All Forum Posts by: Eric S.

Yes, that's a good point, the horizon is long and quite frankly, the cash flow after 15 years is so heavily discounted, it does not add much more to the NPV total. $100/ door is interesting, I had not heard that before. About the real numbers though, is there a rule for estimating maintenance expenses? I'm not talking about taxes, and insurance and mortgage, I can get that information. But are there any thoughts about what is the yearly expense for new roofs, water heaters, windows, drywall, etc.? I've guessed about $1500 per year but that is just a guess.

And what do professional inverters in the rental market do? Do they purchase the property outright or do they take out a mortgage and leverage as much as they can?

Sorry the numbers got smushed together even after I painstakingly put lots of little spaces so everything was easily readable.

I'm new to real estate investing so I've been browsing this website and have read many discussion on the 2% and 50% rule, ROI and the like. I have a little bit of finance experience, just what I have learned in school, and the tool that is used to evaluate an investment in anything, stock, property, a new product, is NPV. It's pretty simple, you have to account for your cash in and cash out, and if you have positive cash flow each year, then you have to discount that cash flow by your cost of capital. The further out the cash flow comes in the less it's worth...a dollar today is worth more than a dollar tomorrow. Your cost of capital is generally determined by the rate of return you COULD get for an investment of similar risk. That can be difficult to determine so I usually use 10% since that is what I could get by investing in an index fund. So, here's my example:

Purchase price: $70k
Down payment: $17.5k
Annual interest rate: 4% (30 yrs)
So my payment: $250.64/mo
Rent income(2 units): $1025/mo
Expenses:
Utilities(sewage & water):$1200/yr
Insurance: $700/yr
All property taxes: $3400/yr
Maintenance: $1000/yr
10% Vacancy: $102.5/yr
Income tax on NOI is 35%
I assume all expenses increases by 1% yearly and rent increases by 0.5% yearly. So here are my first two years of calculations from my spreadsheet:

Year 0 1

P(L)
Tenant1 Rent (10% vacancy) 5,130 5,155.65
Tenant2 Rent (10% vacancy) 5,940 5,970
Expenses:
Payment (P + I) (3,007.72) (3,007.72)
Utilities(Sewage & Water) (1,200.00) (1,212.00)
Insurance (700) (707)
Property Taxes (3,400) (3,434)
Maintenance (1,000) (1,010)
Taxable Income (Loss) 1,762 1,755
Income Tax (617) (614)
After tax P(L) Impact 1,145 1,141

Total Operating Cash Flow 1,145 1,141

Investment Capital
Down Payment (17,500) -

Total Cash Flow (Gross) (16,355) 1,141
Discount Factor 1.000 0.909
Discounted Cash Flow (16,355) 1,037
Payback (16,355) (15,318)

NOTE:The rent from the tenants has been reduced by 10% in year 0 to account for vacancy. Year 1 has a 0.5% increase from year 0. If I take this out to 30 years, my NPV is ($6135). Negative! I would be better of investing in an index fund to get a 10% return, probably less risk too. BUT, if I reduce my down payment to 0, then the NPV after 30 years goes to $4750. Positive. I know that does not sound like a lot but anything with a positive NPV is a good investment. BUT, it does not pass the 2% rule. Thoughts? Do my numbers look reasonable? Am I leaving anything out?

Eryk