How do experienced investor calculate cash on cash and IRR

Question

I am a newbie at RE investing. Finding various SF homes on zillow/redfin and try to run numbers.

I am trying to use Rental Property Calculator to run numbers. I am aware of 1% rule.

Question is what type of numbers you put in.

1. Management companies, I think, charge first months rent and than 5-10% management fees every month depending on the area. Lease renewal every year. So do you add first months rent to closing cost? Say loan closing cost is 3000 and rent is 2000, you normally put 5000 as closing cost? (assuming property is ready to rent, otherwise there would be money required to repair it.)

2. I back calculate property tax and Home insurance from the zillow and redfin and estimate % from there. any better way to do this? How accurate are zillow and redfin numbers?

3. How much to put under maintenance savings, is 10% a good number?

4. Do you actually increase the rents by at-least 3% every year?

5. After all above expense, 5k closing, 5% vacancy rate, 10% managment fees, 10% maintenance, taxes and insurance, 3% yearly rent increase and 3% appreciation, at-least 8-10% CoC and at-least 15% IRR is a realistic goal?  Obviously this is for areas where SF cash flows.

6. Are rent estimates accurate on Zillow and Redfin? I estimate rent by finding a property in zillow near to one I am trying to buy. (same # of rooms and bath, similar sqft and similar age).

Any tools or advice on how to evaluate a deal would be appreciated.

Also, are there companies which can guide/help investors in finding the area with cashflow and appreciation potential anywhere in the USA and actually gives the projected numbers?

I am currently looking at areas in Indianapolis, IN. Memphis, TN. Tampa/Lakeland. Phoenix, AZ to get a feel of what is available in those area.

I am from SF Bay working in tech and own a primary single family.

Mike D'Arrigo · Answer

@Akshay Gandhi this isn't a question that can easily be answered in a forum. A lot goes in to calculate returns. My first recommendation is to not pay any attention to the 1% rule. It's not a meaningful metric since it looks at the top line only. The next thing I would say is not to be relying on estimates which I see that you are doing. If you're evaluating a specific property. use actual expenses. Instead of estimating property taxes or using Zillow which may not be accurate, go to the county assessors site and get the actual taxes. The difference between 5 and 10% for management fee is pretty big. Find a good property manager in your market and find out how much there monthly fee is. Personally, I don't work with any property manager that charges a lease renewal fee, especially on top of a 1 month tenant placement fee. As far as maintenance, that depends on the age and condition of the property. A fully renovated property is obviously going to have far less maintenance the one with deferred maintenance. If you're going to include CAP Ex expenses you have to also include the offsetting depreciating tax write off. You can't include one without the other. Vacancy rates as well as rent increases will vary by area and property class. The 4 markets that you mentioned are very different and these factors are going to vary quite a bit by market.

Account Closed · Answer

Trying to crash course this in a post isn't likely possible.

Couple things that stick out, those Zillow property taxes? they don't matter. You need to call the assessors office and have them tell you what YOUR taxes are going to be as a new landlord. Spoiler alert, they are going to be higher.

Capex? You need to break down major items by service life. % of rent has nothing to do with it. A roof cost a roof. The roofer doesn't give you a break cause you own an inexpensive, section 8 building collecting small rent.

Rent boosts depend on what you can get away with in your local market.

Go to Rent.com or Apartments.com or other sites that show real rentals currently being listed in your market to see the reality of the market rents. Don't rely on Zillow rent estimates. Have to be leery of agents about what they claim for "market rents" too.

Tools? An excel spreadsheet and working knowledge or metrics and how to read/write a pro forma. Otherwise you are blind trusting someone else.

Ak Gandhi · Answer

Thanks everyone for the pointers. Since this post I have learned a lot on how to run numbers on the property. And how to read pro forma(or approximately create one if there is none) and how to ask right questions. And decided on my own criteria.

Few key points.

- Buy B or better investments only, at-least for first few deals.

- Buy as newer house as possible. no pre 1950s for me. Walk away if I can't assess the maintenance or near term capex requirement. Getting interested in new construction.

- It is okay if the rental is not giving 10-15% cash on cash(after mortgage+maintenance+vacancy+Capex+management) right away. as far as it has decent appreciation potential and numbers work out that it would in 5years from now.

Thanks Again!

Regina Sloan · Answer

I reccomend you look at Dion McNeeley's youtube videos. he explains well~

Wale Lawal · Answer

@Akshay Gandhi, use Rentometer.com or BP Insight to have an idea of what the property will rent for.If you don’t have access to either then use 90% of whatever Zillow Rent Estimate is forexample, if Zillow says it will rent for $2000, then 0.9x$2000 = $1800 will be the most likely rent.That been said, the best comparable is the one you get from an Agent because they have MLSaccess with a lot of data that will provide you the best result.Goodluck

David M. · Answer

@Akshay Gandhi

Sorry, don't have time for a lengthy message.. but where (what State really) are you looking to invest?  The topic of "what are your" taxes is somewhat State dependent.  In my region of the country, your taxes are what are listed.  Other portions of the country, especially California, change the assessed value to the purchase price and have a fixed tax rate.  I hear about that more in the west sort of.  In the east, we tend to have the ad valorem system so the rate floats and its the assessment that matters, but it doesn't change with the purchase price.

Also, there is the Homestead tax rebate in some areas which is available to homeowners who live in the residence..

So, given the large swath of info you are trying to figure, you need to be location specific.  Goodluck.

Ak Gandhi · Answer

Hello, thanks for replying. Some excellent points. I am looking for screening criteria to bring the list down to say 10 to 2. I understand that this depends on market to market and property to property. But, when someone is running numbers how they normally go about it. if property needs a rehab within 1-2 years, I would consider it capex, but even after that keep a cash account for unknown maintenance items.

About property tax, when a house is listed for sale, there is an estimate on listed price, I am not looking at the property tax history. Wouldn't be possible to call assessor's office during screening to find out what the new assessed value be. But I would do that before putting an offer.

For rents, I am actually looking for houses for rent on zillow, not the estimate that zillow provides on listing page. Thanks for pointing out other sources.

How do experienced investor calculate cash on cash and IRR

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