Is This Worth It?
Hello! I'm learning about real estate investing and am very interested in the buy/hold strategy. I've been running some numbers and, I'll be honest, I'm having doubts as to whether or not this strategy is worth the risk. I'm posting my assumptions and calculations here. What do you think? Keep in mind, my numbers are very generic. As such, I may be WAY off on my assumptions, in which case I encourage you to correct me.
Take this house in northern Houston for example: $150,000 with 20% down ($30k cash invested). 3bed/2ba in a great neighborhood. Rental estimate is about $1500/month. Here are my numbers:
Yearly Rents: $18000
Yearly Taxes: $5100
Yearly Management (10%): $1800
Yearly Maintenance Allotment: $2000
Yearly Vacancy Allowance: $1800
NOI: $7300
CAP Rate: 4.8%
Yearly Mortgage Payment: $7728 (assuming 5% interest)
Annual Cash Flow: -$428
That doesn't look good. I understand that I'm also building equity in the place, which after 10 years is worth about $52k without considering house appreciation (just initial equity and principal paid... I'm trying to be conservative). Considering I can invest in a REIT with a sound 7% dividend, that same $30k paid as a down payment after 10 years could be worth $59k (again, without considering asset appreciation). Even if I bumped the rents up to $20k per year, I'd still only be cash flowing about $1090 per month. The present value of that (new cap rate is about 5.9%) after 10 years is only $8000... even if I consider the same amount of equity built, that's only slightly beating the REIT I could invest in with no work at all. In my opinion, this is not a smart move. I'm very interested in hearing your opinions.