Penciling out rentals

[Jonathan Wilson]

Hey,

I want to buy and hold rental properties. My primary motivation is to own cashflow. My stocks are broad index funds, and they do not return much in the form of dividends (I know, it's more tax efficient). We rent our basement as a medium term rental (for about $20 less than the mortgage), and while I can talk myself into believing its my best (or worst) investment, I do love getting the rent check. 

My litmus test is that I must believe the investment will out perform a 7% real return or 10% nominal return. I would like to earn a 10% cash on cash return, and feel that provides a margin of safety. Otherwise, I do love stocks. It costs me almost nothing, and I loose no sleep. :)

I really enjoyed "Rental Property Investing", by Brandon Turner. I'm trying to figure out how much I can pay for a property in various cities throughout Idaho. I've included sample calcs below. To be honest, it doesn't look very promising. That's fine, nothing in this world is free. If others are doing similar, then I'll resolve to find a deal that works. So that's my question: am I penciling this out reasonably, am I being too greedy, or am I doing something wrong? Thank you for your time!

I start by guestimating the average rent for a house I would be willing to own or rent. For example, in Boise ID a 3bd, 1.5bath+ 

Rent:                                              $2300/mo

Then I back into what expenses might be:

Property Management @10%:  $230 

Maintenance                  @5%:    $115

Capital Expenses           @5%:    $115

Vacancy                          @5%:     $115

Property Tax                          :      $180

Insurance                               :      $85 

P&I                                          :      $1104

Target Cashflow                    :      $356

This would mean that the I could buy a house for up to $216K.  I would borrow 80% (173K) on a 30yr fixed at 6.6%. I would need about $43K in down payment.

What's kind of crazy, is that by the time your looking at houses for that little, they need some love. That 216K is the max I think I would be able to put into the deal and get my goal rate of return (if we take the $2300 as a given). Meaning I might have to try and find something for even less and after including repairs have 216K tied up in it.

[Derek H.]

Jonathan, 

There are Zero rentals in Boise that meet those criteria. Everything under $250k is a mobile home, maybe two bedrooms, and far from renting for $2,300/month. There are some 3BR homes less than $250k in Canyon County, but really rough places, and not places that would get you $2,300/month. The returns you are looking for don't exist in the Treasure Valley in 2022.