Expenses Cash Flow for the First Year ?

Question

Background:

• $50,000 house
• 3 bed, 2 bath

Cash Flow:

• Rent - $850

Expenses:

• Down Payment - $10,000
• Mortgage - $201/mo (30 year loan)
• Rehab - $10,000
• Repairs - $500 (may or may not spend)
• Property Management - $85/mo (10% is fairly common)
• Closing Costs - $1,953

Conclusion:

The first year's expenses were $25,885, while the property only brought in $10,200. Is this just a fact of life for the first year? Are my numbers out of whack? I didn't even take into account the fact that you probably won't have a tenant in the first month. Please go easy on me; I'm new at this haha.

Kevin Coggins · Answer

You can't really treat your capital costs the same as your operating expenses...well I mean you can, but as far as analysis that's not the best way to go. Everything related to the purchase and your rehab are your investment into this property, then those month to month expenses are where you want to be positive. At the end of the day, you want to be cash flow positive month to month (or at least at year end). Eventually, you'll reach the break-even where your total costs (investment + Operating) will be equal to your revenues. When I analyze deals, I typically have a formula for a quick estimate for how many years till I hit my break-even point. I keep it simple though, I'm sure some people on here got some crazy formulated Excels that are way more accurate.

Amy Little · Answer

You're numbers aren't necessarily out of whack. Acquisition costs and large rehab costs are usually a one time thing (albeit you may have large repair costs down the road). Most investors that are buy & hold lose money the first year, especially if there is a rehab involved. Your $10K downpayment is equity so that can't be counted. What you want to look at is the monthly rent minus all expenses associated with running the property....it's that final number that you want to be positive.

$850 (rent)

-$201(mortgage)

-taxes

-insurance

-vacancy rate

-maintenance

-capital expense

-any utilities you may cover

-lawncare, if applicable

-property mgmt

-any other expense you might have

TOTAL

-

Expenses > Cash Flow for the First Year ?