First investment property numbers and questions

[David Johansen]

I am so glad I found Bigger Pockets!!! I have been reading and researching the site and many of your blogs as much as I can as I did not want to ask the same questions you have already answered a million times:) 

First off I wanted send thanks @Ali Boone as her article "Rental Property Numbers so Easy You Can Calculate Them on a Napkin" was invaluable to me! (I could not get the @ thing to highlight Ali so I will come in to add that to this thread.) I have used this article to run the numbers on my first investment property that I am currently living in and am preparing to rent. Please let me know if I made any erroneous assumptions or made any outright blunders:)

The home I purchased has 4 bedrooms and 2500 square feet(it had gone through foreclosure) on approximately .22 acres.

Purchase Price - $124,000

Cash to Close - $4,340 (3.5%)

Monthly Projected Rent - $1,350 to $1,450 (Figures obtained from a PM yesterday)

I am using $1,350 for these calculations so: 

Yearly Gross Rent $16,200

Yearly Property Taxes - $1,730.61 (do property taxes change when going from residential to being a rental?)

Yearly Home Owners Insurance - $726.18 (I assume this will increase when switching to a landlord policy)

Yearly HOA Fee - $350

Yearly Mortgage Insurance - $1,451.76 (I will be able to get this dropped in approx 3 yrs)

Yearly Vacancy - $1,620

Yearly Property Management -$1,620

Yearly Repairs- $810 (It is an A/B property in a good neighborhood with minimal immediate repairs so I used 5%. But I will be saving all excess cash for repairs until that account has $5,000 in it. I also can borrow from my 401K if an emergency comes up.)

Yearly Mortgage - $6,358.58

The PM charges 50% of the monthly rent each time he needs to fill a vacancy as well so should I add that in and just assume on paying this once a year even though hopefully that will not be the case? Currently I don't have this in my calculations.

So the Net (not including the mortgage) is - $7,891.45

The Net including the mortgage is - $1,532.87

So I come up with a CAP Rate of 6.36%

Cash on Cash Return of 35.31%

Now if I don't include the mortgage insurance as it will go away in 3 years I get:

NET not including mortgage - $9,343.21

NET including mortgage - $2,984.63

CAP Rate - 7.53%

Cash on Cash Return - 68.77%

From my reading these returns are lower than many of the recomendations. 

Did I do ok? 

Should I be using the low end of the rent range for these projections as I did or do you use the middle, etc? Obviously the returns would be better if I used higher rent figures...

Are there any considerations that I should be including but did not?

Thank you in advance for taking the time to look at this and help a newbie on his journey!

[Gerald Harris]

To get an accurate determination of rent range do this

call 3 management companies and 3 real estate professionals in the area

Ask them what a property of that size in that area will rent for. This will give you a clearer indication of what you will net. If this fits into your portfolio then go with it. I like the return. Better than a Bank, IRA etc.... Good Luck to you.