Is this calculation correct?

5 Replies

Tell me if my calculations make sense as im thinking about buying a 50k sfh rental. I buy house for 50k. put 10k down on it. 2.5k closing costs. 12.5 total cash investment. No immediate repairs needed. It will rent for 735. When following the 50% rule, it will cash flow around 60 dollars a month. That is 800 a year. So my return on investment would be: 800 cash flow yearly 3% property appreciation=1500 yearly principal paydown=600 yearly total yearly=2900 2900 divided by 12500 = .23 23 percent total return.

I'd recommend using the BP tools to help calculate that and if you should buy.  (The rule of thumb I've been seeing is minimum $100 per unit cash flow and at least 12% cash on cash...just so you know what to look for to decide if it's a good deal.)  They are pretty comprehensive and include things we might not think of like insurance and taxes (which I don't see included here).  Your cash flow of $60 doesn't leave a lot of margin for error.  To be safe, I think you should use the tool.  Good luck!

@Byran Parson this is not a good deal. I will assume you are new, so I will try not to sound like a jerk. Don't Answer, but just ask yourself a few questions.

Do you think it is a good idea to invest $12,500 in hopes of getting $60 per month? 

Will it actually rent for $735? 

What if the renter doesn't pay? Can you afford to carry the cost of the property if vacant?

$60 per month would make you $600 in 10 months. Then the hot water heater goes out and it costs $700 to replace.

Please be aware that even if you made $100 per month of cash flow, you will never make any money from one house using this method. $100 per door works if you have 100 units and maybe even 50 units, but never just one. You need more cash flow Sir.

@Byran Parson I failed to mention that your 3% appreciation projection is unreliable. I would suggest that you do not use appreciation to determine if you should buy a property. Appreciation does happen and will probably happen over a long period of time, but property can also go down in value 3%. If you get appreciation, great, but don't count on it.

Hi Bryan -

I agree with Jody & Anthony, you need to dig deeper into the operating expenses. If your cash flowing $60 a month with only the factors you mentioned, keep looking.

Remember to also include management fees when factoring operating expenses 10-12%?of gross monthly rent assuming this is your only rental).

Julian

actually i calculated incorrectly. the mortgage (p&i only) is 240. rent is 725. the mortgage is 33% of the rent. so it should cash flow 122.50 per month.

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