ISO First Deal - How does this sound?

Question

Okay, So I guess this isn't my first residential rental.  I have another duplex that I lived in, couldn't sell, so now I rent it.

This is my first property bought with the intent of renting it immediately.

This house is a duplex - they are asking $45,000.00

It has a 2 bedroom and a 3 bedroom apartment.  The 2 bedroom is rented at $350 a month - they have admitted that it should have been rented at $400. The 3 bedroom should be rented for $450

Income:  $800
Expenses (50%):  $400
NOI:  $400
Mortgage (20 yrs @ 6.75%):  $342
Cashflow:  $78

This doesn't work at their asking price...  I need 1.2 + debt to income ration for my lender...

So, if I offer $30,000, cashflow is $172 ($228 payment)...

Am I thinking correctly?  I personally think the 50% rule expenses are high as I am doing my own managing and 'fixes'...  but everyone seems very certain about it, so I'm working from their experience.

FYI:  taxes are only $600 a year.

Any pointers?  I think this may just be one of those houses that are just an exercise in learning, which is fine.  Better to learn than to lose.

Account Closed · Answer

I love the 50% rule -

It really helps newbies such as myself in qualifying first deals. Especially when I am bombarded by emails from Realtors with listings that look like this: "Great Deal: 280 Per Month Cash Flow!!!"

That turn out to be pretty negative cashflows once the 50% is applied, or even .45

I promised myself I will always run the numbers and do as much due diligence as possible, but the .5 rules does make it easier to see if the deal is even close.

Thanks again.

Jon Holdman · Answer

The "50% rule" lumps vacancy, all actual operating expenses (debt service is not an operating expense), and all capital expenses (like a new roof) under the one "50% of rent" umbrella.  So, with that rule of thumb, the forumla for cash flow is:

cash flow = rent - (50% * rent) - P&I payment

Bill Robinson · Answer

You include vacancy and taxes in the 50%? I've always lumped the taxes with the debt management and taken the vacancy off the top.

Michael Rossi · Answer

YES!

Mike

Michael Rossi · Answer

Yes, they are!  Your initial analysis was correct, except for the small math error.  $400 - $342 = $58.

Mike

Steven Grabowski · Answer

Isn't vacancy in the 50%?  I thought ins. and taxes were also...

Steven Grabowski · Answer

So, Mike, my figures look correct?

So, if I have $800 rent...

$400 for expenses (taxes, insurance, maint,e tc...)
$400 left to pay debt and profit...
so, In my pocket, I have $400 - Mortgage
??

Bill Robinson · Answer

If taxes are $600 a year then that reduces your monthly cashflow by $50. Your calculation of cashflow at 45000 was $20 off ($400-$342=$58) and if you subtract the $50 for taxes you end up with $8 a month. You NOI calculation is not including vacancy either (which at a fairly standard 8%) drops your monthly cashflow another $64 leaving you at a $56 per month loss.

Michael Rossi · Answer

Yes, your analysis was correct.  However, the 50% rule does not change because you are doing the management and 'fixes'.  You are EARNING the management and maintenance expenses.

Good Luck,

Mike