Am I Too Conservative

2 Replies

[Originally posted in the wrong forum]

I've found that after I take into consideration my contingencies seemingly good deals on the surface don't look so attractive any more. I wonder whether my assumptions/budget is too conservative.

I generally use the following assumptions:

[Based on a SFR: 1500 sq. ft./$850 Rent]

10% vacancy

$1000/yr Cap Ex Reserve

$100/mnth maintenance/landscaping/etc.

$1200 annual turnover cost (Breakdown: 1 turnover per year; Repairs: $100; Painting: $375 ($0.25/sq ft); Cleaning: $150; Management Fee: $850 (1 mth rent); Flooring: $375 ($0.25/sq ft); LESS Deposit: $850 (deposit) PLUS Evictions: $100/yr (using 10% eviction rate/$1000 eviction cost); Marketing: $100)

For example, for an Indianapolis - SFR (3bd/1bth; $65K purchase; $850 rent; $600 Insurance; $0 Utilities Paid by Owner; Tax: $1900) the Cash On Cash is about 4% / $240/mth.

Using the 50% rule, $425 would be leftover per month. With my numbers, I'm calculating 72% Expenses & 28% NOI.

I'm eager to get my first property but don't want to be blind-sided by foreseeable expenses; however, if I play it too safe then I'll never get in the game. Are my numbers off?

Hi @Account Closed  first let me say that I think you're smart to be looking at Indianapolis. It's one of the best cash flow markets in the country in my opinion and if you can't get something to cash flow there, I don't know where you can. It's good to be conservative but you might be estimating high on some things. First of all, $1900 property taxes on a $65K property are too high. Indy's tax rate on non owner occupied properties is 2% so the tax should be around $1300. Marion Counties property taxes are all over the place though because they have been very slow to re assess property values downward after the housing crash. At $1900, you're paying too much in taxes and this is a deal breaker. I also think that $1000/yr for Cap Exp reserves is on the high side. Your main capital expenses are furnace, AC, water heater and roof. Over a 30 year period, you'd replace those twice. Figure $5000 for AC, furnace and water heater and $3500-$5000 for a roof and you're talking about around $20,000. The main thing in your scenario though is the property taxes. I would pass on it with taxes that high. It looks to me that the tax assessor never adjusted the assessed value. I do a lot in Indianapolis. Feel free to reach out if I can be of help or answer any questions.

Mike

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

$0 Utilities Paid by Owner if the property is occupied. 

If you have a vacancy, you have to pay for the utilities. If it happen to have a vacancy in the winter, utilities bills can be substantial.

[email protected] | 818‑648‑8501 | http://www.ciprianlaza.com | CA Agent # 02004150