Crofton, MD · Member since 2015 · 2 posts · 0 votes
Hi
We are looking at purchasing our 2nd rehab to rent investment property of a 2Br/1Ba townhouse. We are using traditional financing 30 fixed with 25% down. The home is being priced at 150 and we expect to get 1350 in rent. This one will need an estimated 15k to remodel and fix a leak/mold issue. My question is when calculating the monthly free cash flow (rent minus expenses (Taxes, HOA, Ins, Maint and Rent Vacancy) how do I factor in the cost of the initial remodel expense? I don't think I should add it to the cost of the house since I am not financing the repairs but coming out of pocket for them. Should I divide the 15k into monthly payments but if so for how long? I hope this question makes sense.
@Rob BelandI disagree with you on this one, sorry. Grated some items will be depreciated off, this case is buy and hold, so the cost of the repairs can't be passed on to an end buyer as it would be in a fix-n-flip.
The number I am always looking for is; what does a property cost me to get it rented & will my return be on my investment? Up front out of pocket cost compared with positive cash flow.
@James McGuirethe cost of the initial remodel is not used in your cash flow calculation. Its not part of the equation. Ultimately those costs will be added to the purchase price and depreciated.
Here's what I would do... A good number of your repairs can be depreciated off over time, but check with your tax guy/gal on exactly what, so you will make some of it up, however over time most things have to be redone.
Your initial investment is:
25%Down Payment
+3% Closing Cost
+15k Repairs
=$57k
So, when you look at your rate of return/cash on cash, use the $57k since that includes all of your out of pocket expenses to get the property up and running, look at it as your business start up cost. That is the basic formula that I use.
@Rob BelandI disagree with you on this one, sorry. Grated some items will be depreciated off, this case is buy and hold, so the cost of the repairs can't be passed on to an end buyer as it would be in a fix-n-flip.
The number I am always looking for is; what does a property cost me to get it rented & will my return be on my investment? Up front out of pocket cost compared with positive cash flow.
@Jesse Watersyour analysis of cash on cash return and ROI are pretty good. Unfortunately you missed the actual question that @James McGuirewas asking. He was asking about monthly cash flow. In that case you wouldn't factor in the money spent on rehabbing a property to get it ready to rent. Once it's ready to rent you start calculating cash flow. Are we on the same page?