In this series, we’ve been talking about 14 mistakes that every new investor makes in real estate. We’ve gotten through #9, and you can catch up on my Youtube channel! Today, we’ll cover the 10th and 11th.
#10: Not Creating Enough Cash Flow Spread on Your Rentals
I’ve used this number before. But remember, if you were to call me and ask absolutely what return you should look at, I would say this.
1. Your target formula is that you want to make $300 positive cash flow per month over and above PITIM (principle, interest, taxes, insurance and management). Your management fee is going to run anywhere from 7%-10% depending on how many properties you have. If you can make $300 a month after PITIM, then you are buying property right. That’s positive cash flow based on how much you’re able to rent it for.
Some people do it just on the PITI and I advise you to do that on your first five properties. Learn to rent them yourself. If you learn how to rent them and manage them yourself, then you will be much more qualified to know what you need to find when you’re looking for a property manager.
2. Another target formula is something I use on almost any investment. But it definitely works on a single-family property as you’re starting to build your wealth. I like to see a 1.2%-1.5% on the gross monthly rent return. For example, if you pay $100,000 for a house, then you want to see $1,200 to $1,500 a month.
Now before you throw tomatoes at me, I know some of the places you live, you’re doing well if you get $700 a month for it! But I’ve learned all over the country there are places where you can find this. What you often have to do is look in more low-to-moderate income areas where you can get these kinds of returns. Or you can start looking for multi-family properties: duplex, triplex, or quad. You have to either start looking down the spectrum or at multi-family properties. If you’re looking at a fourplex, you typically want to make $100 per door positive cash flow per month. That’s my low end, I personally like to make $150 per door. That’s $600.
Also make sure you’re watching out for repairs. I try to manage repairs to 5% of my rents. I set that aside. I can tell you that if you buy too low on the spectrum and it has a bunch of deferred maintenance, it can get quite a bit above that. You want to manage your repair to a lower number. One way you do that is that you have to do some of the handy work yourself or find a handyman who is not charging retail rates to do that. So be careful because those repairs can get much higher.
#11: Not Inspecting Your Properties Regularly
Here’s what I like to say: You or your manager should go into a property once a month. I always say that we need to come into your house the first Tuesday of every month to check the smoke detector batteries and the filters in the furnace. Of course, you’re there for other reasons. You’re really there to smell, listen, look, hear and see what condition the property is in. They’re going to clean it up if you tell them it’s the first Tuesday of every month. But if you walk into a house that’s not clean and they know you’re coming, you know they’re probably not taking good care of that property.
I know I hear back all the time about how difficult that is to do. But I would rather pay my managers a higher percentage and have them give me a written report every month, than pay them a lower rate and not get that. If you’re renting better properties, you can get by with every 90 days. But if you’re in that low-to-moderate-income neighborhood, I want to make sure you’re getting there once a month.
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P.S. Don’t forget that Wealthbuilders is currently offering a Holiday (Christmas and Thanksgiving) sale on tickets to the conference! Purchase at wealthbuildersinc.org by December 31st.
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What other things do you recommend to check when you inspect the property?
This is very helpful. Thanks so much.
I have been listening a lot lately! My husband and I have 5 successful rentals in our portfolio, and are hitting some growing pains now.
I hear you talking about a $300/month cash flow from each property guideline. What type of mortgage do you base this on? 15 year?
Thank you for your help!