Investor · Cedar Falls , IA · Member since 2014 · 49 posts · 8 votes
Newbie here.. beware..
Trying to locate a deal for myself and I upgraded to the Pro version to take advantage of the rental calculator.. I am interested in SF properties right now..
My question, I have ran a few today and I get this low cap rate of about 5.2% but click on the 50% and it has $121.00 cash flow on it..
price 50,000
tax 2191
closing 2000
20% down
repairs 1500 (flooring/paint) I will do
4.5
20 yrs
rent 750 = 9,000
vacant 10
repairs 10
pm 10
capex 10
insurance $60 month
The deal analysis tool says..
expenses 795.64
monthly cash flow -45.64
pro forma cap -4.6
NOI 2489.00
cash need 13,500
cash on cash NOI -4.06
purchase cap rate 4.98
50% rule
$121.94
Is this correct how i did this? If so i dont get all the negatives then it cash flows based on the 50% rule?
Real Estate Broker · Lakeland, FL · Member since 2011 · 305 posts · 181 votes
12y
negitive cash flow? You'd probably need to raise the rent and keep the property management in house.
I have not used the property analysis yet. I have 4 rentals.. But they are free and clear.
I use as a rule of thumb if the rent is $800 then I'm going to have about $200 in expenses.. (taxes, ins and repairs)
I'd keep using the program till you can get a solid idea of how it works.
I like the John Straub rule.. If you cant generate $500 of cash flow or put down 50% of the purchase price, then you should not. But I am very conservative..
I have not used the rental calculator either, but if I am not mistaken, the 50% rule does not include debt service. Therefore, the $121 figure you are getting would be the amount leftover for debt service & profit. The numbers don't seem to work on this one.
I'm a newbie, as well, so please take this for what it's worth, but $2.2k property taxes on a $50k home that doesn't need much work seems relatively high to me. Don't get me wrong, there seems to be plenty of people who successfully invest in places like TX with high tax rates, but it may be that the 50% rule of thumb doesn't work in an area like that.
If all your numbers are right, it looks like you should be using a rule of thumb for estimating non-mortgage costs closer to 70 - 75% of monthly rent.
How confident are you on your taxes and insurance figures?
Also, I just noticed you have 10% for repairs and 10% for capex. Is this how experienced buy and hold investors here are doing it, I wonder? I've been using a total of 10% for both (as well as 10% each for vacancy and prop. management) and I'm already having a hard time getting offers accepted at numbers that will cash flow on paper. If I took another 10% of rent off the table, I'm confident I would never buy a property in my market.
Thanks for the input! I looked up the property tax from last year on the county assessors site so might of went up a few bucks.. The insurance that is a guess, my in laws are insurance agents and not answering the phone right now! ha So on that figure not that confident, we lived in a 3 bed 2 1.5 bath not far from there and it was around 700 a year..
As for all the 10% this is what i have been reading on here? I would really like to hear what some others are doing on here? I talked with my banker yesterday he owns 12 homes. He said he is usually around 8% Just like you said, I am having a terribly hard time finding things that will meet the mark here. I guess when I do and if i can close it, should have some potential..
I am not sure if I am doing that all correct either... Just trying to get this figured out so I can feel comfortable about making an offer..
Are some people using 10% with vacancy and repairs combined?? Anyone care to share?
I haven't checked out the rental calculator yet, but the more I'm thinking about this, the more I'm questioning that extra 10% for capital expenditures. I mean, if this is meant to capture the accounting expense for depreciating capex costs over time, then it should be treated like Depreciation on the structure, no? Not with respect to depreciating it over 27.5 years, but meaning, it wouldn't be considered for calculating cash flow.
Depreciation, capex and adding back principal pay down would be considered after cash flow, only for calculating taxable net income...I think.
Bottom line, unless you think you'll actually have out of pocket costs at $1,800 per year (20% of rent), on average, for repairs of all types (IRS "repairs" and capex) then you might consider lowering the total of repairs/capex to something below 20%. For some perspective, that seems like enough money to buy appliances and a hot water heater every year, or replace the roof every 4 years...again, I think.
It just doesn't sound right to me. I hope some seasoned landlords will weigh in on this, as well, so we both can learn. :-)
Charlottesville, VA · Member since 2014 · 37 posts · 8 votes
12y
If the intent is to build a reserve fund for maintenance/capex items, then another method of addressing this that a local investor shared with me recently is to set that money aside up front, and consider it part of your acquisition costs. This way, those costs are still being considered in your projection for cash-on-cash returns (in this case, cashflow divided by down payment plus closing costs plus repairs plus maintenance reserve) so you're not disregarding the maintenance entirely. But this way, you're also not being overly pessimistic with your monthly cash flow analysis, which might make it impossible to find a deal that both works on paper and will stand a chance of being accepted in some markets.
This is not to say that I wouldn't love to buy properties with strong positive cash flow projections while figuring total maintenance costs at 20% of rent (plus 10% vacancy and 10% prop management), but I just wonder if that's not setting the bar a bit too high in some markets, especially for us noobs who are presumably starting with MLS properties.