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Updated 18 days ago,

User Stats

3
Posts
3
Votes
Shakthi Kamal
  • Investor
  • Boston
3
Votes |
3
Posts

Is a min of 2% rent to price ratio needed for positive cashflow in today's market?

Shakthi Kamal
  • Investor
  • Boston
Posted

Hi BP Community,

I'm a new investor learning the ropes on analyzing RE deals. I'm interested in deals that cashflow more than appreciation (I'm in it for the long term and happy to wait for my appreciation). I like to be thorough and hence included detailed expense categories in my spreadsheet when evaluating a deal. 

I've been analyzing a couple deals in the OH market recently to get some practice (my research tells me it's one of the few decent cash flowing markets). I've incorporated the following assumptions across all my deals,

1. Mortgage rates at 7% 

2. 25% down

3. 10% of current rents budgeted for capex, monthly repairs and maintenance and property management fees. 

The 7% rate pretty much equates to 50% of monthly rent for P+I for a 1% rent to price ratio deal. And given #3 above, it leaves about 20% of rent for all other expenses like property tax, insurance and other PM expenses like leasing fee, eviction fee and other minor expenses like for e.g landscaping, pest control etc. Long story short, all this means a net negative cashflow. 

In playing with the numbers a bit, I'm seeing a trend of atleast 2% rent to price and (ideally) < 7% mortgage rate needed to achieve a decent cash on cash rate. (I'm not including expected appreciation in my ROI numbers, I'm just treating that as a bonus).

Am I looking at this right? Am I overbudgeting in the expense areas I mention above?

Would love feedback and learn from the seasoned professionals. 

Thanks,

Shakthi

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