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Updated over 1 year ago on . Most recent reply
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Am I Analyzing Properties Correctly?
Hey, I could use some pointers on whether or not I am doing analyzing the cash flow on properties correctly (or whether or not I'm even on the right track).
I'll provide an example property:
3 bed 2.5 bath townhome listed at $265,000
I project that the rent should at least be $2050 (when renting rooms individually).
If I offer a maximum of $250,000, then 250,000 x 0.08 (targeting the 0.8% rule) = 2000 ... so this meets that rule of thumb, now I can continue evaluating.
Calculating NOI:
Scheduled Rent.....2050
Vacancy (5%)..........(102.5)
HOA.........................(174) [Covers lawn, water, sewer]
Repairs (5%)............(102.5)
Taxes........................(170)
Home Insurance.....(93)
Electric.....................(150)
Prop Mgmt (11%)...(225.5)
CapEx (10%)............(205)
-------------------------------------
NOI: 2050 - 1222.5 = 827.5
Income - Mortgage = 827.5 - 1264 = -436.5 Cash Flow Per Month
Questions:
- Am I analyzing cash flow accurately?
- Is there anything I'm not accounting for that I should or anything that looks off (perhaps too high, too low)?
Currently it seems near impossible to find something that will work in the current market (where I live at least). Any advice regarding this? Do you view it okay to start out with negative cash flow and lean on appreciating rents and loan paydown?
Thanks!
Most Popular Reply

Quote from @Riley Harris:
Hey, I could use some pointers on whether or not I am doing analyzing the cash flow on properties correctly (or whether or not I'm even on the right track).
I'll provide an example property:
3 bed 2.5 bath townhome listed at $265,000
I project that the rent should at least be $2050 (when renting rooms individually).
If I offer a maximum of $250,000, then 250,000 x 0.08 (targeting the 0.8% rule) = 2000 ... so this meets that rule of thumb, now I can continue evaluating.
Calculating NOI:
Scheduled Rent.....2050
Vacancy (5%)..........(102.5)
HOA.........................(174) [Covers lawn, water, sewer]
Repairs (5%)............(102.5)
Taxes........................(170)
Home Insurance.....(93)
Electric.....................(150)
Prop Mgmt (11%)...(225.5)
CapEx (10%)............(205)
-------------------------------------
NOI: 2050 - 1222.5 = 827.5
Income - Mortgage = 827.5 - 1264 = -436.5 Cash Flow Per Month
Questions:
- Am I analyzing cash flow accurately?
- Is there anything I'm not accounting for that I should or anything that looks off (perhaps too high, too low)?
Currently it seems near impossible to find something that will work in the current market (where I live at least). Any advice regarding this? Do you view it okay to start out with negative cash flow and lean on appreciating rents and loan paydown?
Thanks!
So generally speaking it looks 'mostly' right... but...
Why are you paying for electric each month? Shouldn't that be a tenant shared expense?
I'm never a fan of HOAs... plus they often get in the way of landlords. But if that is actually providing for lawn / water / sewer that isn't so bad probably. But make sure they are on board with you renting the unit. Often HOAs have many rules about how many units can be rented out (not owner occupied), among other things like minimum lease terms. Other's say you can't rent for the first 2-3 years... they must be owner occupied. Also be aware that you can get hit up for special assessments.... "the pool needs resurfacing, the streets need to be paved, the roof needs to be replaced, etc, etc. You think you are upside down now... try getting hit with a $5,000 bill. I was reading about a condo on the beach in Florida where all the railings had to be brought up to code. It was a $15,000 assessment per unit. OUCH!
Other than that, you can see what a hit you take with property management. You should see about managing it yourself. (We manage 37 units...it's really pretty easy if you systemize things.) Use a rent collection program that will also screen your tenants, market your properties, etc. That along with have a few vendors on speed dial is well over 1/2 the battle.
What most people starting out don't realize is that very little if anything will cash flow at 7+% interest. New people just say, "Ok, the interest rate is 7.5%." What they should say is, "Wholly HE** the interest rate is SEVEN POINT FIVE PERCENT(!!!!) and stop right there. I get that means you can't buy a property right now... and make a profit. But you seem to think you are doing something wrong, when really it's just that the financing world is against you right now. NOW is not the time to be buying a property... put succinctly. Interest rates are over the top, and only going higher in the short term... but are predicted to drop to the mid 4's by 2025... the last I saw. That doesn't mean you have to wait that long... but trying to buy at over 7% is almost going to be a non-starter unless you just find an amazing deal. We personally look for a minimum cashflow of $300/unit/month on a single family long term rental. If it's not generating that, we aren't buying it... which means we aren't buying right now. And as your numbers show you, neither should you!
But beyond the basics... you need to recognize that property management is extremely expensive in terms of how much of your profit it steals each month. You should think of property management as a luxury that you can't afford right now.
If we had our 37 units under property management it would cost us over $50,000 a year! (The numbers start to get "real" when you start multiplying by 37!!!). Even with your single unit... that's $2,706/year you would give up to property management. That's a no-go for us right now. Managing one or two units is really very easy! Think about how many times you have to call for service on your own residence. That is more or less what you would expect for one other unit. Maybe once, or twice a year something breaks that needs looking at? Is it worth $2,706 to avoid those two phone calls. As for filing units, it's not rocket science. We use RentecDirect.com to manage our properties... but there are a number of services out there that will broadcast your rental unit for rent, collect applications, screen your tenant, etc. Pretty much everything a property manager would do. Yes you have to deal with it... but for thousands of dollars we think it is a no-brainer.
Hope some of it helps!
Randy