Rental Calculator numbers don't make sense

17 Replies

Hi everyone,

I am brand new to Bigger Pockets.  I have started using the rental property calculator to assess the profitability of  a typical 2 family in my neighborhood.  Prices here in Riverdale, Bronx, NY are high.  But rental prices are high too so I though there should be some correlation.

The average 2 family houses are advertised for $800,000. An apartment may rent for about $2,500 ($5,000 for the 2 apartments). Using the calculator I needed to go down to a purchase price of $200,000, assuming $50,000 for repair and ARV of $300,000 before the number started making sense (COC of 10.44%, positive cash flow of a couple hundred dollars, and a Cap rate of 7.10%. The point is that I kept the rental price at its true estimated rate ($2,500). Obviously you cannot get this kind of rental in a neighborhood where houses cost as low as the numbers I entered above. Am I doing something wrong? Thank you so much for caring to clarify.

Mark hi,

Thank you so much for replying. I believe I have a basic understanding of ARV. That is my point though. There seem to me no correlation between the cost of these houses and related expenses to the potential income. I am looking to use a 3.5% FHA loan. I needed to bring my numbers down to $300,000 basically to avoid a negative cash flow.

It should come out just fine. You might find a mortgage calculator you like online and cross check numbers for assurance. It is totally possible to eval a property and get negative cash flow and that's a deal breaker right there.....

@Boaz Golani  , I think the issue is not that the rental calculator is not making sense, it's that buy and hold where you are looking doesn't make sense.

NOI (Net Operating Income)= Income - Expenses

Cash Flow = NOI - Debt Payment

Cap = NOI / Purchase Price

Prop Value = NOI / Cap

Cash on Cash = Year of Cash Flow / Down Payment

What do you assume your expenses to be on a 2-family?

$5k in gross rent calls for a property worth more than $200k...

Brett, I think you are right.  The numbers around where I live may be super inflated which makes the calculator appear to make no sense...

Originally posted by @Griffin Fehrs :

NOI (Net Operating Income)= Income - Expenses

Cash Flow = NOI - Debt Payment

Cap = NOI / Purchase Price

Prop Value = NOI / Cap

Cash on Cash = Year of Cash Flow / Down Payment

What do you assume your expenses to be on a 2-family?

$5k in gross rent calls for a property worth more than $200k...

NOI (Net Operating Income)= Income - OPERATING Expenses

Cash Flow = NOI - Debt Payment

Cap = NOI / Purchase Price

Prop Value = NOI / MARKET Cap RATE COMPS

I though I would invest in a two family and live in one unit.  What I found out from using the calculator is that investing only 3.5%, even if I am able to find a 2 family for $500K  (in a neighborhood where 2 family go for $800K and rent is $2,500 per unit) I will have a negative cash flow to cover beyond my part of the rent.  I still fee something here does not click. 

Thank you all for your comments!  I will catch up in the morning.

Bob hi,

I entered the expenses as recommended by the calculator: utilities, 10% maintenance, 10% big repairs, 10% management company, 3% inflation, etc.  Thanks for asking.

The calculator makes sense - the "investments" don't. 

Doug McLeod

    Will tell you that rents don't keep up with the value of the property. A $200k property doesn't rent for double what a $100K property does. Generally, the higher the value of the property the crappier the ratio of market rent to principal and interest. 2% rule would be $1000 in rent for $50K in property value. It's overly ambitious, but quick. If you're getting 5K on a $250K mortgage, sounds like a good deal.

    You're seeing what is true of many expensive markets. There's a reason I rent out here in CA and buy out of state. 

    I've looked at buying a duplex here in San Diego....exactly like the one I live in now. The purchase price and financing with my VA loan, which would allow me to buy at 0% down if I wanted, would give me a payment of about $2500-2800. Guess what rents per side are?

    About $1400, meaning my portion would be the same as I pay now. The ONLY advantage would be a little principal paydown, and potential appreciation. The problem with that is it comes at the cost of paying property tax, insurance, repairs and maintenance. Which make it more expensive to buy than continue to rent. Or I would have needed to buy about 3 years ago when things did make some sense with the artificially low prices a few years back.

    The real benefit only come in if you buy today planning on living in the home for the next 20 years, since then my cost will stay relatively the same as rents and other expenses climb. But realistically I may not stay in San Diego for any real length of time, and if I did I'd want to buy a SFR for my personal home. So for me the negative effect on my borrowing ability on cash flow producing investments isn't worth it. The other option would be to put a big DP on the purchase, but that stagnates my buying out of state since the cash would be tied up in my home instead of being able to buy something that would bring in rental income that is greater than the savings I would realize on my own housing cost.

    @Boaz Golani  10% maintenance is way too high for your estimates and will throw it off.  When you're dealing with higher priced markets, this can easily drop to the 1-2% range.

    Lots of details in that generalization, but a $100k house in one area has roughly the same maintenance costs as the same house in a $400k area.  That 10% maintenance just became 2.5%.

    Edward, Matt, Justin, I thank you for clarifying this issue.  Your comments seem to come from true experience and understanding.  I like Matt's approach.  Seems like that would be a great way to go, rent where buying does not make sense and buy elsewhere where it does make sense.  Edward, thank you for mentioning the 2% rule. It clears the picture.

    Justin, I totally see what you are saying, I was not thinking about it but it makes perfect sense. This forum is indeed a great source for education.   

    You definitely aren't doing something wrong....that's just support for why investing in rental properties in that area and similarly-priced areas doesn't work for cash flow. I live in LA and when I first started looking around for properties, I couldn't figure out why the numbers weren't working either. Then I learned a ton about how to calculate cash flow and it became clear....the purchase prices were just too high. That's why you'll see so many people in NY and CA cities investing elsewhere...the numbers just don't work locally. It's a huge bummer! I'd love to own in LA.

    Ali,

    I read nice articles you wrote.  Thank you for your reply.  Perhaps out of state may work.  

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