Looking to get feedback on anything I missed with this hypothetical analysis using the 50% rule:
1. Purchase price = 100k
2. Downpayment = 20k
3. Closing Costs = 5k
4. Income (Rent) = 12k / year
5. Expenses, using 50% rule, (Including $100/mo managment fee) = 6k /year
6. Mortgage @ 4.5% = $405/month, or $4,860 / year
7. Cash flow = Income - Expenses - Mortgage = 12k - 6k - 4860 = $1,140/year
8. Cash-on-Cash Return = Cash Flow / Investment = 1,140 / 25,000 = 4.56%
9. Principal Paydown = 1,291
8. Tax Writeoffs for depreciation and management fees = 30% of (1,200 + 80k/27.5) = 722
9. Internal rate of return = (Cash flow + Principal Paydown + Tax Writeoffs) / Investment = 3,153 / 25,000 = 12.6%
From what I've learned on BP research and podcasts this seems like a very conservative approach to doing a quick analysis of a deal. I personally feel the Internal Rate of Return, taking into consideration principal paydown and tax write-offs is important. I also understand that there are costs associated with selling so you would really need to hold the property for a number of years to recoup that cost.
But just hoping to see if I missed anything major or if anyone agrees with this quick analysis.
A 4.56% COC return seems a little thin but if it fits your criteria you should go for it! Have you been prequalified for an 80% rental property loan with 4.5% interest?
No this is a purely hypothetical situation for me to practice the math and get some feedback.
the math is technically correct but the way you've put this together is best possible case scenario. Depreciation and mortgage pay down are paper incomes and could skew your excitement about a deal.
just know when you analyze a deal you want to be more conservative than generous. Every investor lie's to themselves during due diligence at some point and deals are prone to go worse in real life than on paper. With this in mind, you want to take every precaution you can to guard against being optimistic when underwriting.
When you analyze deals, do so with the worst in mind. (murphy's law)
Other than including principle pay down and depreciation how is this not conservative? I used the 50% rule. Isn’t that being quite cautious? If I worked it out this deal looks like a 10% vacancy and 10% repair situation (which is just included in the 50%)
I Think the cash on cash is conservative and the depreciation is quite real. To me and many others I’ve spoken to it’s the tax benefits that pull many toward real estate.
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