June | 2014 | BBQ Capital | Kansas City Real Estate Investing

Monthly Archives: June 2014

June 16, 2014 · 12:35 pm

This Math Will Make You Broke

This math will make you broke if you are a real estate investor. I received this math in an email from a local real estate investor who has turned agent and property manager, too. I won’t call him out by name, but this is the type of real estate math that makes rental property owners think they are going to get one thing but end up getting another. Take a look;

The Numbers:
Rent – $750
Mgmt – $75
Taxes – $75
Ins – $40
Net Income – $560/mo x 12 = $6,720/yr
ROI = 10% ($6,720 NOI / $65,000 Purchase)

Doing the math I calculate about 25% of the Gross Operating Income being set aside for expenses. I more believe the math would look something like this, especially in the neighborhood I know the house to be in…

Rent 750
Mngmt 75 (that’s if there are no lease out fees, we charge $67/mo plus 75% of first month’s rent . Many property managers charge a lease out fee, as well.)
Taxes 75 (estimated at 900/yr)
Ins 65 (remember, this is now a rental property)
Vacancy – 37 (and that’s at a 5% vacancy, in this neighborhood figure closer to 10%)
Repairs – 50 (anything less than 600/yr is not realistic)

And what about a sinking fund for major appliances and a roof? What about a future make ready when the tenant leaves? What about….? I’m not even going to get in to the purchase price for the neighborhood in question.

At a very quick glance I’ve reduced the Net Operating Income from $6,720/yr to $5,376/yr. That is a significant reduction of the expected NOI, which will greatly impact however you choose to correctly figure your return on investment.

Investment Property Leads To Property Management

Investment property leads to property management like sex leads to babies. Both of the formers are a lot of fun. Both of the latters take a lot of work, patience and the will to never give up on the situation until it’s just gone too far.

Look, buying and analyzing investment property (or rental property, if you will) are both kind of sexy. It’ s fun to be attracted to new property and imagine how your life could be a little different. Better even. If only you had this new relationship (buying another house) you would be happy.

But after the deal is done (closing, not sex) you find out you’ve just become attached to a very needy partner. And this partner has partners (tenants) that you didn’t even really think about too much when you were in the attraction stage. And yet these partners that come with the new relationship are one of the most important cogs in whether or not this relationship will be successful…or not.

Property management, whether done yourself or farmed out to a professional property manager, is a lot of work. You have to feed your new relationship (find good tenants) and then you have to nurture it (take care of tenants) but eventually, your relationship hits the teen age years.

Replace “I hate you!” or “You don’t understand.” that your 15 year old daughter was yelling at you last week with “My son has asthma and there is black mold in the basement!” and “I will have the rent to you next week because…”

Rental property, like kids, is very rewarding. But do not go in to this thinking it’s all blue skies and pretty flowers. There has to be rain and there has to be manure for you and your investment property business to grow. Trust me.