Are My Numbers Right / Rental?

Question

House is almost ready for rent. I have 1 house now but wondering if my #’s are right.

House was 110% completely renovated from top to bottom side to side and a new roof. House is a 2 bedroom 840 sq ft

Potential rent $13,750($1250 a month rent with 1 month vacancy per year, so getting 11 months rent per year)

Taxes $1000

Insurance $1000

Expenses $2500( keep stacking for potential expenses)

Total income from rent $13,750

Total expenses $4500( taxes, insurance, expense account$13,750(11 months rental income) - $4,500 = $9250 revenue?

I know there’s going to be fed income tax but I’m hoping that that can be offset with the $2500 expenses as sort of write offs.

Marc Possoff · Answer

@Joe P.

Thanks for the reply. Actually the house cost $1and the complete reno cost $125k. So I have $125k mortgage on the property. Mortgage is $547 a month / 30 years.

So my expenses are monthly.

Mortgage $547

Property tax $84

Insurance $84

Vacancy $135(10%)

Repairs $65(5% a complete gut reno)

TOTAL : $915

I’ve talked to some renters on the block and most pay the water. The landlord sends them a bill and they pay it.

How much to add for a PM?

After doing some digging it’s suggested I get a cap rate #?

Conservatively can get $1200 a month rent. So we are looking at a $285 cash flow. From reading I take $285 cash flow + $547 mortgage x 12 = $9984. Then you’re suppose to divide that into cost of house.

Since I paid $1 for the house my cap rate is extremely high. But then it looks like I have to get a cash on cash figure. Which from the looks is $9984 / $125k(reno) = 8%.

This link is where I got the info just a little while ago.

https://www.biggerpockets.com/blog/real-estate-math

Current market rate for this house since it’s a 2 bedroom and 1 1/2 baths is in the $200k- $225k range conservative. There are 2 houses developed from the ground up on the same block that are 3 stories. And a lot of other spotty development and reno’s in Grays Ferry. I can imagine that in about 2 years my house could be go for $300k with the way GF is being developed. And / or higher rental rates.

As far as property / real estate taxes the house is under an ‘old resident’ program so yes taxes will go up but not at the rate as a new owner would. Actually taxes on the house are less than $1,000 a year.

I do own an empty lot around the corner, 14x51 which I’m going to sit on for a while.

Stephen Brown · Answer

Why are you adding in your mortgage for your return unless you're trying to calculate your total return?

Nathan M. · Answer

I think the rule of thumb for PM is around 8% of gross rent. You also need to include the $55 rental license in expenses. I also like to aim for 1.5% of property value in the repairs/reserves fund.

Your understanding of cap rate is not quite right. You should be basing cap rate on the total amount invested (i.e., acquisition cost + rehab). So [net income] / $125,000 = cap rate. But, cap rate doesn't matter at all to me in non-commercial properties. It's not nearly as useful a metric as cash flow, cash on cash return, and debt service coverage ratio.

Cash on cash refers to just that--cash; not debt. Don't include a mortgage in that figure. [net income] / [cash invested] = cash on cash.

Also, I get the sense that you don't have a good grasp on taxes.  You should probably talk to an accountant.  Don't forget PA taxes and Philadelphia Net Income Tax.

Marc Possoff · Answer

@Joe P.

I was basing my numbers off of this article.

https://www.biggerpockets.com/blog/real-estate-math

Joe P. · Answer

I would be careful regarding the making the tenant pay water -- if they do not and you don't find out about it, for whatever reason, that bill belongs to you. Conversely, its a good touch point for you and it puts the onus on the tenant to watch their consumption. What I do is a $1000 (or whatever rent is) plus $75 (or whatever I think water will be per month) for a total of $1075, for example. It explains to the tenant that they're responsible for the bill even if they pay me, and I also put a consumption max (e.g. if the water bill exceeds $75 per month, they'll be responsible for that overage) and if they're under, kudos, you can pocket the difference.

I think your repairs/CAPEX is too low. You're right in that everything should be good early on, but lets say the first tenant is a bit of a mess and on turnover, you have about 1000-2000 in expenses. Not much, right? But you're only setting aside $780 a year total for that. It's low, in my opinion. Others may disagree. I do 10% of rent for CAPEX and 10% of rent for maintenance, personally, because I'm not very handy and I would rather have the setaside ready instead of going into my reserves and accounting for the inevitable repairs.

The cash flow is probably most important -- what does cap rate do for you? Nothing. It serves no purpose other than to tell other investors how good of a deal it is. If you're hitting a monthly cash flow goal, that's way more important. I.e. I want $150 per door, per month. 10 doors...I want $1500 per month in net proceeds to me.

Joe P. · Answer

I'm not adding it in to the return, I'm subtracting it from the cash flow analysis. It's a cost. He has a 125k mortgage so he's paying $~525 per month for debt service.

Joe P. · Answer

Yep...missing key details like debt service/price paid for the property. Tenant won't pay water, because water will be in the owners name. So if you are adding that number to your rent, make sure the rent remains competitive with the neighborhood.

Also, while you may be self-managing, that's a job. The point of this is to not have a job...so bake a PM cost into your expenses. At the very least, it can be used to pay yourself for your time, be used for future acquisitions, etc. But your pro forma analysis should have all expenses.

I don't know a single property in Philadelphia where the taxes are less than 2k a year. In Grays Ferry, I would imagine you'd be in that range, so make sure you confirm and adjust.

I'm not sure of the price of this property, but lets assume its 200k. If you're paying cash, with the numbers you provided, it'll take 20 years to earn back your money (assuming all numbers hold). That's pretty unacceptable to me. If you're using debt service, assume 25% down on this property, you would have a $150k mortgage costing you $716 per month at 4% interest. Your cash flow becomes miniscule or negative.

Joe Steinheiser · Answer

Debt service? Or did you pay cash?

Marc Possoff · Answer

@Joseph Pietrzak

Tentant will pay gas, electric and water. Sewer and trash is already including with taxes and water. I will self manage property. I plan to inspect property once a month.

The property is located in Grays Ferry Phildelphia.

The $2500 a year would include expenses down the road and operating expenses.

When you say operating expenses can you give an example? Like I said the $2500 a year included expenses. For instance let’s say tenant moves the $2500 a year stacking will include getting rental ready for next tenant. Also the $2500 stacking will include expenses down the road like a new roof but I don’t expect a new roof for another 15 years since there’s a brand new roof already.

Joseph Pietrzak · Answer

Does your $1250 include water, gas, electric etc? You also have to figure in sewer trash and other operating expenses. Will you self manage or hire a property manager? Where in the city is this property located? Your insurance number seems high as well.

Are My Numbers Right / Rental?

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