Rental Analysis

[Mike D.]

I've been analyzing some townhome/condos in the Denver metro area for the last few weeks.  I wanted to bounce some numbers off folks to see if I'm going about the analysis correctly.  The reason I'm questioning my approach is I'm not seeing anything that looks like it will cash flow which may be just part of the market we're in but I thought it would be good to double check.

My sources for information include Redfin, Trulia and RentOmeter.  Based on the numbers I've ran, I don't think any of the properties warrant more detailed analysis.  One example is as follows.  All numbers are per month.

2 bed, 1 1/2 bath 1,100 sqft
Purchase Price - $143,000

Rent - $1,479
Principle & Interest - $768
HOA - $226
Taxes - $54
Insurance - $55
Vacancy (10%) - $148
Repairs (10%) - $148
CapX (10%) - $148
Property Management (10%) - $148
Total Monthly Expenses - $1,694
Cash Flow - Negative ($215)

As stated above, this doesn't look like a deal because of the negative cash flow.  In the properties I've looked at, virtually, I have negative cash flow ranging from ($141 - $494) using 10% for vacancy, repairs, capx and pm.

I appreciate any feedback you might have and thank you in advance for your time.

[Linda Weygant]

@Trace S.

 - typically, I would agree with you.  But sometimes economics does not make sense.  Just because something couldn't possibly happen, doesn't mean it won't.  I mean, take your logic, and go tell all the employers, landlords and renters in the Bay Area of San Francisco about it and see how quickly you're laughed at.

Keynes and Smith would roll over in their graves at the way economics actually plays out in the real world.  Theoretical economics doesn't always survive its first encounter with actual human behavior.

Now, does that mean we can or should *count* on that happening in Denver?  No.  And I hope like heck it doesn't.  We should never really count on or plan for appreciation or more than Cost of Living Adjustments on rent in any market, in my opinion.  But it's really nice when it happens.

It's also prudent to be prepared in case the upward trends that are experienced are not actually an upward trend, but are more like a soap bubble, poised to burst when it reaches maximum expansion.

By advising @Mike D. to stick with the number he "should be" using, you're asking him to ignore reality and stick to theory and that simply isn't practical.

I like Mike's model because it builds in some conservatism.  But sticking with the tried and true formulas when they are no longer applicable is as disadvantageous when the market is performing better than average as it is when the market is performing worse than average.

My .02