Posted by JoeKaiser on April 24, 2002 at 19:12:04:
David,
One of the reasons I can’t stomach parts of the Sheets course is this notion about what the rents “should be,” based on a formula or “rule of thumb.”
You mentioned what Carleton says, here’s what Joe says, “a house rents for whatever it rents for.”
Now, the casual observer or the uninformed will read that and conclude it isn’t very helpful. Trust me, if I had to choose between the two, with money on the line, I’d take my approach 11 times out of 10.
Here’s reality. If you’re talking rentals, to make houses cashflow in most parts of the country, you must be able to buy them at deep discounts. The $110k house will cashflow nicely when purchased for 50 cents on the dollar, I suspect.
Find someone who really really wants to sell, work the magic, and then find someone who really really wants to buy. You do that and cashflow happens.
Question on Carleton Sheets Program - Posted by David Quirke
Posted by David Quirke on April 24, 2002 at 04:47:40:
Hi all,
I have read Carleton sheets program and it seems very interesting and definitely something I want to get involved in as soon as possible. However, I have one concern and that is this. I am not from the US. I am from Ireland and the situation there is that the property prices seem to be way above those described in his program. I’m having difficulty seeing how you can ever get into a position of positive cashflow at the end of the month (except by getting a seller that would sell for a ridiculously low price). Please don’t take this as being negative as I want to understand and it’s probably just a gap in my own understanding but let me give an example of what I’m talking about that comes pretty much straight from Carleton Sheet’s own literature as follows:
Property = $60,000
Now lets say you go for a no money down deal. It still seems to me that there is interest payable either to the bank or to the seller. The only question is what the interest will be i.e. There is interest on the whole $60,000 no matter what way you cut it. Now I get the point that the interest can be deferred but it still needs to be paid. Let’s say for the sake of simplicity that the interest on the whole amount is 8%. From what I have read that is reasonable. Now let’s follow the general formula as outlined.
Carleton says that the monthly rent should be 1 - 1 1/3 of the total value of the property. Let’s even take the high range of this and say the monthly rent is $800 (this is in fact slightly higher than 1 1/3% but let’s just make it simple.
He then says allow for a vacancy rate of around 5-10%. Let’s take 5% ($40) and say we are left with $760.
He then says that in general the expenses for a single family home are between 20 and 30% and for a multi family can run as high as 50%. This would obviously be a single family dwelling. Let’s even take the lower range of this and say that ouur expenses come to %20. It is unclear whether this should be 20% of the full $800 or 20% of the rate less vacancy but we’ll again take the lower of the two and say 20% of the rate less vacancy. This makes our expenses $152. This leaves a total amount of $608 ($760-$152).
By my calculations the monthly repayment on this would be in the region of $460 which means that his formula works. By my calculations, however, it stops working if that same property reaches a price of around $80,000 and even sooner if the above factors are less favourable, for example if the expenses are 30% rather than 20% as outlined above.
The problem is that I have researched the market in detail over the last few months and the prices they are asking (and the prices they are selling for) for a property that produces the equivalent of $600 is at least $95,000 and sometimes as much as $110,000. It seems as though a seller would need to sell a property for hugely less than the market value if Carletons formula were to work here.