Discover YOUR Why

I talk about this a lot, Hell it is THE challenge for Week 1 of my Mindset Calibration course. HUGELY important to know WHY you want to be involved in real estate investing. As I’ve been on BiggerPockets forums lately, I have been challenging lots of newbies on WHY they want to get started. Even when I tell them money can’t be the answer (a most certain by product if done right), the answer to the first couple of evolutions to this question is typically: to obtain financial independence (money), to have another stream of income (money), or to create wealth (money).

IT IS NOT ABOUT MONEY!!!

Money is a by-product from investing in real estate, or at least it should be if you have set proper and strict investing criteria and are patiently sticking to them. MONEY IS NOT YOUR WHY.

Real estate investing is NOT EASY, especially to start. That is why it is ESPECIALLY IMPORTANT to start out on this journey by discovering YOUR why for wanting to be involved in real estate investing. And when I’m writing about this concept typically I type YOUR in all caps to emphasize YOU. It is YOUR WHY, not your mum’s, not your dad’s, not your brother’s or sister’s nor your friend’s, it is YOURS! Focus on yourself here.

Think of this scenario. You’re just starting your pursuit for your first property, without a WHY. If you don’t know YOUR WHY, you don’t know what goals you want to accomplish and then you certainly don’t have any established investing criteria to analyze deals. And not having investing criteria or sticking to those investing criteria will get you financially into trouble. Speaking from experience, the only time I’ve lost money in a real estate transaction is due to one or two reasons (a) I didn’t have a clear picture of my Why -> Goals -> Criteria or (b) I abandoned my established criteria that supported my Goals -> Why.

Knowing YOUR WHY Establishes Your Goals

“If you don’t know where you’re going, any road will get you there.”

– Lewis Carroll

Lewis Carroll hit the nail on the head with this quote. Meaning if there is no destination in place, like most of us who mind numbing-ly just get through the work day on the corporate carrousel, you’ll eventually end up…where?

Knowing YOUR why is the cornerstone of your investing career because it will lead you to establish goals that support YOUR why and from those goals you’ll establish supporting investing criteria. Think of the waterfall affect, your investing criteria fill up a pool of supporting drops to YOUR why.

For example: my WHY equals these three:

I want to provide generational wealth for these three. And yes that is money, but its not centered around me its centered around how my kids and (eventually…hopefully) grandkids can live a life outside of financial barriers – without acting like spoiled brats :). In the more immediate future I want to provide a lifestyle for us that isn’t hindered on anyone’s schedule except ours. In order to do that, like most wealthy men and women have figured out, I have to figure out how to stop exchanging time for money. This is a 3-5 year goal for us. MUCH BIGGER GOALS beyond the 3-5 year mark have been discussed but seeing as they are not super clear and secondary, we’ll just focus on the more immediate, especially for the remainder of this blog post. And real estate is the best way for us to do that. In 2018, we made $231/hr from our rental properties.

Knowing your GOALS Establishes Your Investing Criteria

To keep our lifestyle and stop exchanging time for money in the next 3-5 years we need to accumulate passive rental income from 100-500 doors. The reason the # of doors is such a wide range is because ownership in each unit can vary based on partners and our participation level but it is somewhere in that range. So, our investing criteria is pretty simple cash flow per door is $100+/month and yields a 15% Cash-on-Cash return.

Challenge: Do The Discovery

What’s YOUR why?

I want to challenge you to discover YOUR why. And if you already think you know what that is, go through this exercise anyway. As you being pursuit for your first (or next) property, you will potentially kick over 100s of rocks before you find that gem. This can be exhausting work, physically and mentally, especially since you don’t know when you’ll reach the closing table. This process can be an emotional roller coaster (which we want to stay away from our emotions as much as possible – this is a #s game) but knowing and being very clear about YOUR WHY will help you stay grounded with your emotions and help you stick to your established criteria once you find a potential deal.

Having trouble discovering YOUR why?

If you’re having trouble discovering YOUR why, you are not alone. This is normal. You are normal! Also accept as life changes, situations change and YOUR why has the potential to change as well – I call these course corrections. Point being, discover IT right now, begin pursuit and make changes down the road. A couple of resources to help you discover:

  • 7 Levels Deep : take some time to go through this exercise. This site says 10-15 minutes, but take as much time as you want. If you’re pressed for time, rush through it and then come back and do it again once you have time.
  • Start With Why and Find Your Why by Simon Sinek: I highly recommend the Audible audio books here.
  • Our Closed Facebook Group: thousands of members willing to help. Join and engage by asking for help from people who were where you are now.

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We Earned $231/hr From Our Rental Properties in 2018

The 2018 #s are in! The biggest # we track when it comes down to it is cash flow. While cash-on-cash return comes in at a close second for priority, the main focus for us is cash flow. And while I don’t go into net worth accumulation by someone else paying down your debt (i.e. the tenants) nor do I go into tax advantages, those are hugely beneficial and worthy of their own post. Today, just cash flow. There are several rules of thumb most people use when analyzing properties for cash flow: the 50% rule, the 1-2% rule, the $XXX/per door rule, the Lobster rule, the Alexa rule, the downward dog rule, all sorts of rules. Our primary focus is $100/per door/month and 50% rules.

Wait, before we go any further most of you know I’m involved in a 42 unit apartment complex. For this exercise the 42 unit is not being considered as we are still in process of stabilizing a heavily deferred maintenance property. I’m also not sure my partners want me sharing detailed info on that asset with the world wide webs so I’ll keep this exercise to the properties just my wife and I own. However, 2019 is looking VERY promising for the 42 unit.

Moves & Acquisitions

In 2018 we sold one property (our very first rental property in Pensacola – the one we’ll never sell!) and 1031 Exchanged into a 4 plex. Other than that our focus was geared toward stabilizing a couple acquisitions that were made in mid-late 2017.

Thank You PM Teams!

I can’t say enough about our PMs. Having a full-time job and growing family (ref: How I Balance), we have very little time to focus on managing these properties, plus managing our own rentals is just not what me or my wife want to do. Thus we hire professional property managers to manage all of our properties. We have a few different property managers based on our properties’ locations being in different cities, BUT those property managers are a huge part of why our hourly # is so high. All in all, we averaged about one hour a week working with our property managers. So 52 hours a year. Thank you Team! YOU GUYS ARE AWESOME!

The Numbers

Before we get started, here are a few definitions to ensure you and I are on the same page when it comes to The Numbers:

  • Expenses column includes mortgages (if applicable), insurance, taxes, property management fees, repairs, legal fees, miscellaneous operating expenses and capital expenses. Our expenses were high this year and I get into that in more detail below.
  • Revenue column includes rent, pet fees, and late fees.

Again, I can’t say enough about our PMs and the systems they have in place to keep us abreast with situations but overall they just handle them. So here is how I came to us earning $231/hr on our rental properties in 2018:

  • 52 Hours Worked for the Year (thankful for awesome PMs)
  • $12,038 Annual Cash Flow in 2018
  • $12,038 cash / 52 hours = $231.50/hr

One goal we want our assets to accomplish are $100 cash flow per door/per month. On average we were just shy of that in 2018 so I won’t spend any time discussing that here, but I do want to address the 50% rule.

Not Meeting the 50% Rule

For those of you not familiar, the 50% rule simply states that fifty percent of your rental income should cover all of your expenses (I’m grossly summarizing for the sake of this post). And since only 1 of our properties met the 50% rule, I feel the need to explain, just how close the rest of them were and the importance of keeping separate, sacred accounts for each property to cover vacancy and the more costly, unexpected capital expense items.

  • Little Yellow House: we actually sold this property in February 2018, so only two months into the year. The sell of this property yielded a 77.5% ROI for the life of us owning this property. The proceeds from this house were 1031 exchanged into the 4 Plex – Mobile. So while we experienced a negative cash flow for the 1st two months of 2018 with this property, all-in-all, it provided a great return from acquisition to exit.
  • Duplex – Gulf Breeze: We replaced one unit’s HVAC at a cost of approx. $3700. Not having to do so would have easily put this property above the 50% rule. Thankful for the reserve accounts we established. If you’re not establishing those reserve, sacred accounts for capital expenses and vacancy, DM me.
  • 4 Plex – Mobile, AL: this was the acquisition we 1031 exchanged into from the Little Yellow House. Almost completely turn key, but we had one tenant turnover and a few large repairs to make during the acquisition process – no worries though, we bought this at a bargain!
  • Mobile Home – Pensacola: this is the property from our First Tax Deed Auction. It had a rough 2018 with a tenant turnover, vacancy, a HVAC replacement and some fairly major plumbing issues resulting in >$3k in expenses. 2019 should be a strong, stable year for this one.

In closing, 2018 was a profitable year and I am anticipating 2019 to be much better. By that I mean I’m anticipating our cash flow to almost double as a result from just the two transactions. And while most investors don’t look at hourly earnings from rental properties, my W2 background has me thinking that way. If you’re not engaged with our group on Facebook, you’re missing out on conversing with us and 4,500 other W2 real estate investors. Join Us: Real Estate Investing for the W2 Employee

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Real Estate Investing Terms: DTI

First off, what is Debt-to-Income? The Debt-to-Income ratio is one used by lending institutions when underwriting your loan (for almost anything – car loan, mortgage, HELOC, etc). DTI is a calculation they use to  measure the risk on which you’ll be able to pay back the loan you’re seeking. The lower your DTI, the less risky you are to a lender. Think of it as your golf score, lower is better.

If you have just one source of income, DTI is fairly simple to calculate. Take your recurring monthly debt divided by your gross monthly income. Expenses like groceries, utilities, gas, insurance are not usually involved in this calculation. For example, let’s assume your current situation looks like this:

  • Reoccurring Monthly Debt: $2,030
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
  • Gross Monthly Income: $6,000

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $2,030 / $6,000 = 33.8%

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BUT WAIT, there’s more! What about the loan your seeking? Let’s say hypothetically the loan your seeking will add $700 more in monthly debt. Let’s recalculate as the lending institution certainly will.

DTI = $2,730 / $6,000 = 45.5%

Most lending institutions will consider you an acceptable risk if your DTI is less than 43%. Remember the lower your golf score, I mean DTI, the less risky you are to a lender.

BUT WAIT, there’s EVEN more! You and I are both here because of buy & hold real estate investing. So let’s assume you’re relatively new, have 2 properties in your portfolio and are seeking a loan for a 3rd property. DTI becomes increasingly more complicated to calculate the more properties and the more loans you have in your personal name but one of the reasons why I encourage you to build your team AND a solid relationship with a local bank is because it makes this process much easier as you start acquiring more and more properties. Using our original example, let’s do some more math!

  • Reoccurring Monthly Debt: $3,258
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
    • Rental Property #1 Mortgage: $415
    • Rental Property #2 Mortgage: $823
  • Gross Monthly Income: $9,625Gross W2 Income: $6,000
    • Gross Rents Property #1: $1,375
    • Gross Rents Property #2: $2,250

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $3,258 / $9,625= 33.8%

Making up the debt/income numbers as I go along, I found it extremely weird two of these examples both came out to 33.8%

By the way, check with your lending institution to ensure you understand their seasoning time frame. In this example, “seasoning” is how long a rental property has to be occupied to count the gross rents toward your DTI calculation. Most seasoning periods fall between 6-18 months but best to ask your lending institution what they require. In my examples, all properties are seasoned, except for the 3rd one you’re wanting to purchase.

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  • Reoccurring Monthly Debt: $3,258
    • Personal Mortgage/Rent: $1,000
    • Car Payment: $320
    • Total Credit Card Payments: $600
    • Student Loans: $110
    • Rental Property #1 Mortgage: $415
    • Rental Property #2 Mortgage: $823
    • Potential Rental Property #3 Mortgage: $722
  • Gross Monthly Income: $9,625
    • Gross W2 Income: $6,000
    • Gross Rents Property #1: $1,375
    • Gross Rents Property #2: $2,250
    • Gross Rents Property #3: $0 (once seasoned will be $1,700)

DTI = Reoccurring Monthly Debt / Gross Monthly Income or in this case:

DTI = $3,980 / $9,625= 41.3%

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Still under that 43% mark we’re striving for and if you have a great relationship with the bank and all other items check out, you should be on your way to close.

Also, gross rents minus the mortgage on a rental property does not equal cash flow. This is a common misunderstanding of the term and if you’re investing for cash flow, you need to ensure you’re calculating it accurately. More detail on cash flow here: REI Terms: Cash Flow.

In closing, DTI is just one factor a lending institute will consider when evaluating you and underwriting your potential next loan. Make sure your properties are seasoned properly when doing your own calculations but more importantly work on the relationship with your local bank to understand what all they require.

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We Will Never Sell This Rental Property…SOLD!

A friend of mine recently asked to see a blog post about our first few acquisitions. Starting to provide him with those links (on what I consider my wife and mine’s first buy and hold deals and not my false start), I realized I never posted about our very first deal. How rude of me! Thanks for inquiring Josh!

Our very first acquisition happened in October 2014. I know the month and year but the date is fuzzy as our first child was born only 3 weeks before. I think we zombied our way through the closing. If you ask my wife she’ll probably tell you “Who are you kidding? Jay sleeps like a baby. I think the saying should actually be “I want to sleep like Jay!” And she’s right. Minus the insomnia attacks ever now and then (when I’m really excited about a deal we’re working on), I sleep very well. However, the anxiety of not knowing how to handle our first newborn weighed on me during that time. But she’s right, I can sleep through a dump truck driving through a nitroglycerin plant!

Back to buy & hold property number 1….Our very first rental property acquisition happened in downtown Pensacola. It was a one bedroom, one bath, 600 sq ft single family home. Pictured above, undoubtedly we nicknamed it “The Little Yellow House.”

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The Little Yellow House was a bank foreclosure located in an up-and-coming part of downtown Pensacola. It didn’t need a lot of work and by that I mean, new roof & gutters, new back porch, new flooring in the bedroom, new appliances, replace a few broken outlets & switches, and fresh paint up & all around. The most important item about this property is it hit all of our investing criteria. So we jumped right in.

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Closing Day – 1st Buy & Hold – October 2014

Actually, jumping right in might be a slight exaggeration but at the time it was a huge leap for us. Being our first rental property, we were hesitant and VERY conservative on our projections. Should we do it? Should we not do it? This round of questioning and pros/cons list revolved around our conversations many, many…many times. Wow, we were nervous but we finally pulled the trigger and we’re glad we did.

Pro Tip:Our biggest mistake on this property was attempting to do a lot of the interior reno work ourselves. A full-time job, getting used to the new addition and entering the holiday season, it took us 5 months to essentially put some paint on the walls. Quotes from contractors/handyman came in at $1500 with a timeline of 2-3 weeks. This would have shortened our rent ready time window by 4 months @ $600/month rent = $2400. This property rented right away and by paying a handyman $1500, would could have earned an extra $900 by having it occupied sooner…plus we’d have our late nights and weekends back!! 

How we funded this acquisition: We acquired our first rental property with the use of a Home Equity Line of Credit (HELOC) from our primary residence. Three months later we actually sold our primary residence, naturally we paid off our HELOC with that transaction, and thus owned The Little Yellow House free and clear. That all important (to us) cash flow then went even higher. “We are off and running in the buy and hold game with a cash cow! We’ll never sell this property!!”, or at least we thought.

Fast forward three and a half years from ‘we will never sell this property’ to present day…

Several weeks ago I received an unsolicited message from a potential buyer. He reached out to me through this site and told me he had been following The Little Yellow House for several months. For clarity, during a brief tenant transition I placed for-sale-by-owner (FSBO) ads to test the market. I ended up renting it quickly as the demand was there and again, we’ll never sell this property!

Long story short, the potential buyer made an all cash offer that would allow us to pursue some different opportunities as our investing strategy and focus has changed since 3.5 years ago. So, we accepted the offered, closed the deal and celebrated with a family lip sync battle:

So why accept the offer on a property dubbed “We’ll never sell”? The ROI was great and we have been looking to add more units (reference 2018 Goals). The cash from this sale will allow us to pursue our 2018 Goals easier. For an advanced investing technique, I am taking the proceeds from this sale and pursuing a 1031 Exchange, which I’ll dive into once we succeed or once our time runs out. 🙂 Stay tuned but for now, let’s do some quick math!

These are the actual #s from The Little Yellow House (I track our income/expenses through our Small Multi-Family Spreadsheet, now available for download) :

  • Gain from investment:  $57,670
    • Sold Price: $50,000
    • Annual Net Incomes (after all expenses are paid):
      • 2018: $330
      • 2017: $2,564
      • 2016: $1,727
      • 2015:  $3,049
  • Cost of investment: $32,479
    • Original Purchase Price: $22,000
    • Initial Rehab: $8,975
    • Closing Costs @ Sale: $1,504
  • ROI = (Gain – Cost ) / Cost or in this case….77.5%

My apologies to Josh, and my Instagram, Facebook, and Twitter followers. A recent text / post I stated 79% ROI. In 3.5 years The Little Yellow House provided us with a 77.5% ROI…not bad!

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Side Note: This is also the property where we discovered self managing is not for us. We had great tenants and rarely had issues, but with a full-time day job, growing family, trying to expand our side hustles and rental portfolio, we are happy to pay the 10% management fee to experts who are focused on that type of business (just make sure you hire the right PM).

Questions or comments? Leave us a reply below.

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How To Calculate Your Net Worth [Spreadsheet]

Growing our net worth is one of the main reasons we invest in real estate. I also think it is important to calculate your net worth on a routine basis; I calculate ours quarterly. This helps me keep track of our goal obtainment and also encourages me when months go by where we’re paying down debt but haven’t made an acquisition.

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how to calculate net worth

I referenced The Millionaire Next Door by Stanley/Danko in a recent post titled How Do You Know How to Invest in Real Estate? . In their book, they discuss a simple formula to determine two types of people: Prodigious Accumulators of Wealth (PAWs) and Under Accumulators of Wealth (UAWs).

To determine if you’re a PAW or UAW, their formula looks like this:

Your Age / 10 X Current Salary

Those with a net worth greater than the result of this calculation are labeled as PAWs and those with a net worth of < the result of this equation are considered UAWs. For example, if I’m a 30 yr old, making $60,000/yr, in order to be a PAW, I would need to have a net worth greater than $180,000. I certainly recommend the book, but in short, PAWs typically operate on a budget, live within their means and don’t have a high consumption model of “stuff”.

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How do you calculate net worth?

Spreadsheets make this easy, but essentially all you do is total your assets (cash, savings, auto, jewelry, real estate, mutual funds, etc) and subtract your total liabilities (credit cards, mortgages, car loans, student loans, etc). What comes out as the difference is your net worth. And yes, it is possible to have a negative net worth – scary territory here (me in my early 20s). If you have a negative net worth, hopefully you’re calculating it wrong, but if not, major life changing spending habits are needed.

Contact me via the form on this website or email [ jay@helmsREI.com ] and I’ll send you a copy of the 3-Tab spreadsheet I use. 

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Growing our net worth is one of the main reasons we invest in real estate. I also think it is important to calculate your net worth on a routine basis; I calculate ours quarterly. Using the spreadsheet I’ve adopted, it takes me approx. 15-20 minutes to do. This helps me keep track of our goal obtainment and also encourages me when months go by where we’re paying down debt but haven’t made an acquisition.

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How We Use Our Tripod of Adopted Investing Criteria

We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.

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real estate investing pensacola fl

If you’ve been following us you know we have adopted a tripod of investing criteria we use to analyze ever potential acquisition. There are many criteria and tools used in real estate investing, but our current REI focus in the Pensacola area is buy & hold with an emphasis on cash flow. Since cash flow is the #1 goal, we start our analyzing there but each criteria I mention below must be met before we make an acquisition.

Prerequisite: Asset Must Rent @ 1-2% of Acquisition Costs
Also known as the 1 or 2% rule. I was introduced to this rule by the guys over @ BiggerPockets.com and is the first hurdle any potential asset must leap for us to pursue any further. I try to analyze at least 3 Pensacola properties a day with this prerequisite. Takes approx. 15 minutes or less with this prereq and if it passes, we move onto Criteria #1: Cash Flow.

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The 1 or 2% rule is fairly straightforward – the asset must have a monthly rent of 1-2% of its potential acquisition costs. For example, using the 2% rule, if a potential asset has a total acquisition costs (purchase price, closing costs, capital expenses/repairs to make it livable) of $50,000, it must rent for $1,000/month. Knowing the rent values in our investment areas, makes this a quick prerequisite to jump through.

Criteria #1: Cash Flow is >=$100/Month Per Unit
I go into how we calculate cash flow on the Real Estate Investing Terms: Cash Flow post, but essentially you add up all your monthly expenses, subtract those expenses from gross rent. What you have left over is Cash Flow and our target here is $100/unit or in other words $100/door.

Criteria #2: Projected CoCR is >= 15%
Cash-on-Cash Return (CoCR) is a way we analyze Pensacola properties to see how they compare to one another, but also how well they compare against other non-real estate investment avenues (i.e. IRA/401k, stock market, etc.) In the post How We Used Our IRA to Invest in Real Estate, I talk about how previous IRA and current 401K provides a return of 8% on their money. While our criteria is 15%, anything over 12% we look at in more detail. I’m posting in detail how we calculate CoCR and I’ll link back here.

Criteria #3: Asset Acquired @ 20% Below Market Value

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This essentially means we make a lot of offers, low offers. My realtor team calls me Mr. Low Ball and I’m ok with that :). The primary reason we do this and especially right now, is preparing for a dip to happen. The Pensacola market has been on the upswing for a while now and many of the local experts are predicting a dip or slight correction in the next 3-5 years. As the market tends to shift, we will slide the % on this criteria. The biggest takeaway from this criteria is look for a deal!
We consider appreciation extra icing and don’t acquire based on assumed appreciation, but we also don’t want to be put in a position to exit a property and be required to bring money to closing.

Acquisitions are one thing, exits are another. We currently hold 2 criteria as our exit strategy and more to come on those later.

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My First Eviction Turned Into Greater Cash Flow

I received the email no landlord wants to receive. “It’s the 11th of the month, Unit A hasn’t paid rent yet. Do you want us to start the eviction process?”

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real estate investing pensacola fl

 

Being my first eviction and at times a hard ass, my initial reaction was, rent is due on the 5th, it’s the 11th, why are just now bringing this to my attention? Why didn’t you already file the eviction on the 6th and just let me know that you’ve done it? But, as I get older I’m learning that sometimes cooler heads do prevail and in more ways than one, this is certainly one of those examples.

A week later I followed up with Pensacola property manager to find out the status of the eviction. “She’s fighting it”, was their reply. “She paid rent through the court and now’s she fighting it.” I thought, that certainly sounds strange to me. If Tiffany Tenant (Tiffany is not tenant’s real name BTW) had the money to pay rent, why didn’t she? I’m now out $400 court costs. Again, being my first Pensacola eviction and trying to be wiser, I let it roll.

Before I go any further, I must admit I assumed Tiffany was a “professional renter.” I inherited these tenants with the purchase of the property and at the time of the eviction they had 2 months left on their lease that was signed with the previous owner. I assumed the worst.

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Toward the end of the month I receive a call from Tiffany. How she obtained my # I still don’t know, but I appreciate her determination. We had a lengthy conversation about the eviction and her story was not matching up to the Pensacola property manager’s. Tiffany brought up several maintenance items, that I was led to believe had been addressed – as in there were line items on my monthly maintenance statement from the property management company as being addressed. I figured the truth was somewhere in the middle but I needed to see for myself.

Sure enough, personally doing an inspection of the property, the maintenance items had not been addressed. The tenant even showed me the cancelled money order (date printed/receipt) where she attempted to pay rent through the property management company.

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Why this transpired and I’m out $400 court costs, I still don’t know, but I’ve now decided to manage this property myself. I was able to sign Tiffany to a new lease, one she is happy about and one that cash flows an extra $75/month for me. As for my Pensacola property management company, I see that relationship coming to an end soon, but for now I’ll let it roll.

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Real Estate Investing Terms: Cash Flow [example]

Because we focus on buy & hold rental properties in Pensacola, Cash Flow is the most important metric we look at when considering an acquisition.
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real estate investing pensacola fl

Caution: This post goes technical real quick and my geeky side does come out 🙂

Most people, even some experienced Realtors, think cash flow is the gross revenue generated from a rental property. Unfortunately, that is not true.  Cash Flow is similar to Net Operating Income, but also includes some calculations for future expenses. Let me explain…

Cash Flow, as I calculate it, is the Monthly Revenue minus ERMVITC.

Monthly Revenue – ERMVITC = Cash Flow

What is ERMVITC?  Glad you asked.
Expenses (General): these include utilities, garbage, mortgage, property management fees, etc. You should be able to obtain exact #s for these variables.

Repairs & Maintenance: I typically estimate these between 5-10%. The range is based on the amount of repair work done prior to placing a tenant. The work performed up front, the lower the percentage and vice versa.

Vacancy: Also estimated between 5-10% based on the property, current tenant situation, and neighborhood.

Insurance: Insurance carriers always vary, so I encourage you to shop around. While underwriting a potential acquisition I stay conservative an estimate $100-125/unit.

Taxes: usually a known quantity by visiting your county’s Property Appraisers site.

Capital Expenses: I typically estimate these between 5-10% also. The range is based on the amount of repair work done prior to placing a tenant in the property and covers such things as a new roof, bath room remodel, appliances, etc. And just like RM,  the more work performed up front, the lower the percentage I use in my underwriting and vice versa. 

 

Here is a real life example of how I evaluated a Pensacola property for acquisition. This property is fairly old and needs some repairs so I’ll be using 10% for Repairs & Maintenance as well as 10% for Capital Expenses. This property should stay rented fairly easy so I’ll use 7% for vacancy. I’ll also be using 10% for Property Management Fees, the tenant is responsible for all utilities, there is no HOA and I’m purchasing this Pensacola property with cash, so no mortgage payment. Let’s do some math!

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Monthly Rent: $750

Expenses: 10% of $750 = $75 (for Property Management)
Repairs & Maintenance: 10% of $750 = $75
Vacancy: 7% of $750 = $52.50
Insurance: $125/month
Taxes: $840/yr or $70/month
Capital:  10% of $750 = $75

Add up all of our estimated expenses:
$75 (E) + $75 (RM) + $52.50 (V) + $125 (I) + $70 (T) + $75 (C) = $472.50

$750 (Monthly Rent) – $472.50 (ERMVITC) = $277.50 (Cash Flow)
 
 

Based on these calculations, this meets one of our investing strategy criteria. Now to further evaluate this property with our other criteria before making an offer.

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