Would you buy a $5,148 Cashflow with $2k of capital gains?

[Aroldo Villarreal]

I'm looking to make my first deal, but don't know if I want to go with this one. It is $20k out of pocket with $5,148 of cash-flow a year and $2k of capital gains. I only have $50k to invest and am putting aside $800/month towards investing from my salary. My question is, the cash-flow is great for the San Antonio market, but the gains are not, is it still a good deal? I want to buy and hold. I know the typical motto is "You have to make money when you buy it." What are the cons and pros of a deal like this? Any input would help!

[Jon Holdman]

Rent: $950

Expenses, capital, and vacancy: $342 (assumes self management for free)

NOI: $608

P&I payment: $417 ($80,000, 4.75%, 30 years)

cash flow: $191/month, $2288/year

Cash on cash return: 11.4%, assuming total investment of $20,000

That's an OK deal, but its not $5000 a year. If you do decide to use a PM, they typically take 10% off the top and have a fee to fill a vacancy. I'm assuming one vacancy per year with a charge of half a months rent. That drops your cash flow to $58 a month, $692 a year for a 3.5% cash on cash return. What that should tell you is the property is only generating a very small return and you're earning the majority of it by doing the PM job.

You're assuming taxes and insurance are your only expenses. A common new investor error. You have many others: vacancy, CPA fees, legal fees, pest control, maintenance (even if its brand new or newly rehabbed), utilities (at least when vacant), capital items (roofs, ACs, etc.) Then there are the ugly ones that are unlikely, but possible: major tenant damage, a lengthy eviction, lawsuit, etc. You WILL have these expenses. I have to run a new stove over to a tenant this weekend. I paid $6200 last year to replace a sewer line. The best months you will have will return the number you're estimating. The worst ones will be much, much worse.