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

We’re going to show you how to make any rental propertyThis is how you make an offer on a rental property that will not only get accepted, but will also increase your passive income. Sometimes when you run the basic numbers on a property, it doesn’t cashflow, and that’s okay. It happens all the time. That is just a starting point. You have options to craft an offer that other potential buyers are not going to be thinking about that can help you land a great deal. So on today’s show, we’re going to be running through which numbers you can actually change and modify before making an offer to a seller to increase the long-term performance of any rental property you’re adding to your portfolio. And we’ll also talk about which numbers you should never change when analyzing a deal, even if it’s really tempting to. Hey everyone, it’s Dave Meyer. Welcome to the BiggerPockets podcast. Today on the show we are going to be breaking down a real live deal that’s brought to us by BiggerPockets, rookie host Ashley Kehr. Ashley, thanks for being here.Yeah, thank you so much for analyzing this deal with me. I’ve been resisting it. Temptation.You actually haven’t analyzed this.I have not. I haven’t actually inputted into the calculator reports at all.Alright, cool. Well ahead of time. Ashley did share some information about the deal with us. So I know that it is a triplex in Buffalo going for 2 75. That’s what they’re asking for.Yep.I mean that means that this property is well below the median home price for a single family home, which is like four 20, but you’re getting three units at roughly $90,000 a unit, which is awesome. So in this episode today, basically we’re going to hear about how Ashley found it. We’re going to analyze this deal together. We’re going to show everyone how we can use BiggerPockets tools to do this in their own investing. And hopefully by the end of this episode, Ashley, you’ll decide if you’re going to offer and how much.Yeah, I think it’s more of how much I’m going to offer because you might as well put any offer out there. If you don’t offer, then you’ll definitely not get the deal.That’s right. So let’s figure that out. Tell us about this deal, how it came to you.So I actually have a Google Voice number that I have set up for my tenants to contact me and also anybody else to talk about investing. I guess. I received this voicemail from this guy the other day and he said, Hey, I got your card from, it was one of the local banks and he said that one of the bankers there had given him my card three years ago and said, if you ever want to sell, you should call Ashley. So he kept my card for three years and I think that just as a great example of maybe I need to give out more business cards.Honestly, that is such a good example. I don’t think I’ve ever kept a business card for more than 15 minutes, but it just really speaks to this long-term of finding off-market deals. I know people all want off-market deals and you want to be able to get them immediately, which is understandable, but it’s just a long game. You have to put a lot of hooks and lines in the water essentially. And some of them might pay off quickly, but if you do this for two or three years, they’re just going to start hitting over time. And this is just a perfect example. So what does this guy have to offer?Yeah, so I sent him a text and I said, I would love to know more information if you could send me the addresses of the properties and what the rent are. So based on that information, I can pretty much find any other information like property taxes, different things like that that I would need to actually analyze. So those are the things that I need to know to actually start analyzing the deal. So he ended up sending me an email and basically went into, he been a landlord for over 25 years and he had accumulated five properties. There was a six unit, a four unit, a three unit, and then a couple of duplexes I think. Yeah. So he said it was just time for him to start letting go and this year he wanted to sell two of ’em. The triplex will go over and then another duplex. And then over the next couple years he’d like to sell the other ones and he’d like to work something out with me where I eventually bought them all from him.This is a dream come true. I know if you got that call, you are hooked up for the next five years. I like where this story is going so far. So what happened next?Yeah, so he sends me the rents. He also sent me interior photos of all the properties too. In this triplex we’re seeing one unit was completely renovated, nice LVP, newer cabinets, things like that. And then the other ones, they’re a little outdated, I would say. And he did mention in his email that he would be doing a 10 31 exchange with the sale of the property, but he would be willing to do seller financing on the sale of it.Whoa. One of the challenges I’ve always had in investing Great Lakes region is the age of these properties. How old is this one?Like 18 hundreds?Yep. Yes. Okay. You knew that from the listing, but I assume at this point you didn’t even know what was going on with the systems?Yeah, I mean I could figure just because of this town that they’re in, that they probably were at least early 19 hundreds. The triplex is actually right around the corner from where I went to high school. So it’s like I’ve walked by it so many times that once I saw where it was located, I could picture the house immediately.Oh, that’s great.But that’s how most of my portfolio is. They are older properties.Yeah, I’ve done it too. You just have to account for that during your diligence. So at this point, do you have an estimate in your head at least of what it could grab for rent?Yeah, the rent’s actually pretty confident in, I have a bunch of rentals already in this town and then I’m friends with another property manager who has 80 units they manage there. So the lower apartment in this is a two bedroom apartment that’s listed at $900 per month, which I think is market value, pretty comparable. And then one of the upstairs apartments is another two bedroom apartment, and that’s listed at 800. I feel like it could easily be brought up to 900. Rents are going for a two bedroom between 900 to a thousand dollars in this market. The second upstairs apartment is a one bedroom apartment at $600 per month. Okay. I rent a second story studio apartment for 600 a month. So I think definitely a one bedroom could be increased to probably seven 50 to eight 50.That’s pretty good. So you’re talking what, 25, 2600 bucks a month in total rent? Asking prices 2 75. So you’re almost at the 1% rule, just even paying what the guy’s asking for.And there’s the room to increase the rents by about two 50 per month and every unit he’s selling is actually filled so there’s no vacancy. Oh, that’s nice. And I know people, that’s a big debate. Do you buy apartments with people in them are not. And I’ve done it both ways and I think it’s definitely nice to get a property that already has income coming into it, but also I really do like to vet my own people and bring them in.Well, this sounds very interesting. Just back of the napkin math, let’s actually break out the BiggerPockets calculator and analyze it, but we got to take a quick break first. We’ll be right back. They say real estate is passive income, but if you’ve spent a Sunday night buried in spreadsheets, you know better. We hear it from investors all the time. They spend hours every month sorting through receipts and bank transactions, just trying to guess if you’re making any money. And when it’s tax season, it’s like trying to solve a Rubik’s cube blindfolded. That’s where Baseline comes in. BiggerPockets official banking platform. It tags every rent, payment and expense to the right property and schedule E category as you bank. So you get tax ready financial reports in real time, not at the end of the year. You can instantly see how each unit is performing, where you’re making money and losing money and make changes while it still counts. Head over to baseline.com/biggerpockets to start protecting your profits and right now you can get a special $100 bonus when you sign up. Thanks again to our sponsor baseline. Welcome back to the BiggerPockets podcast. I’m here with Ashley Care. We are walking through a real live deal. She’s preparing to make an offer on, so we’re going to break out the BiggerPockets calculator, but just wanted to call out what Ashley has done first before we got to the step was get the relevant information here. She knows what the asking price is, she knows what the rent estimates are going to be at this point. Ashley, have you made an estimate for rehab costs?I recently did another property that is very comparable in size to the other apartments, and it was about $5,000 to do each of those and I haven’t seen inside. So that is just the basic renovation of these two others. So we’re going to use 10,000, but like you said, this is also something I definitely want to account for and my numbers, but since there are people that are living there, it’s not a rehab that would be done right away. It would wait until it was turned over again because they’re actually getting decent rents for not being completelyUpdated. Alright, let’s actually do this thing. So I’m not going to give away the street address, so I’m just going to put in your name, street address as Ashley’s deal, and I’ll just say Buffalo, even though it’s probably in a suburb. Right? So I’m using the BiggerPockets calculator. Basically for anyone who’s listening to this, I’ll talk you through what I’m doing. There are five parts of the BiggerPockets calculator. First thing is just putting in the property info, which I did basically copy and pasting an address. Then we’re going to go through the purchase information. So cost closing cost A RV, which stands for after repair Value. We’ll talk about the loan details, the rents, and then expenses. So when you do this getting started first time, do you run it at what they’re asking for, which is 2 75?Yes. Because I think that’s such a great starting point and then you can tailor it from there,Right, exactly. Because maybe you have a slamming deal right already and you don’t want to push too much to frustrate the seller, or maybe it’s terrible and you really need to be aggressive. We’ll find out. What do you estimate closing costs to be?I would say since we’re not using a real estate agent, let’s just put on my side three grand because you have to use attorneys in New York State.Okay. You will be rehabbing it. So do you have an estimate for a RV? This is the hard part, right? There’s not a lot of comps, soYou’re stillTrying to figure out what the value is.Yeah, I honestly don’t think that adding the 10 grand will increase the value that much. I think you’ll be able to increase the rents. So I would say it’d probably stay at 2 75, which seems ridiculous to put 10 grand in and still be worth the same. But I think that the opportunity would be to increase the rent. So I guess if you had an appraisal done, it would depend on how they were appraising the property too, if it was the income-based approach or if it was based on the market value.I think this is really good insight though for our audience here. Sometimes this is just the way it works. You just need to spend some money to increase rents, but market value is not really going to change that much, but it’s an investment in the long-term viability of your income. I’ve done this where I buy and put 15 grand in repair costs just to replace stuff I think is going to break so I don’t have to worry about it for the next five years or 10 years. Or like you said, replace a bathroom because that’s going to get you a hundred bucks a month or cover some parking, stuff like that. That probably isn’t going to come back to you, but it’s going to make your vacancies lower, it’s going to make your rent higher, and that has a lot of tangible value. Alright, so that was easy. That was the purchase information. Again, just for everyone listening, Ashley is running this deal at 2 75, repair costs of 10 grand. We’re estimating that the property is going to cost 10 grand to renovate, and then the RV is going to be the same 2 75. Let me ask you, in the calculators it asks us for appreciation, the default on the BiggerPockets calculators is 2%, which is low, that is below the long-term average. Buffalo is a hot housing market. Zillow’s top housing market for two years in a row. What do you run your appreciationAt? So I actually Googled it for this market, did a little research. I used Bright Investor and they said the annual growth for appreciation the last five years averaged about 3% for this market.I like that. I like using 3% personally, that’s close to the long-term average, and I like to assume appreciation is going to be average. And if it’s better, great. But I don’t want to count on that because it’s completely out of your control. All right. Let’s move on to financing. Haven’t asked you that. How do you plan to finance this?So I actually have three options that I could do. One is just A-D-S-C-R loan, 20% down probably around an 8% interest rate. I would have to increase my closing costs probably for doing A-D-S-C-R loan. My second option is to do a commercial loan, which I’ve actually done this more often than A-D-S-C-R loan. So the commercial loan, I go to a small local bank. I go to the commercial side of lending and I’ve done it on single family. I’ve done it on duplexes, and they offer 20% down and it’s a five year fixed, and then it can be amortized over 15 or 20 years, which in this case I would pick 20 years. And the interest rate would probably be around 8% too.And then it adjusts after five years.Yes. And the closing costs are a lot less using the small local bank than going and doing A-D-S-C-R loan too.Okay, so I just want to explain to everyone if you haven’t heard what A-D-S-C-R loan. It stands for a debt service coverage ratio loan. And basically what this is, it’s a loan product that mimics commercial underwriting. When you go and buy retail space, large multifamily, they’re not evaluating you as an individual for your credit worthiness. They’re looking at the quality of the deal as a business and if that business can produce enough cashflow to cover the mortgage payment. That’s how commercial loans work. Over the last couple of years, there’s been this thing called the debt service coverage ratio loan that’s become very popular that basically does the same thing but for residential properties. So rather than underwriting you going through your credit scores and your W twos and all that stuff, they’re basically to say, Hey, you’re buying a triplex, Ashley, can this thing throw off enough cash to cover your debt or not? And that’s a great option for investors. One, the underwriting tends to not be as difficult. I think they close a little bit faster, I’ve heard.Yeah, and you get 30 year fixed rates too with them, which commercial lending you usually don’t. Usually you can get five, seven, maybe 10 year fixed,Which personally I believe is one of the greatest things about residential real estate. One of the main reasons to invest in residential real estate is 30 year fixed rate mortgages. So that’s really beneficial. And it can also help investors who are bumping up against 10 conventional mortgages. It becomes difficult to do it once you get that. And DSER loans are not subject to that same limitations. Those are two, I think you said that you had three financing options,And the third one is the seller financing options.Oh yeah, I forgot aboutThat. 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 one offer would be the bank financing, and then the other offer would be the seller financing. Usually different 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’s just a little more straightforward.Okay. So we’re going to do 20% down.Okay, 20% down. And do you have an estimate of rate?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 cashflow, but your total profit if you held this for 20 years, would be higher. And if you wanted to own this free and clear sooner, that’s also another benefit if you don’t need the cashflow today. Alright, 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 we’re900, 800, 600.All right, so that’s 2300 bucks. We’ll go withThat. And I think always do it as is what the rents are. 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, you haven’t rehabbed.Yeah, I guess the only thing I would 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 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 years. Not one who’s going to just go in and bring it up to market rate right away. I usually try and work with people. So that is just one caveat there. Alright, what about rent growth? How do you usually model that? At what rate do you think it will grow?I would say probably we could put 2% for this. I don’t think that it’ll be huge. I think that this area is kind of at the top of it. It’s drastically, drastically increased since 2020 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 assume low growth if you’re wrong. Great. Alright, 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. So in this town you have to pay school taxes, town and county taxes and village taxes. And they come out to $3,5593,559. Great. What aboutInsurance? 1500.Whoa, your insurance is low. That’s awesome.Well, this is based off of 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. ButIt’s an easy thing to get a quote for though if you don’t rule of thumb. It’s hard to estimate if you’ve never done it, but it’s something you can call ’em about easily. Alright, we’re onto 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 thoseFor 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%. 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 youSo 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.No, there’s just lawn care and snowplowing would be the other two that we need to add. That would probably be about 3000 per year for both of them.Yeah. Okay. Two 50 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. We do have to take one more quick ad break and we’ll be right back. Welcome back to the BiggerPockets podcast. I’m here with Ashley Care. We’re going to see if this deal works or not, but that’s with the current number. 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?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? Hello? We can go,Yeah, let’s see what it takes to break even with that number.Okay, two 50. I don’t think two 50 is going to do it. No, two 50 doesn’t even get us close. All right. 2 25. What do we got? 2 25 gets us two negative six 60. Oh man, we’re going to have to go.You got a long way to go.50? Yeah. Okay. 2 0 6 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 one 50?Yeah, put ’em one 50. That’ll probably give us a little cash flow.All right. Let’s see. One 50 and then we need to change our A RV right to one 60. Okay. Let’s see what we got. Still not. Wow. Okay, so that’s still not working. That’s minus one 50. If we go to 1 25, I bet that will get us close. So 1 25 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. This is where I would go in and manipulate. Okay. Maybe I’m only putting 10% down. 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 a 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 is a savvy investor, so honestly, I think I might give the calculator report. Right.Why would you buy that at2 75?You’re going to buy that to lose a thousand dollars a month. It makes no sense. Should we analyze the seller financing idea?Sure. Yeah. Let’s, let’s do 2 25.Okay. 2 25. Closing costs pretty low, right? On aSetOf financing,We should just keep the 3000 attorneyFees. So we’ll update the RV to 2 25. 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 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. Wait, do you think this is going to work? IDon’t know. And when I think about this is to, 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 that turns out to be like $300 a month. That’s like, I don’t see why they want to do that.Alright, update the analysis. All 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. 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 breakeven, but back of my head, that’s worst case scenario. I know I could probably boost rents over the next couple of years and thatWould get us, yeah, so we already know we could do two 50 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.So what does that amount come out to?So variable expenses was 7 82 a month. 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.Passive mailbox money.Okay. So that’s pretty good. So I’m just curious. I’m want to see if you go about, let’s say two 30 here in rent. So if you do 2330, 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 2 25 with 3% interest seller was originally asking for 2 75. So is this the kind of offer you would make or are you making any other changes here?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, include the calculator report to show. I think where sellers will give a lot of pushback are the variable expenses as in, because the expenses he sent me were just the fixed expenses and not taking that into an account.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. It comes out to 180 4 for vacancy a month. I think 8% is a pretty good number. I like using 8% for vacancy, basically one month of vacancy per year. And to me that’s just a good way to be safe. Maintenance at 180 4 CapEx at 180 4 old house, that seems reasonable to me. I would hold back that much.And I think too is one thing we don’t know is the actual CapEx needed. As in, if I got an inspection, I would want to know what needs to be replaced in the first year, next two years, over five years. So we may have to even increase that based on what will do. We need a roof in five years too.Yeah.What was the management fee? That will go back in my pocket, but I always like to,Yeah, two 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. That would really help. But I was just curious. 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 are 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 cashflow, it’s like an 11% cash on cash return. That’s looking, I don’t know what your criteria, but to me that looks like starting to look like a good deal.Yeah, I used to 12 to 16%, but that’s getting harder and harder.Yeah, exactly. Me too. But to me, if you can get even at seven, 8% cash on cash return on a deal like this, you’re still doing better than you can get in other asset classes.And this is a somewhat passive investment for me, I would say as to, 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 in my portion.So you’re going to make two offers, right? Or you’re going to make one, offer two options. You’re going to do the, or you’re just going to send over the calculator report and be like, this is what I need to break even, which was crazy. It was 1 25, so that’s 150 off. So less thanHalf. I mean, maybe I shouldn’t even, because I feel very insulting to do. ButYeah, 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 wouldn’t want to insult you for built a rapport. And then would you offer at this 200 or you think 2 25?I think I would start out at the 200 and just let ’em know. 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, and presenting this as a package deal. Like, okay, I will buy both of them for three 50 and not even say how much is allocated to each one. 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 amount. 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 is like, these ones you’re buying for $20,000. This one I own myself. You’re buying for 50,000. Oh my God, that’s hilarious. But I think that’s what I would do. I would have to go and analyze that duplex 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 off. Yeah, I don’t think I can offer more than the 2 25 for this.Alright, well, I mean, I’m so invested in this deal right now. Ashley, you’re going to have to come back and tell us what happens here because 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. I 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.I know I used to get so mad at my one business partner send me stuff at 11 o’clock at night and I’d be like, stop doing that because then I don’t sleep at night because I have 2:00 AM But I just looked, just for reference, the investor that’s selling it bought this property in 2011 for $110,000,So he’s not taking 1 25.Yeah,I think that would be a hard pill for him to swallow with all of that. But 200 maybe. That’s a lot of appreciation.Yeah.Alright, well thanks so much, Ashley. We’ll have you back soon and hear what happens next with this deal. It 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.