Am I calculating costs correctly?

Question

Am I doing costs right?I'm running the numbers on some different properties and I just want to make sure I'm estimating my costs right. Does this seem accurate to you?Mortgage: For multifamily the loan will be 75% of sale price and the interest rate will be ~6%Property tax: sale price multiplied by the property tax rate I find online.Repairs: 5% of rents.CapEx is $3000/year. (Taken from Ben Lybovich)Vacancy is 8% of rents annually.Property management is 10% of rents.Landlord insurance is ~$300. Finally, since I'm OOS, I want to pay an inspector to check out the house twice a year, which should be about $600 altogetherSo for an imaginary $100,000 duplex with $16,800 ($1,400/month) in rent, my annual balance sheet should be:Mortgage of $5,400Property Tax of $2,000 (assuming 2% rate)Repairs of $840 (spent or saved)CapEx of $3,000 (spent or saved)Vacancy expenses of $1,344 (spent or saved)Property Management of $1,680Landlord Insurance of $300Inspectors at $600Total Expenses of $15,164Rental Income of $16,800Profit of $1,636Does this look right?

Based on this, I wouldn't be making much money even though rents are 1.4% of value, which should be good. I feel like I'm overestimating costs somehow but I'm not sure where.

Yannik Cudjoe-Virgil · Answer

@William Hoppes Decent start but its not that black and white. Expenses vary from market to market. They also depend on what the current state of the property is. They get really particular when you scale up into larger multifamily 75+ units.

Not sure the state of the property you are looking at but talk to your lender about rates. Call the tax assessors office for the tax rates in your area. Repairs are vague. Depends on the condition of the property, capEx as well. Vacancy depends on the market. If your are out of state, find a good property manager that you can trust to report the condition of the property (unless you really want to spend on an inspection twice a year).

Based off your numbers: This property is not cashflowing. You expenses may or may not be sharp. Work on sharpening your pencil if you can. Always buy for cashflow. Hope this helps.

Ned Carey · Answer

@William Hoppes the cap ex seems a little high. Otherwise your numbers do basically seem reasonable.  However without more details it is hard to say (See @Yannik C- V. Post)

The reality that most don't talk about, is that most rentals are not that profitable. It takes a LOT of them to add up to significant cash flow.

Ned Carey · Answer

@William Hoppes

Many if not most expenses only show up after time. I think a lot of people look at how much is coming in above their mortgage payment and look at how fast the cash builds.

Also different houses will have different expenses. Expense ratios will vary based on price range somewhat. If you buy a new, or newly renovated property,  you may not see any capital expenses for the first several years. You could own it and sell it in 7 years, and never have had any capital expenses.

In my market the houses are 50+ years old. Even though we renovate them heavily we can still have a sewer line break under the basement slab or underground out the to road. This years record rainfall had many houses have basement water problems that never had them before.

The reality is problems can be  somewhat random. You just have to assume that there will be problems.  I like the 50% rule.  It says

"Over a portfolio, over time, your operating expenses (not including financing  costs)  are going to be approximately 50% of your income"

Notice that is Does Not say "every property will have exactly a 50% expense ratio."  That would be absurd. Yet those that argue against the 50% rule act as if that is what it says. The more properties you have the more the risk is spread out.

In your example above you have more than 50% expenses. I think you are being too conservative here and you will actually do better.

Caleb Heimsoth · Answer

@William Hoppes. Capex is high.  Why are you paying an inspector to inspect your house twice a year? That’s overkill.  A PM will do a basic walk through for free or a nominal fee

Mike D'Arrigo · Answer

@William Hoppes Do you know how property taxes are assessed in your market?  Not all markets reassess when property transfers. Find out how it's done in whatever market you are in.

William Hoppes · Answer

@Yannik C- V.

For someone looking to invest out of state, how would you recommend getting more detailed numbers? I'm (yet another) Californian looking out of state. I based this off kind of a generic A/B duplex I'm seeing in places like Cleveland, Indianapolis, Kansas City

@Ned Carey

Ok. So when people talk about the crazy cash flow they're seeing, are they just not taking vacancy/capex into account?

Am I calculating costs correctly?

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