Investment Margin

12 Replies

I'm looking at a place that will bring in ~950/month after mortgage, taxes, PMI, home insurance and water/sewage.

Fully occupied with long term tenants, and no major outstanding maintenance that needs to be done. 

Would you say this is a good margin on a property? What other fees (if any) am I missing?

First time investor looking for some information!

Thanks!

Well, there are a lot of expenses beyond the few you list.  What are you paying, what are your financing terms and what's the rent?

180k

30 yr fixed with 3.5% down

Rent is 2300/month

Margin of ~950 month after mortgage, pmi, home insurance, taxes

Where did you get 3.5 down ?

what @Jon Holdman is referring to is monthly expenses that you have not listed. These numbers are missed by new investors and it's crucial you factor them in.

vacancy = 8-10%

Maintenance= 5-10%

Management (must be accounted for even if you self manage) = 8-12%

CapEx = 8-10%

A simpler way to do this is the "50% rule" which shouldn't be used in place of calculating actual expenses but to quickly see if a deal is worth your advanced attention. 

The 50% rule says that 1/2 of your revenue will go towards expenses before debt service. Based on your numbers it would look as such:

2300 rent

-1150 expenses

-mortgage PI ONLY (guessing ~650 based on what you provided)

= 500 net 

This still looks really good. I would take your time and go through all the calculations a few times to be thorough. BP has a calculator you can use for free a few times without upgrading your account as well. 

Originally posted by @Jane A. :

Where did you get 3.5 down ?

FHA Loan (unit has to meet certain safety/maintenance requirements)

Originally posted by @Alexander Felice :

 I would take out vacancy...tenants have been there on average about 7 years. Also for management, if it self managed, what are those costs for? I will not be taking a draw out of the profit. 

Thanks for all of the info, though. I have run through the numbers about 100 times now and never seem to find anything too extraordinary out of place. 

You can manipulate the numbers however you want. I'm just posting what is standard. These tenants may be perfect, but the next ones may not be and it's important to make sure the property will still cashflow.

Management expense is a personal pet peeve of mine. Not counting it is what I consider incorrect accounting. SOMEONE is managing the place, and that's an expense. Even though you manage it now, you may not always manage it. It's important to make sure that if someone else manages the property that it still cashflows. 

It sounds like a hell of a deal!!! If you can get a few of those, you are ready to retire.

Originally posted by @Alexander Felice :

You can manipulate the numbers however you want. I'm just posting what is standard. These tenants may be perfect, but the next ones may not be and it's important to make sure the property will still cashflow.

Management expense is a personal pet peeve of mine. Not counting it is what I consider incorrect accounting. SOMEONE is managing the place, and that's an expense. Even though you manage it now, you may not always manage it. It's important to make sure that if someone else manages the property that it still cashflows. 

 Totally makes sense. I guess I need to look at this more in the long term rather the short. It's definitely nice that short term is looking good, which I think will be a good start to an investment. What's important is to expect the unexpected. 

I appreciate all the input!

I assume with 3.5% down you're living there.  Is the $2300 the total rent, including what you're not paying?  Or, is the rent really $3000 or some such if the unit you're living in is rented.

A rule of thumb is that all expenses will work out to about 50% of the gross scheduled rents. That does not include debt service (principal, interest, PMI). New investors never believe this number. You can do somewhat better in some years, but also much worse when you have a big expense. And if you're in this for the long haul, you will have those big expenses.

I'll assume a 5% rate on your loan. I get monthly true cash flow with property management of about $217. I'm not accounting for PMI, though, so that comes out of that $217. The high leverage and the PMI is hurting what is really a very good deal.

If the true gross rents are higher with your unit rented, the deal gets even better.

If you manage yourself, you can earn the PM's cut.  I use 14% of gross rents for that number.   That assumes 10% of collected rent plus half a month to fill a vacancy.   I assume one vacancy per year.  You must account for that even if your tenants have been there a long time.  Just because eight of the last 10 spins on a roulette wheel have been black doesn't change the odds for the next spin.  Doing the PM job earns you another $300 or so a month.

Originally posted by @Jon Holdman :

I assume with 3.5% down you're living there.  Is the $2300 the total rent, including what you're not paying?  Or, is the rent really $3000 or some such if the unit you're living in is rented.

A rule of thumb is that all expenses will work out to about 50% of the gross scheduled rents. That does not include debt service (principal, interest, PMI). New investors never believe this number. You can do somewhat better in some years, but also much worse when you have a big expense. And if you're in this for the long haul, you will have those big expenses.

I'll assume a 5% rate on your loan. I get monthly true cash flow with property management of about $217. I'm not accounting for PMI, though, so that comes out of that $217. The high leverage and the PMI is hurting what is really a very good deal.

If the true gross rents are higher with your unit rented, the deal gets even better.

If you manage yourself, you can earn the PM's cut.  I use 14% of gross rents for that number.   That assumes 10% of collected rent plus half a month to fill a vacancy.   I assume one vacancy per year.  You must account for that even if your tenants have been there a long time.  Just because eight of the last 10 spins on a roulette wheel have been black doesn't change the odds for the next spin.  Doing the PM job earns you another $300 or so a month.

 Thanks, yes I will be living there and the $2300 is what I would get with me living there. If I left, even more. 

Interest is more to the tune of 3.8%-4% which should help me out. PMI is running me around $175/month. So doing the PM job would definitely be something I would need to do in order for this property to cashflow. (definitely feasible)

I'm not so much interested in making money to use on vacations today. I'd like something even if I break even to be able to have paid off within 30 years and have a solid cashflow once I am older and the mortgage is paid off. 

If you can cashflow anything while living there free I think you're in good shape.

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