How to Make Any Rental Property Cash Flow (Before You Buy)

20:06Ashley Kehr:Yeah. And the third one is the seller financing option. Oh yeah. Yeah. I forgot about that. So what we do is, and we won't have time for this, I'm sure, but what I usually do is I would do two offers and an offer would be the bank financing. And then the other offer would be the seller financing, usually different, you know, purchase prices and obviously different terms, things like that. But I would submit both to the seller. So Dave, which one do you want to do? Okay, well, let's start with the bank financing because that one is just a little more straightforward. Okay, so we're going to do 20 % down.

20:41Okay, 20 % down. And do you have an estimate of rate?

20:45Ashley Kehr:I would say probably around 8%. Okay, we'll go with eight. All right, I assume no points charged. And then what would the term be on that? We're going to put a 20 year. Okay. So it's amortized over 20 years. So that's shorter. So that is going to eat into your cash flow. Just so everyone knows when you amortize a loan over less time, it means that you are paying more per year. But the benefit is that you pay less total interest over the lifetime of your loan. So it might eat your cash flow, but your total profit over the, if you held this for 20 years would be higher. And, you know, if you wanted to own this free and clear sooner, that's also another benefit if you don't need the cash flow today.

21:28All right. So we've moved through three steps of the analysis. We've done property info, purchase, loan details. Now we're on rental income. So do you want to use it with current rents, which I think you said were.

21:40Ashley Kehr:900, 800, 600. All right. So that's twenty three hundred bucks. We'll go with that. Yeah. And I think always do it as is what the rents are. Because like, what if the people stay there for three years and great, you don't have to do anything, but then your rents are the same and you haven't increased them because you haven't rehabbed. Yeah. I guess the only thing I would do sometimes do differently is if they're really under market, I will accelerate what I think my rent growth will be in the first three years. Because like normally I'll model out two or 3 % rent growth most of the time. But if it's 20, 30 % under market value, I'll put like 10 % rent growth for three or four of years because I'm not one who's going to just go in and bring it up to market rate right away.

22:21I usually try and work with people. So that is just one caveat there. All right. What about rent growth? How do you usually model that? At what rate do you think it will grow?

22:30Ashley Kehr:I would say probably we could put 2 % for this. I don't think that it will be huge. I think that this area is kind of like at the top of it. I don't like it's drastically, drastically increased since, you in the last five years from what rents were, but I don't see that drastic increase happening the next five years or so. I think it'll be more steady and stagnant. I think that is very wise in a lot of things these days. It's just like, assume low growth if you're wrong. Great. All right. So we're onto our last step. That one was easy. Do you know what the taxes are going to be? Yeah. So this was also something he supplied for me, like a nice breakdown.

23:11Ashley Kehr:So in this town, you have to pay school taxes, town and county taxes, and village taxes. They come out to$3 ,559. $3 ,559. Great. What about insurance? $1 ,500. Whoa, your insurance is low. That's awesome. Well, this is based off of like the other properties that I have in the area as to what they are. So I think insurance is one of the hardest things to estimate, especially if you don't have any other properties in the area. But it's an easy thing to get a quote for, though, if you don't like rule rule of thumb, you know, like it's hard to estimate if you've never done it, but it's something you can call about easily.

23:52All right. We're on to the expense portion here. So we talked about the fixed costs, which are property taxes and insurance. What about repairs, maintenance, vacancy, CapEx. How do you model those?

24:04Ashley Kehr:For a property like this that's older, I'm going to do 8, 8, 8, 8 across the board. 8%, just so everyone knows. 8 % of rental income. So that comes to$184 per month for each of these. I think those make a lot of sense. Then management fees, do you self-manage? I do, but I always account for it 10 % because there was a time I didn't. Okay. So we're adding on fees. Now, what are we doing with utilities on a property like this? Do the tenants pay or do you? So the tenants actually pay for all of the utilities. Yes. Everything is separately metered. Oh, that's really nice. Yeah. Okay. I assume there's no HOA.

24:43Ashley Kehr:No, there's just a lawn care and snow plowing would be the other two that we need to add. That would probably be about 3000 per year for both of them. Yeah. Okay. 250 a month. All right. Well, we have all the numbers. So let's actually, we're going to click finish analysis and see what kind of deal you got here. But I'm going to leave everyone with a cliffhanger because we do have to take one more quick ad break and we'll be right back. Most investors only think about insurance when something goes wrong, a tenant injury, storm damage, loss of rent. Then suddenly the cheapest policy doesn't feel like the best one anymore.

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29:06Welcome back to the BiggerPockets podcast. I'm here with Ashley Kerr. We're going to see it this deal works or not, but that's with the current numbers. So let's just, we're going to press analyze. Whoa. Okay, Ashley, this is a money loser at current rates. So anyone who's watching on YouTube can see this, but we ran these through the BiggerPockets calculator. And what we're seeing is with the current estimates, you would lose$1 ,000 a month and your cash on cash return would be a whopping negative 20%. So what do you do from here?

29:39Ashley Kehr:So the easiest thing to manipulate that's not going to screw you in the end is the purchase price. So that's not increasing rents. It's not decreasing your expenses. It is decreasing the purchase price. So that would be the next thing. I just play with the calculator until I get a number that works. All right. Should we see? There's this little slider that I can drag. Should we see how low we can go? Yeah. Let's see what it takes to break even with that number. Okay. 250. I don't think 250 is going to do it. No, 250 doesn't even get us close. All right. 225. What do we got? 225 gets us to negative 660.

30:22Oh man, we're going to have to get a long way to go. Yeah. Okay. 206 doesn't even get us close. All right. I need to actually go back and edit this. We have a little slider, but it doesn't go as low as we need to go. What do you think? Should I just put in like 150?

30:36Ashley Kehr:Yeah, put in 150. That'll probably give us a little cash flow. All right, let's see. 150. And then we need to change our ARV, right? To like 160. Okay, let's see what we got. Still not. Wow. Okay, so that's still not working. That's minus 150. If we go to 125, I bet that will get us close. So$125 gets us to$13 a month. Wow. Okay. So that means you need to offer less than half of what they're asking for to get this to break even. Does that discourage you? No, this is where I'm definitely looking at the seller financing option. Like this is where I would go in and manipulate, okay, maybe I'm only putting 10 % down.

31:25Ashley Kehr:Maybe it's only a 3 % interest rate. The last seller financing I did was a year ago, and I did that for 30-year fixed at 3%. So, I mean, that's where I would start is going with the seller financing option. And then I would keep this option. I mean, he's a savvy investor, so honestly, I think I might give the calculator report. Right. Because, like, why would you buy that at$275? You're going to buy that to lose$1 ,000 a month? It makes no sense. Should we analyze the seller financing? Sure. Yeah. Okay. Let's do a$225. Okay. $225. Closing costs, pretty low, right? On a financing? We should just keep the$3 ,000.

32:09Ashley Kehr:Okay. The attorney fees. So we'll update the ARV to$225. Repair costs are going to stay the same. So you think maybe you'll go in 10 %? Now we're talking about financing again. So you probably put 10 % down on this? Yeah. At a 3 % interest rate? Yeah, let's see that. Okay. Do you think it would be 20-year term? No, let's do 30. 30-year term. And then keeping rents the same. All of our expenses are the same. Do you think this is going to work? I don't know. And when I think about this, not only will it work for me, the next thing I look at is what does that monthly payment actually come out to be for the seller?

32:52Ashley Kehr:Because if it like that turns out to be like$300 a month, that's like, I don't see why they want to do that. You know? All right. Update the analysis. All right. That's basically, wow. You got it to almost exactly break even. We got the other one to positive$13. We got this one to negative$6, basically break even. I mean, so, okay, not bad, right? And so would you buy a deal break even? Or is this, I mean, I assume you would need to see something change a little bit here. Or are you basically thinking, hey, this is break even, but back in my head, that's worst case scenario because I know I could probably boost rents over the next couple of years.

33:31And that would get us something better.

33:32Ashley Kehr:So we already know we could do$250 in a rent increase. And then what were the variable costs, like the repairs and maintenance, the vacancy, things like that? You'd put 8 % for everything and you had a 10 % management fee in there. Right. So what does that amount come out to? So variable expenses was$7.82 a month. Okay. And so the payment to the seller would be$8.54 a month. That's not bad. I mean, I don't know. In this market at that price, I feel like that's a pretty solid payment. Yeah. Passive. Max money. Okay. So that's pretty good. So I'm just curious. I want to see if you go about, let's say$2.30 here in rent.

34:11So if you do$2.30, what we're looking at here is a cash-on-cash return of 5%. So once you stabilized it and brought it up, that would get you to 5%. And again, what we're talking about now is a seller financing deal at 225 with 3 % interest. Seller was originally asking for 275. So is this like the kind of offer you would make or are you making any other changes here?

34:35Ashley Kehr:I think first I'm going to make a lower offer. I think the seller finance option, I mean, I might as well do the bank financing, include the calculator report to show. I think where sellers will give a lot of pushback are the variable expenses. As in, because, you know, the expenses he sent me were just the fixed expenses and not taking that into a, you know, into an account. So, yeah, but an experienced landlord should know better. I'm not saying they wouldn't negotiate it. I would probably do the same thing, but I think you'll have an interesting debate over that. Yeah. Yeah, because it comes out to 184 for vacancy a month.

35:15I think 8 % is a pretty good number. I like using 8 % for vacancy because it's basically one month of vacancy per year. And to me, that's just like a good way to be safe. Maintenance at 184, CapEx at 184. Old house, that seems reasonable to me. Like I would hold back that much.

35:33Ashley Kehr:And I think too, is one thing we don't know is the actual CapEx needed as in like, if I got an inspection, I would wanna know what needs to be replaced in the first year. True. Next two years, over five years. So we may have to even increase that based on what will, you know, do we need a roof in five years too? Yeah, right. What was the management fee? Because that will go back in my pocket, but I always like to. Yeah,$2.30 a month. So that could really, if you don't manage it, would really help you, especially in the first few years while you're getting things stabilized. Yeah. That would really help.

36:05But I just, I was just curious because you said you might go lower on the seller finance. If you drop that to 200, that would get you at current rents, a 3.25 % cash on cash return or 90 bucks a month. And once you stabilize it, you could probably get up to, yeah, that's pretty good. So if you offer 200 at stabilization, when you get the rents up to what you think you can get them to, you're talking 300 bucks a month in cash flow. It's like an 11 % cash on cash return. And that's looking, I don't know what your criteria, but to me, that looks like starting to look like a good deal.

36:41Ashley Kehr:Yeah. I used to like 12 % to 16%, but that's getting harder and harder. Yeah. Exactly. Me too. But to me, if you can get even at 7%, 8 % cash on cash return on a deal like this, you're still doing better than you can get in other asset classes. Yeah. Yeah, and this is a somewhat passive investment for me, I would say as to like, I've spent a lot of time building my systems, my processes for property management that to add another unit to my portfolio at this point in time is not very labor intensive or time consuming on my portion. Okay, so you're gonna make two offers, right? Or you're gonna make one offer, two options, right?

37:25You're gonna do the, or you're just gonna send over the calculator report and be like, this is what I need to break even, which was crazy. It was 125. So that's 150 off. So less than half.

37:36Ashley Kehr:I mean, maybe I shouldn't even, because that's like going to, I feel like very insulting to, to do, but yeah. Would you just say like, Hey, I'm going to make you an offer for seller financing because the bank financing just is too low. I don't, you know, wouldn't want to insult you for building rapport. And then what do you, would you offer at this like 200 or you think 225? I think I would start out at the 200 and just let them know, like I'm open to negotiate. But also too, I think one thing I'm also going to do is there's that duplex he wants to sell right away too. So in presenting this as a package deal, okay, I will buy both of them for$350 and not even say how much is allocated to each one.

38:19Ashley Kehr:So maybe the duplex is a little bit better performing so I can lump those two together and then he can decide when he closes. And this is what I had done with that other investor I bought the portfolio from. I said, I will buy all of these for X amounts. And we figured out some had a bank loan, some had seller financing. But what we did was he decided how to break them each out. He owned some properties with his sister. And so he's like, these ones you're buying for$20 ,000. This one I own myself, you're buying for$50 ,000. Oh, my God. but I think that's what I would do to, I would have to go and analyze that duplex.

39:03Ashley Kehr:And that would be my first step is to just make one offer for both of them and let him decide how he wants to break it up. Yeah. I don't think I can offer more than the two 25 for this. All right. Well, I mean, I'm so invested in this deal right now, actually, where you're going to have to come back and tell us what happens here. Cause I'm so curious what's going to happen. I also want to know for everyone listening, let us know in the comments, if you're watching on YouTube or listening on Spotify, Let us know in the comments. We want to know what you would offer. What is your best offer for this exact deal?

39:34I want to see how well it compares to what Ashley does and if it gets accepted. But this was a lot of fun, Ashley. Thank you so much for coming and sharing this with us, for waiting, having the discipline to wait and not analyze this without us. We really appreciate it.

39:47Ashley Kehr:I know. I used to get so mad at my one business partner because he'd send me stuff at like 11 o 'clock at night and I'd be like, stop doing that because then I don't sleep at night because I have to be up until 2 a.m. But I just looked in just for reference, the investor that's selling it bought this property in 2011 for$110 ,000. So he's not he's not taking 125. Yeah, I think that's going to be that would be a hard pill. Yes. For him to swallow with with all that. But 200, maybe that's that's a lot of appreciation. Yeah. All right. Well, thanks so much, Ashley. We'll have you back soon and hear what happens next with this deal.

40:26It was great having you. Yeah, thank you so much. And thank you all so much for listening to this episode of the BiggerPockets podcast. I'm DeMar. We'll see you next time.

40:36Brandon Turner:I'm not giving up. I am selling the building. The final season of FX is the bear. The restaurant is flooded. Everything's either going to be okay. Or not. We are outgunned and we are outmanned. We have each other. FX's The Bear, the final season. All episodes now streaming on Disney+.

41:25Ashley Kehr:$45 for three months,$90 for six months, or$180 for 12-month plan required. $15 per month equivalent. Taxes and fees extra. Initial plan term only. Greater than 50 gigabytes may slow when network is busy. See terms.