Is my cash flow projection way off?

7 Replies

Hi all -- I'm trying to build out some kind of cash flow projection formula for analyzing properties. I'm looking in Grand Rapids/Holland/Muskegon/Kalamazoo MI.

For simplicity's sake, assume a $100K property renting for $1000/mo:

  • $400/mo for a 25% down, 30-year mortgage with 5% interest
  • $300/mo for PM/vacancy/repairs/CapEx (30%)
  • $250/mo for property tax
  • $50/mo for home insurance

Expenses = $1000/mo

My first thought was that property taxes looked pretty high. Non-homestead millage rates are around 50-55 in Grand Rapids, whereas in Kalamazoo/Holland/Muskegon they're around 60-66. With a tax assessment ratio of 50%, that puts property taxes between ((50000 * .05) / 12) and ((50000 * .066) / 12), or $208 and $275 respectively. Is my math off?

Cheers

Your math might be fine with the expenses. But the problem is that you have no free cash flow. All lenders are going to require you to have a debt coverage ratio of 1.2 at least. You should be targeting at least $100 of free cash flow after expenses and debt service in order to meet the debt coverage ratio. Some lenders will require debt coverage of 1.25, and some will require 1.3. A 30 year loan might be more difficult to get. You should be able to do better than a 5% interest rate for a conventional loan. I'm thinking something in the range of 4.65% should be relatively easy to get assuming you have the financial strength to qualify for that interest rate. A 25 year loan at 4.65% would cost $423 per month instead of $402.

Originally posted by @Victor Menasce :

Your math might be fine with the expenses. But the problem is that you have no free cash flow. All lenders are going to require you to have a debt coverage ratio of 1.2 at least. You should be targeting at least $100 of free cash flow after expenses and debt service in order to meet the debt coverage ratio. Some lenders will require debt coverage of 1.25, and some will require 1.3. A 30 year loan might be more difficult to get. You should be able to do better than a 5% interest rate for a conventional loan. I'm thinking something in the range of 4.65% should be relatively easy to get assuming you have the financial strength to qualify for that interest rate. A 25 year loan at 4.65% would cost $423 per month instead of $402.

Agreed! I'm targeting $150 cash flow, not looking to buy this kind of deal. I was moreso looking to confirm if the estimated expenses looked fine since people oftentimes refer to the 1% rule. In this case it looks like 1.2% is a better goal.  

I think your math is generally correct; when I look at my numbers for properties in GR I'm around 14.4% for PM expenses, 5% vacancy, and average around 10% for repair/CapEx. I'd try to land on what kind of property do you want to buy and who you want to manage your properties because that will determine the management costs as well as give you someone local who can give you a better idea of what market rent should be. A great property with a poor manager is worse than an average property with an excellent manager in my opinion :) You're correct that the "1.2% Rule" is better than the "1% Rule", however finding that will require you to switch from generalized percentages to a specific analysis on a specific property because many of your expenses will scale right up with your rent: a PM's fee is almost always a fixed percentage (although some do offer a fixed fee) and taxes, vacancy, and insurance also usually increase as the rent does and if your Pro-forma uses all percents then you'll likely overlook a real deal because you'll be overestimating your expenses on a steal of a property. Good luck! What made you decide to choose West Michigan as the place to invest? I spent 8 months in Palo Alto, so I know that Silicon Valley is NOT the place to find cash-flowing properties, but I'm curious how you decided where the best place was.

@Steven E. After looking at your estimates, here is some feedback based on the properties I own in Grand Rapids.

  • $400/mo for a 25% down, 30-year mortgage with 5% interest
  • Seems accurate (you may be able to come in closer to 4.5% if you are using conforming lenders)
  • $300/mo for PM/vacancy/repairs/CapEx (30%)
  • Seems reasonable (10% for PM is $100 + 5% vacancy is about $40 + 10% for repairs/cap ex is $100 for a total of $240)
  • $250/mo for property tax
  • This is your main variable. I don't pay 250/month or even 200/month for any of the GR properties I own. The most I pay for taxes is around 200 a month. But I have houses that I rent for 1500 with taxes that run 130 a month. So this is just too variable to estimate super accurately.
  • $50/mo for home insurance
  • This is a bit too low. I don't pay less than $75-80/month in GR. Kalamazoo is higher because, according to my agent, claims are higher in Kalamazoo.

I have properties in Holland, Kalamazoo, and GR. If you ever want to discuss investing in this market more, let me know. Im happy to help. 

Originally posted by @Nathan Biller :

I think your math is generally correct; when I look at my numbers for properties in GR I'm around 14.4% for PM expenses, 5% vacancy, and average around 10% for repair/CapEx. I'd try to land on what kind of property do you want to buy and who you want to manage your properties because that will determine the management costs as well as give you someone local who can give you a better idea of what market rent should be. A great property with a poor manager is worse than an average property with an excellent manager in my opinion :) You're correct that the "1.2% Rule" is better than the "1% Rule", however finding that will require you to switch from generalized percentages to a specific analysis on a specific property because many of your expenses will scale right up with your rent: a PM's fee is almost always a fixed percentage (although some do offer a fixed fee) and taxes, vacancy, and insurance also usually increase as the rent does and if your Pro-forma uses all percents then you'll likely overlook a real deal because you'll be overestimating your expenses on a steal of a property. Good luck! What made you decide to choose West Michigan as the place to invest? I spent 8 months in Palo Alto, so I know that Silicon Valley is NOT the place to find cash-flowing properties, but I'm curious how you decided where the best place was.

Thank you Nathan!

I'm from East Michigan and my family is still there. Not too familiar with West Michigan yet, but I hear plenty about how it's booming! Fortunately my sister is relocating to GR in Spring of 2020 after being a realtor in Nashville for the last 5 years, so we're ready to get the ball rolling.

Originally posted by @Ryan Kuja :

@Steven E. After looking at your estimates, here is some feedback based on the properties I own in Grand Rapids.

  • $400/mo for a 25% down, 30-year mortgage with 5% interest
  • Seems accurate (you may be able to come in closer to 4.5% if you are using conforming lenders)
  • $300/mo for PM/vacancy/repairs/CapEx (30%)
  • Seems reasonable (10% for PM is $100 + 5% vacancy is about $40 + 10% for repairs/cap ex is $100 for a total of $240)
  • $250/mo for property tax
  • This is your main variable. I don't pay 250/month or even 200/month for any of the GR properties I own. The most I pay for taxes is around 200 a month. But I have houses that I rent for 1500 with taxes that run 130 a month. So this is just too variable to estimate super accurately.
  • $50/mo for home insurance
  • This is a bit too low. I don't pay less than $75-80/month in GR. Kalamazoo is higher because, according to my agent, claims are higher in Kalamazoo.

I have properties in Holland, Kalamazoo, and GR. If you ever want to discuss investing in this market more, let me know. Im happy to help. 

Thank you for the input, Ryan. Is my property tax calculation missing something? Glad to hear that I may be overestimating. Will definitely reach out, thank you for the offer. I'm hoping to buy something before next summer!