i tend to be very conservative when I

run the numbers on these rentals very

typically a property manager will take

the first month’s rent as a fee for

finding screening and placing a new

tenant if you own a duplex or a quadplex

and you forget to put shared utilities

or landscaping then unless you’ve made

it clear that that’s the tenants

responsibility as well that’s another

one that’s going to just eat right off

the top of your gross profits

welcome back to our special podcast

series The 20-minute Investor where we

bring you actionable nuggets and

insights from our real estate investing

journeys in bite-sized 20-minute

episodes i’m Aaron Amin my wife and I

built a portfolio of eight cash flowing

rentals across three states while

working full-time and raising a young

family and I’m Nathan i’m a husband a

father a tech executive who built a

portfolio of cash flowing rentals across

two states from over 2,000 m away

together we co-founded the remote real

estate academy where we coach investors

on how to build their own portfolios of

cash flowing rentals from anywhere in

the world so today we’re going to riff

on one of the most common and costly

mistakes we see new investors make which

is ignoring financial planning and cash

flow analysis so this is actually day

three from our remote rental cash flow

checklist email series and it’s a game

changer for anyone who wants to sleep

well at night after they buy a property

so we’ll unpack what most investors

overlook some dangerous assumptions that

they make that could wreck their numbers

and how to actually run the kind of

analysis that gives you confidence

before you ever close your deal well

that’s a pretty dense topic but uh where

should we start Nathan i think we should

start with the with uh what I see

unfortunately way too often online and

those who are trying to sell or paint a

way too rosy or unrealistic real estate

investing picture on the internet where

people tend to sometimes just kind of

want to showcase how powerful real

estate is or even worse in some cases

showcase how great a particular

investment property is that they’re

looking to offload or sell and they

pitch it as the the numbers like your

either cash flow flow or cash on cash

returns and what they pitch and don’t

necessarily show in full transparency is

the way they run their numbers they just

say here’s the rent and by the way they

take the absolute most top of the topest

of the market minus you know your

mortgage your property taxes and your

insurance and then they call everything

else you know profit beer money whatever

you want to call it and that is so far

from the truth that I think first maybe

that’s a warning for people out there

looking at these properties looking at

real estate things like that but also to

to maybe kick kick off the conversation

in terms of how inaccurate numbers like

that are in reality yeah and I I have

spoken openly about this and I have a I

I’ll confess again right that when I

bought my first rental property that’s

pretty much how we thought it was if the

rent is higher than the monthly payment

and there’s a few hundred bucks left

over you know then we’re in the green

and I always talk about how if I were to

knowing what I know now go back and

underwrite that first property again

using the same rental amount and the

same monthly payment I wouldn’t have

bought it it would have been a few

hundred underwater on a monthly basis

now in reality when you collect that

rent and you make that monthly payment

and you don’t have any expenses come up

you don’t have any maintenance uh or

capex or any any of the variable costs

come up then you get that false sense of

security like oh yeah I did I did pocket

you know $250 or $300 whatever that

number is one of the things we’ll we’ll

dig into further is you do have to acrue

and at least keep a mental tally if not

an actual tally for what are the big

items that might be around the corner

like unexpected minor repairs come up

pretty frequently with rental properties

especially ones that aren’t brand new

builds but even even new construction

still you still have to factor that

stuff in but then the big ticket items

this is where I think people get really

stung if they’re not accounting for it

is even if you buy a brand new house

eventually you’re going to have to

replace the AC eventually you’re going

to have to replace the water heater and

if you’re not like kind of setting that

aside or or understanding that then it

can really inflate your sense of what

you’re making on the property so to

Nathan’s point I feel like it’s um

overestimate you kind of have a rosy

vision of you think you can get the

highest possible rent based on whatever

somebody may be told you or even some of

the rental tools that are available

you’re always in your head going to aim

for the highest number and then you’re

instinctively going to underestimate

expenses so I think it’s this is

something that we train on quite a bit

is like I would rather pad it much more

than I need to and if it still turns a

profit then I know I’m going to be okay

than what I did with that first house

which is basically just simplifi

oversimplified if the rent’s higher than

the mortgage payment then I’m in the in

the green and that’s not uh you know I I

I learned the hard way that that’s

that’s not how it works well that’s how

we learn I guess as long as you’re not

making that same mistake again you know

you learned and you move on but maybe

the maybe we should start with you know

if the worst possible most unrealistic

picture being rent minus mortgage minus

insurance minus property taxes equals

profit what’s the the more conservative

or more realistic picture in your world

and then I could talk about what I do as

well yeah so just to make sure I

understand the question it’s basically

like how do I build it now yeah yeah

what are all these what are all these

you know expenses reserves items that

you’re taking either setting aside or

actually taking from the rent uh in

order to have realistic um you know

property you know rental numbers I guess

yeah so the biggest zingers right that

are pretty much unavoidable in a

long-term rental situation are property

management which that’s a real monthly

expense if you have a property manager

then that’s coming off the top whether

you want it to or not right they’re

going to get paid every month Then

there’s maintenance and repairs that’s

kind of like your shorter term something

happens you know you got to um call a

plumber or an electrician or a handyman

just things that naturally go wrong but

that are minor and then there’s capital

expenses which are the big ticket items

you know those water heaters HVAC the

roof big mechanicals anything you know

major structural those things will

happen unfortunately despite our best

efforts like some you can avoid some of

it but you can’t avoid all of it so

those are the are the acrruel categories

that I think are easy to ignore if

nothing’s going wrong and then the other

really big one is vacancy so we usually

use an 8% vacancy which is basically

equivalent to one month out of the year

now we hope that we have good enough

processes and our tenant screening is

good enough that we can find tenants

that are going to stay longterm that’s

the goals if you’re turning over every

year there might be a problem in the way

that you’re finding tenants and and the

quality of whether it’s your service or

your product or just in general you want

to aim for more than a year but I would

rather underwrite as if we’re turning

over every year and um and pad for those

expenses and then let it be upside if we

manage to retain the tenants so those

are the big categories and then there’s

some other small ones that I think

sometimes people miss like if there’s a

utility that might end up being your

responsibility whether your local city

might not allow certain things to go

into the tenants’s name so you either

need to make it a pass through and put

it on their lease that the tenants’s

going to cover that utility or you need

to bake it into your assumptions and

then another you know along those same

lines is something like landscaping if

you own a duplex or a quadplex and you

forget to put shared utilities or

landscaping then unless you’ve made it

clear that that’s the tenants

responsibility as well that’s another

one that’s going to just eat right off

the top of your gross profits is what

we’ll call it what about you so I have

um all of those and then some i tend to

be very conservative when I run the

numbers on these rentals you mentioned

property management fees which obviously

I have as well and we we underwrite for

as well because our our properties are

thousands of miles away but um in the

property management fee there’s that

monthly fee that they take off the top

like you mentioned just for them

managing the property but the other

things that I bake into my number that

fall under fees coming from my property

manager are things like placing a tenant

right so if your property’s vacant or if

you have a tenant turn very typically a

property manager will take the first

month’s rent or a portion of the first

month’s rent as a fee for finding

screening and placing a new tenant so

that’s another one that I do and in your

scenario if you underwrite for you know

a yearly tenant turn right then you have

to also underwrite in my opinion for you

know that leasing fee or that tenant

placement fee annually yearly so that’s

something that I take into consideration

as well there’s another fee which kind

of falls under the property management

you know fees category that I uh

underwrite for is just the lease renewal

fee so I have from you know historical

data but also talking to my property

manager we know what to expect what an

average vacancy rate is for our types of

properties in our market so with that we

know that on average our tenants will

stay in a property 3 to four years on

average so that knowing that allows me

to factor in that that lease or that

tenant placement fee is not going to

happen annually if we take that 4% you

know vacancy rate it’ll happen every 3

to four years so I spread that tenant

placement fee over 3 to four years but

what happens in the years where we’re

not placing a new tenant there’s a fee

from my property manager for renewing a

lease so they go inspect the property

they talk to the tenant they you know

typically will raise rent in the process

of renewing a lease comes with a albeit

much smaller but comes with a fee as

well so we can factor that in for the

quote years where we don’t have a turn

we have you know a leasing fee versus

you know a tenant placement fee uh so

those are some other kind of details in

the property management fees bucket that

we underwrite for the other one as well

that I’ve put in practice and gotten

used to or accustomed to doing is I will

have this fee that frankly is made up

it’s you know I I look at historical

data for our our properties and whatnot

but it’s to basically build reserves for

any work that needs to be done when a

property is turned meaning when a tenant

leaves and you need to you know paint

the walls change the floors change you

know hardware whatever in the property

make it nice and ready and pretty for

the next tenant as much as I possibly

can i try to set aside a fixed number of

you know dollars in this case annually

so that when the tenant leaves all of

that turn cost or make ready cost

because of a tenant change will have

hopefully entirely but usually mostly

been paid for by the existing tenant so

in addition I think to the ones you were

mentioning um I also kind of factor

those things in so it really is you know

rent minus mortgage insurance property

taxes property management fee tenant

placement fee leasing fee maintenance

and repairs capex reserves tenant turn

reserves and in my case in my market I

forgot another one the rentals where I

operate require a rental license that is

given to you by the city that needs to

be renewed every year and I know what

costs that comes at so I factor that in

as well so we go from that you know the

the unrealistic rosy you know side of

the spectrum where you had you know rent

minus you know property taxes mortgage

and insurance to however many I just

said on like the more realistic side

right so yeah those were those are some

that I would add on top of what you were

talking about yeah it’s a great call out

now I guess basically part of what added

the items that you added to that were

around understanding your property

manager’s business model and where their

fees are when they occur why they occur

and baking those in and so some of it

depending on if you’re what you’re doing

is like a super cursory analysis like I

know we talk about how to do quick deal

analysis if we’re just using a deal

check and we just want to get a pulse on

hey is this property worth pursuing you

can bake in some assumptions or

percentages and so sometimes what I’ve

seen uh what I’ve done myself if I’m in

a hurry and I don’t want to go bake in

every single one of those fees right

away is I’ll just increase the

percentage on my property management

number and basically say okay if they

charge a 8% fee I’ll bump it up to 10%

to account for all those extra fees that

might come up it’s not as precise but if

you’re essentially um adding in a margin

on top of their base fee can um it can

catch up to some of those others now I

would always check that math because if

your rent is $3,500 an extra 2% is going

to be totally different than if your

rent is $800 so um it’s again

understanding your property manager’s

business model and uh making sure that

you’ve calculated it properly yeah and

and I think we talked about this in in

uh previous you know episodes right but

to me that goes back to why it’s so

important and to your advantage to stick

to a particular market and stick to a

particular buy box because we talked

about this in the past you will get good

at those things that’s great but also in

this particular scenario if you’re

looking at the exact same buy box in the

exact same locations you know same zip

codes or whatever you don’t have to

guesstimate these numbers because you

know what your property management fees

are you know that your city has a

license fee you know what the property

taxes are you know what a typical you

know insurance premium would be so on

and so forth so you can go in with you

know pretty accurate numbers even with a

quick cursory you know deal analysis

yeah absolutely again another thing like

confession from my journey is that by

being in three markets you definitely

you have three different overall buy

boxes three different sets of teams

three different property management

agreements we were self-managing in one

and managing using third party in

another it’s a lot to keep track of and

so if you really want to have reduced

mental clutter and better understanding

and just a more focused approach it

definitely is advantageous to pick a

specific market and build and also your

your relationships will be much deeper

if you are focused and not kind of

spreading your attention all over the

place but as far as knowing your numbers

that’s exactly the case right it’s like

you you said you’ve been in a market for

several years now you can look back

historically and say my property manager

that I’ve been working with we have an

average tenant stay of three plus years

so instead of doing what I did and say

“Hey I’m going to budget for vacancy

every single year.” You have enough data

to show that the type of property I buy

under the management of my property

manager under my ownership and the

quality that I keep the properties I can

expect this and that’s a data driven

approach that allows you to kind of

update your model but the last thing I

want to say on like so when you listed

all those different things what I like

about that is that if you really are

factoring all that stuff in and then

you’re underwriting and you’re doing

deal analysis and you show a positive

cash flow after all that stuff you can

feel very confident that that ends up

being a good buy if you’re if you’re

still hitting your return metrics after

you’ve carved all that stuff out then

that’s you know arguably if not a home

run deal it’s it’s a good deal right if

because you’ve you’ve already you’ve

created an accurate picture of what you

can expect and that’s the thing is like

the profit if you hit if your number

that you want to hit is 8% cash on cash

return after expenses and then you’ve

built your model to acrewue for capex

maintenance vacancy all this other stuff

and it still hits 8% like I’m writing

that offer right then and there so I

think that’s the benefit of being

accurate with your deal analysis and you

can be more confident like we said at

the top yeah yeah I think the only thing

I would add there though which is a

mistake that I’ve made myself and see

others do as well is like um what you

just said is 100% accurate with the

caveat that I think folks need to also

be realistic with the rent potential

right it’s very easy to look at a tool

online or look at what’s out there to

rent on you know Zillow or whatever it

is and you see a property like the one

I’m looking to purchase is renting for

let’s say $1,600 and so you just look at

these tools and you know the tools tell

you it’ll rent or it should rent for

somewhere between $13 to $1,600 and you

pick the high you know end of that kind

of um bracket and you set your rent to

$1,600 that’s also a potential risk or

pitfall because your your your base

number like the income for the property

will be potentially wrong and that’s

something where I like to be

conservative as well if these tools

online you know will give me a range 13

to 16 i’ll pick something maybe in the

middle which makes me even more accurate

obviously like that rent potential and

that rent number is also something that

I validate with my property manager and

I would highly encourage everyone to do

the same because just looking at a tool

online even if you have side by side

three bed two bath you know homes in the

same zip code same school district

whatever one might have high-end

finishes and clean you know layout and

everything’s new and the one next door

is not older kitchen older bathrooms you

know fixtures are dated or whatever and

you can’t rent those two properties for

the same which is totally understandable

you wouldn’t want to pay the same rent

for two varying quality properties right

so you have to factor that in as well

because if you take a wrong rent

assumption to start with all of your

underwriting will be wrong yeah it’s

true you can be really good and have a

totally thorough model that’s considered

every possible expense but if you plug

in a rent number that’s $250 higher than

what it’s actually going to be then

everything is you know uh incorrect your

assumptions of what you could make end

up not playing out and just to like put

a a another point on the comp thing so

whether it’s a sales comp or a rental

comp those tools the online tools which

we use and we recommend using as a data

point but you always validate those with

a local or someone on your team but

there’s even if the house if it’s an

identical house almost and it’s 0.25

miles away well that 0.25 0.25 miles if

it’s across a highway or across another

street i mean those street level

differences can can be huge and it’s not

something that software always picks up

on so you have to be careful when you’re

looking at comps you might say “Oh that

you know this one rents for 1,600 and

it’s only 0.25 miles away but it’s in a

completely different type of

neighborhood with a completely different

base of um people.” Yeah 100% and then

the other thing I would add as well is

like as you learn we talked about having

historical data points to kind of um you

know set your underwriting numbers and

criteria but is also I you know I make

it a a practice of going back you know

every year every you know 6 months or

whatever and look at historical data to

see if my assumptions are still accurate

is my vacancy rate still you know 3 to

4% or did it go up or did it go down did

my you know property management fees go

up or down or you know I budgeted for a

certain percentage for capex is that

truly what I ended up spending same with

repairs right and you go back and you

tweak your numbers because you could use

your past data and experiences to make

your future purchases even that much

more accurate yep absolutely you get

more data as you go along and like you

said if you stay in one market

especially and work with the same team

if a lot of the variables are the same

then you can usually draw you know good

conclusions and make better decisions so

well that wraps up this topic we snuck

it in right under 20 minutes but we will

be covering the next lesson in our email

course on the next episode so thanks

Nathan we’ll see you next time take care

thank you for making it to the end of

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