentals follow the principle of supply and demand, rents can go up or down into absolute negative territory after all deductions.
For example, you can have use that $75k and almost buy 3 houses in Syracuse, LOL:http://www.trulia.com/property/3223633298-1108-Wadsworth-St-Syracuse-NY-13208
that $26k house estimates monthly payment of under $200, I'm pretty sure you can rent out that house more than $200 after everything and cash flows positive plus all the whatever small deductions
panda
Well-known member
Bullsback,
When I first started investing in real estate, I had a misconception that single family homes is where everyone starts and eventually graduates to multi-family, commercial building or large apartment complexes. I was on a mission to find out what is the best asset to buy and hold for my personal retirement portfolio.
I took out several successful commercial brokers and even financial planners out to lunch to ask them what their retirement portfolio looks like. None of the commercial brokers I met owned any commercial properties like office buildings, warehouses, or retail centers etc. Several owned single family homes and multi-family, few owned apartments, and some surprisingly did not own any real estate.
I've talked with several very successful buy and hold investors where their net passive income was close to $200k/year. They owned a combination of single family homes and multi-family. The issue they had with multi-family was that the average tenants only stayed 9 months, and also there were disputes among the tenants about who is responsible for maintenance. Some tenants would even gang up on the landlord and there was a quite of bit of wear and tear in the units every time there was a turn over. These successful buy and hold investors did say that they would not mind exchanging their single family homes for a good 1or 2 large apartment complex in a good area.
A disadvantage of selling an apartment building or commercial property is that the buyer will be another investor. This investor will negotiate to get the best price and terms that he can get. He maybe a better negotiator than you.
Also Investment property can experience large swings in value as the economy changes. An empty office building or commercial building will sell for a small fraction of what it cost to build.
A major advantage of investing in several single family homes rather than one big apartment or office building is that you can diversify by investing in different price ranges. By owning both less expensive ad more expensive houses, you can have the safety of the lower priced houses and the upside potential of the higher priced ones.
Therefore I concluded that I only want to have a combination of single family homes and possibly an apartment building in my retirement portfolio. However, if I never own an apartment building in my life, I am completely okay with that.
If I do own an apartment building in the future, I will have the understanding that this is a business and needs to be treated like a business, not a passive retirement income portfolio like owning a portfolio of 30-40 single family homes located in good solid neighborhoods.
When I first started investing in real estate, I had a misconception that single family homes is where everyone starts and eventually graduates to multi-family, commercial building or large apartment complexes. I was on a mission to find out what is the best asset to buy and hold for my personal retirement portfolio.
I took out several successful commercial brokers and even financial planners out to lunch to ask them what their retirement portfolio looks like. None of the commercial brokers I met owned any commercial properties like office buildings, warehouses, or retail centers etc. Several owned single family homes and multi-family, few owned apartments, and some surprisingly did not own any real estate.
I've talked with several very successful buy and hold investors where their net passive income was close to $200k/year. They owned a combination of single family homes and multi-family. The issue they had with multi-family was that the average tenants only stayed 9 months, and also there were disputes among the tenants about who is responsible for maintenance. Some tenants would even gang up on the landlord and there was a quite of bit of wear and tear in the units every time there was a turn over. These successful buy and hold investors did say that they would not mind exchanging their single family homes for a good 1or 2 large apartment complex in a good area.
A disadvantage of selling an apartment building or commercial property is that the buyer will be another investor. This investor will negotiate to get the best price and terms that he can get. He maybe a better negotiator than you.
Also Investment property can experience large swings in value as the economy changes. An empty office building or commercial building will sell for a small fraction of what it cost to build.
A major advantage of investing in several single family homes rather than one big apartment or office building is that you can diversify by investing in different price ranges. By owning both less expensive ad more expensive houses, you can have the safety of the lower priced houses and the upside potential of the higher priced ones.
Therefore I concluded that I only want to have a combination of single family homes and possibly an apartment building in my retirement portfolio. However, if I never own an apartment building in my life, I am completely okay with that.
If I do own an apartment building in the future, I will have the understanding that this is a business and needs to be treated like a business, not a passive retirement income portfolio like owning a portfolio of 30-40 single family homes located in good solid neighborhoods.
Bullsback said:
YellowFever
New member
.
Panda, very good posts and all of those are good points. My personal view has been to go down the path of SFR (ideally adding one to my portfolio during every 5-10 year window (based largely on market performance though so there could be exceptions)...no I'm not very aggressive...and it will serve as an overall natural diversifier of other investments). I also would be okay mixing in some multi family, outside of that, I wouldn't be interested unless I was more retired and thus the property management provided an additional "hobby" in my later years (and could mean I move into that sort of class when I'm older) but to have a property manager / deal with that when my primary gig is what ultimately brings in the capital to invest in stuff, well it just wouldn't make sense.
But I do want to ultimately get to a spot where I'm generating very strong passive income while still making strong real income. Part of my thoughts are that by never jumping in deep, theoretically I should have properties bought in between market windows and thus mean I have far lower risk of any significant events which would drive huge cash flow issues.
But I do want to ultimately get to a spot where I'm generating very strong passive income while still making strong real income. Part of my thoughts are that by never jumping in deep, theoretically I should have properties bought in between market windows and thus mean I have far lower risk of any significant events which would drive huge cash flow issues.
YellowFever
New member
.
panda
Well-known member
Hi Magic,
Here is an example of a real new construction SFR investment that can be purchased in my market in a solid 9 school zone area with great capital appreciation potential. I have not put in any vacancy in my calculation or property management fees. You can see that this property cash flows nicely without any tax benefits or amortization being factored into the calculation. Over a 7-10 buy and hold duration, capital appreciation is how wealth is built and you will see over time that the return you make on the appreciation will be much larger than the than cash flow and amortization of your loan. In my market, I forecast a steady appreciation of 5-6% in 2016 and 2017 like we had in 2014 and 2015. Inventory levels for homes in the metro Atlanta right before the housing crash (July 2007) was around 140k, today our inventory level sits right around 45k.
MagicJ1zz said:
Is it a good idea to buy a home today at today's prices in Irvine for renting it out opposed to somewhere else? What if prices start to decline a bit? What if rent starts to decline a bit? How much more would you make if you purchased elsewhere?
Also, Ive been told that you should only count 11 months a year. The money from the 12th month should pay for vacancies and repairs. (that might not be the best rule of thumb, but it's something to consider)
Also, Ive been told that you should only count 11 months a year. The money from the 12th month should pay for vacancies and repairs. (that might not be the best rule of thumb, but it's something to consider)
momopi
Well-known member
MagicJ1zz said:
Cash-flow properties are like, buying an older SFR in Riverside County for $100k with 20%-30% down payment, monthly mortgage of less than $400 (excluding property tax), $50 HOA (or none), no mello roos, and rents for $1250/mo.
After you pay the property manager, annual property tax, various repair bills, etc., you'll find how quickly the "cash flow" gets eaten by expenses.
On the plus side, it's a nice drive out there to go fishing (assuming DVL has water), visit winery in Temecula (great baked cheese bread), eat buffet at the casino, etc.
woodburyowner
Well-known member
.
woodburyowner
Well-known member
.
woodburyowner
Well-known member
MagicJ1zz said:
I'm not sure it will be THAT easy to find the perfect tenant. You are assuming that you will have a nice pool of applicants to pick from and one of them will be a hard working student who always pays his bills. The pool of tenants will not always have such an obvious choice.
Also, you should really do your analysis in current market conditions for all components. Meaning, a recent sold example with current rental prices. It's a bit unfair to choose an example with a property purchased in 2013 and then rent from today.
irvinehomeowner
Well-known member
Ask Larry, all the cash flow is in Vegas.
nosuchreality
Well-known member
I wouldn't look at the ideal scenario, I'd look at the this tenant has gone to sh*t scenario and verify you're going to survive it financially. I think the rich dad poor dad author is mostly full of it, but there are a few gems in them. Like his 'talk' with his rich dad when he bought a rental and after covering the expenses only had to kick in $100 to cover the mortgage. RD's question, how many of those can you buy before you go broke?
It is like that. Simple things, like AC service contract, $200. Water heater goes bad, hey you get to choose $450 to fix or $1000 for new. Plus installation. Or if you've got the time, the truck and a rent a day laborer or free buddy, donut yourself.
Then you get what you think is a decent tenant. Pays on time, doesn't pester you, moves out after a year cause they're fighting with the neighbors. Then you discover they're not the tidy kind so you hire the move in move out maid service, a tile guy to repair the chipped floor tile, replace the carpet (and get to learn useful life of carpet under California law), hire a painter to repaint the place, spend a Saturday bleaching and cleaning the trash can because when they moved out they dumped the freezer into the trash can (mmm mmm good frozen raw chicken in a trash can in the summer for over a week), replace the locks, go the hardware store and pick up furnace filters to replace on the air returns that haven't been replaced in a year etc.
Then place your ad or contact your RE agent to put the ad back up to re-rent it.
It is like that. Simple things, like AC service contract, $200. Water heater goes bad, hey you get to choose $450 to fix or $1000 for new. Plus installation. Or if you've got the time, the truck and a rent a day laborer or free buddy, donut yourself.
Then you get what you think is a decent tenant. Pays on time, doesn't pester you, moves out after a year cause they're fighting with the neighbors. Then you discover they're not the tidy kind so you hire the move in move out maid service, a tile guy to repair the chipped floor tile, replace the carpet (and get to learn useful life of carpet under California law), hire a painter to repaint the place, spend a Saturday bleaching and cleaning the trash can because when they moved out they dumped the freezer into the trash can (mmm mmm good frozen raw chicken in a trash can in the summer for over a week), replace the locks, go the hardware store and pick up furnace filters to replace on the air returns that haven't been replaced in a year etc.
Then place your ad or contact your RE agent to put the ad back up to re-rent it.
YellowFever
New member
.
momopi
Well-known member
Being a landlord can be a pain in the butt, or a pain in your property manager's butt. But let me repeat something that my first property manager told me. She was taught to be a property manager by her father, who used to work for the railroad. Her father sustained work related injuries and had to retire early, but he was able to purchase some 30 rental units across LA area during his working years, and he was able to afford early retirement and the medical bills without going on government dole.
Does it make sense to invest in Irvine? This depends on your individual situation. I wouldn't buy today because I think the price is too high, I would wait and buy elsewhere with better returns. But my buddy just bought a 4 bedroom SFR in Irvine, he is single and will rent out 3 of the bedrooms. His renters will likely be pretty girls who will pay for his mortgage. It makes sense for him.
If you do plan on becoming a landlord, finding a good RE agent, loan agent, property manager, and befriending some contractors is essential. It means the difference between being stiffed with $1500 bill to replace a clay pipe, or $300 + steak dinner and beer for your buddy.
Having investment properties mean if your work income declines (more plausible scenario than prolonged unemployment), you can still pay the bills and provide for your family. Having gold/silver means if SHTF you have real money to get out of dodge. Having a couple month's supply of food and water means you won't be joining the zombies at FEMA camp for a handout.
Be kind to your tenants, who pays rent to you from the sweat of their backs. You're entrusting property worth hundreds of thousands of dollars to them, it doesn't pay to be a jerk. If they're good and pay rent on time, try not to raise the rent. The cost of renovation and finding a new tenant will likely outweight the small income gain.
Does it make sense to invest in Irvine? This depends on your individual situation. I wouldn't buy today because I think the price is too high, I would wait and buy elsewhere with better returns. But my buddy just bought a 4 bedroom SFR in Irvine, he is single and will rent out 3 of the bedrooms. His renters will likely be pretty girls who will pay for his mortgage. It makes sense for him.
If you do plan on becoming a landlord, finding a good RE agent, loan agent, property manager, and befriending some contractors is essential. It means the difference between being stiffed with $1500 bill to replace a clay pipe, or $300 + steak dinner and beer for your buddy.
Having investment properties mean if your work income declines (more plausible scenario than prolonged unemployment), you can still pay the bills and provide for your family. Having gold/silver means if SHTF you have real money to get out of dodge. Having a couple month's supply of food and water means you won't be joining the zombies at FEMA camp for a handout.
Be kind to your tenants, who pays rent to you from the sweat of their backs. You're entrusting property worth hundreds of thousands of dollars to them, it doesn't pay to be a jerk. If they're good and pay rent on time, try not to raise the rent. The cost of renovation and finding a new tenant will likely outweight the small income gain.