Rental property analysis - Am I being too conservative?

Question

Hi Everyone,

I'm starting to analyze some rental properties in the Pittsburgh area - this is just a theory exercise for now, since I'm moving there in May.

Anyway I'm struggling to find properties that cash flow, even when they fall into the 1% rule. Maybe I'm being too conservative?

Here's an example of an analysis of a $170000 townhouse that rents for $1700:

Purchase price = $170000

Closing costs (5%) = $8500

Pre-rent holding costs = $1200

Rehab/ Repair costs = $5000

TOTAL COST OF PROJECT = $184700

Down payment (25%) = $42500

Loan = $127500

Investment = Total cost of project - Loan = $57200

Rent = $1700

Mortgage (30 year fixed at 3,62%) = $581

Property management (10%) = $170

Maintenance and repair (10%) = $170

CapEx (10%) = $170

Vacancy (5%) = $85

Water and sewer = $75 (from Pittsburgh Water and Sewer Authority)

Insurance = $100

Taxes (2.08%) = $294.67

TOTAL MONTHLY EXPENSES = $1646.23

CASH FLOW = $53.77

CASH ON CASH RETURN = 1.13 %

Are my assumptions ok?

I know that maintenance costs and capex depend on the age and condition of the property, but since I cannot visit the properties (and also I don't know the maintenance costs in the US yet) I'm assuming a 10% for each. Too much?

Also $100/month for insurance, makes sense?

Any opinion from more experienced investors would be much appreciated!

Thank you,

Andrea

Ron Brady · Answer

My take is that you are not being too conservative.  Our view is that it is better to purchase a property with conservative assumptions and be wrong than vice versa.  In the current market, it is difficult to readily find great deals.  Thus, as a new person, this deal may make sense for you as it does cash flow--even if only limited--and you get the benefit of learning more by doing the deal than solely by preparing to do one. Said differently, the benefit of this deal is some small cash flow and a whole lot of lessons learned to be applied to future deals. Good luck to you.

Stefan D. · Answer

Hi @Andrea Campo,

My properties are typically cheaper, but taxes usually come out to about $2k/year, and insurance is about $600/year.  You can get a property manager for cheaper, but you will have leasing fees and other fees - so really that number will go up.

The truth about buying houses 25% down is that you might have trouble making it worth it for the first few years - but rents go up with inflation, and with any luck the house will appreciate, which is where the real money is made.

You might also consider trying to find cheaper houses for higher CoC - but there's definitely a trade off there, for $170k you can buy in a nicer area and get more appreciation.

Alternatively, you could consider house hacking a duplex.  If it's your primary residence and you're able to put just 3.5% down your CoC return will be higher.

Good luck!

Jeremy Taggart · Answer

@Andrea Campo Insurance may be slightly lower on that if it's a single family home. I think you are good on your maintenance/capex though especially if it's a typical older Pittsburgh property. Taxes could be slightly lower but that varies depending on property. Tenants will typically pay all utilities on a single family home.

If day 1 cash flow is important to you then turnkey single family properties in areas that have rents at $1700 probably aren't where you are going to want to look. You are going to be competing with homeowners looking to move into properties in those areas. Multi units tend to be more favorable on the cash flow side here if looking for single families that are going to cash flow you primarily have to be in the more C class areas to make that work or buy something that needs a rehab up front. I tend to favor multis bought using leverage for cash flow and single families in nice areas using the BRRRR model. You just tend to be fighting an uphill battle trying to buy turnkey single fams in nice areas especially if cash flow from day 1 is a priority for you.

Jon Kelly · Answer

@Andrea Campo Closing costs are very high. Does $8,500 include 1 year of taxes / insurance?

I typically assume 15% combined for maintenance/repair and capex. It SHOULD be less than 20% especially if you're rehabbing.

Otherwise, analysis seems reasonable. Now you adjust the purchase price until you hit a target that works for you.

Andrea Campo · Answer

Thank you everyone for your advice!

Andrea

Michael Noto · Answer

When you say townhouse, is it a condo complex? If so, you want to account for HOA fees.

Shai Flax · Answer

@Andrea Campo

I think your analysis is pretty conservative.

Taxes can range from ~700-2000ish, depending on the area.

I take 8% for maintenance, only if all of my CapEx and other things in the property are new/in good condition.

CapEx- I think around 150-200$ a month is make sense, again, only if everything is new or in a good condition.

Insurance- that's accurate from the rates I see lately.

Rental property analysis - Am I being too conservative?

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