Am I Too Conservative?

Question

I've found that after I take into consideration my contingencies seemingly good deals on the surface don't look so attractive any more. I wonder whether my assumptions/budget is too conservative.

I generally use the following assumptions:

[Based on a SFR: 1500 sq. ft./$850 Rent]

10% vacancy

$1000/yr Cap Ex Reserve

$100/mnth maintenance/landscaping/etc.

$1200 annual turnover cost (Breakdown: 1 turnover per year; Repairs: $100; Painting: $375 ($0.25/sq ft); Cleaning: $150; Management Fee: $850 (1 mth rent); Flooring: $375 ($0.25/sq ft); LESS Deposit: $850 (deposit) PLUS Evictions: $100/yr (using 10% eviction rate/$1000 eviction cost); Marketing: $100)

For example, for an Indianapolis - SFR (3bd/1bth; $65K purchase; $850 rent; $600 Insurance; $0 Utilities Paid by Owner; Tax: $1900) the Cash On Cash is about 4% / $240/mth.

Using the 50% rule, $425 would be leftover per month. With my numbers, I'm calculating 72% Expenses & 28% NOI.

I'm eager to get my first property but don't want to be blind-sided by foreseeable expenses; however, if I play it too safe then I'll never get in the game. Are my numbers off?

Arlan Potter · Answer

Way too conservative. I own close to 60 units. Over the last 11 years I have evicted exactly 4 tenants. Most tennants(good ones) dont leave. We also have very little maintenance. Even with older houses, the majority have zero maintenance for most years.

Plus, if you borrow against the property. your return on cash is huge. And the renters pay the loan off.

Ashley Mullin · Answer

Account Closed

Sorry the format did not stay in place. PM if you would like me to send the sample to you.

Ashley Mullin · Answer

Account Closed

Here is a sample breakdown I use to evaluate properties.

Purchase Info

Initial Market Value

$65,000

Purchase Price

$39,000

+ Buying Costs

$780

+ Initial Improvements

$0

= Initial Cash Invested

$39,780

Income Monthly Annual

Gross Rent

$750 $9,000

Vacancy Loss

($60) ($720)

Operating Income

$690 $8,280

Expenses (% of Income) Monthly Annual

Cleaning & Maintenance (6%)

($40) ($480)

Insurance (7%)

($50) ($600)

Management Fees (10%)

($69) ($828)

Taxes (10%)

($67) ($804)

Operating Expenses (33%)

($226) ($2,712)

Financial Metrics (Year 1)

Annual Gross Rent Multiplier

4.3

Operating Expense Ratio

32.8%

Cap Rate (Purchase Price)

14.3%

Cash on Cash Return

14.0%

Net Performance Monthly Annual

Net Operating Income

$464 $5,568

- Year 1 Improvements

($0) ($0)

= Cash Flow

$464 $5,568

Rodney Kuhl · Answer

Account Closed Oh, gotcha. I misunderstood. So you are saying that is all of your expenses prior to any mortgage payment? Yeah, I think you are being too conservative - will be difficult to find anything that would qualify as good returns with those numbers.

Account Closed · Answer

Thanks, Rodney. That is helpful.

I wish I was able to get a 28% return. The 28% actually represents the percentage of the rent that is left over after allocating 72% of the monthly rent for expenses. using the 50% rule, I'm way off and wonder whether its because I'm playing it too safe.

Yang Xiao · Answer

I agree with Arlan. Don't play it too safe. You may have to pay a little bit tuition when you first get started, but you'll learn very fast. I didn't read a book (not even a blog) or talk to any experienced investors before I started investing in 2008. It's all trial and error. Of course a lot more success than errors. My motto is basically "just do it". Good luck!

Mark Ferguson · Answer

I estimate 10% for vacancies and between 10 and 25 percent for maintenance depending in the age and condition. I think you are being a little conservative.

Rodney Kuhl · Answer

Basically what I do is factor 10% for vacancy, 10% for maintenance, 10% for management, and then whatever the real insurance and tax numbers are for each month. For example, I have a rental in Indianapolis that rents for $825/mo. I put aside $82.50 for vacancy and another $82.50 for maintenance each month. My PITI payment is about $360/mo. And I'm managing the property myself. So I net about $300/mo. I haven't had any maintenance costs yet, but put that money aside into a savings account, so it's there when I do need it.

If you are calculating 28% returns, that's obviously great! I think you are being plenty conservative with 10% vacancy and $100/mo in maintenance. Only thing is I'd be careful factoring in keeping the entire security deposit up front. I wouldn't want to assume I get to use all of that for maintenance right away, to be conservative.

That's just my 2 cents. Hope it's helpful.

I'm in Indy, so if you want me to breakdown the numbers if you have a specific Indy property in mind, I'd be happy to help. Just shoot me a PM or email with the property details.

Am I Too Conservative?

Am I Too Conservative?

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