Do my cash flow numbers look correct?

Question

Hi, I'm new.

I want to make sure my math is right and that my cost numbers are in the right ballpark so that I can estimate cash flow before I buy my first property.

For practice I am looking at this one: 6432 Clark Rd, Paradise, CA 95969

My numbers are based on the data I found online; I would need to confirm and verify many things before actually purchasing.

Purchase:

• Sale price: $99,900
• I would try to buy it for $95k (it has been on the market a long time)
• Closing costs: $3k (realtor / paperwork) + $1k (my travel costs during closing, possible home inspection, etc)

Loan:

• In this scenario I am looking at a $60k loan and $39k cash
• Assuming I can get a 30-year loan @ 5.5%(Is this a reasonable assumption? I have no debt and a decent income.)

Monthly:

• $1,320 Max gross rent ($15,840 / yr)Source: the listing
• $200 Property repairs / maintenanceSource: guess? I am assuming the roof and septic do not need immediate repairs; I would check this before buying
• $175 Utilities (water / gas / electric / trash)Note: I am not sure if the tenants pay for this / would need to checkSource: guess? and personal experience on typical utility costs
• $174 Mortgage interest (51% of $341 total mortgage payment)Note: I know the mortgage payments are front-loaded with interest, but the long-term average is a more fair number in my opinionSource: mortgage calculator and loan rate assumed above
• $167 Mortgage principal (49% of $341 total mortgage payment)
• $132 Property manager @ 10%Source: forums / guess?
• $119 Expected loss of rent (vacancies and non-payment) @ 9%Source: rental vacancies are 1% vs 25% of homes rented, general lack of income in the area suggests higher chances of non-payment
• $95 Property tax ($1,140 / yr)Source: based on property's tax history, tax is 1.2% of assessed value; assuming assessed value = purchase price
• $80 Property insuranceSource: guess?

Tax considerations:

• $144 / mo depreciation on the buildings (taking half the purchase price over 27.5 years)Source: approximation?
• Mortgage principal is not tax deductible and cancels out depreciation and then some (extra $6 / mo towards tax)Note: this might be a non-standard way to present this calculation, but I think it works?Source: assume 25% tax on the difference ($167-$144)

Totals:

• $172 / mo cash flowSource: $ ( 1320-200-175-174-167-132-119-95-80-6 )
• 5.3% Cash on cashSource: $2,064 / yr cash flow over $39,000 invested
• 2.1% Cap rate w/ mortgageSource: $2,064 / yr cash flow over $99,000 total cost
• 6.2% Cap rate w/o mortgage, and the depreciation deduction remainsSource: $2,064 / yr cash flow + $4,092 / yr mortgage over $99,000 total cost

Do my numbers look right? Wrong? Thanks,

Kristopher Windsor · Answer

@Ryan Gillette - thanks very much!

Ryan Gillette · Answer

The risk in using something from the seller is that it can cause you undervalue or overvalue a deal. The income plays the primary role in the calculation. Often current rent is below market. More infrequent, but not an unheard of, some sellers inflate rents prior to sale. That is let's say market rent is $1300. A seller would give a tenant 1 or 2 months for free, and then sign them to a 12 month lease at $1500. Now the tenant, they pay 10 months at $1500 ($15K) for 12 months living there - or $1250/month. So market rent, really, here is $1250/month. But the buyer evaluates the deal with $1500/month in mind. So.. I look at the rent independently of anything from the seller.

For repairs and CAPEX - there's an article explaining how to take apart the roof, the furnace, etc and divide by the life - but in my market I use $1000 + $1200 per unit. So a SFR would be $2200.

Kristopher Windsor · Answer

@Ryan Gillette -- Thanks!

Thanks. When I do end up buying, I'll try to get near this number instead of just taking the best of 2-3 loan quotes.

Good catch -- the closing process and costs are a mystery to me. I should read up on that.

This is a fair point. I'd have to take a close look at the unit interiors too instead of just thinking "they must be good since they are occupied."

My thoughts yesterday: if the previous owner can prove long-term tenants have been paying $X, that must be a fair market rate.

My thoughts today: maybe that was a fair price when the tenants moved in, but then the landlord raised the rents, or the market rate went down, but the tenants didn't feel like moving to save $100 / mo.

Yes, and I guess the numbers I have are worthless without confirming this. If my assumption (that landlord pays utilities) is wrong, I'm calculating only half of the actual cash flow.

Will do. Anything to make the numbers more accurate should help.

I'll read up on that.

I'll read up on those more too.

Thanks,

Ryan Gillette · Answer

You should be able to get a loan in the ~5% ballpark with good credit. If not shop a bit. Some lenders price sub-100K loans worse than others.

I see $3K for realtor/paperwork. I'm not sure exactly what this means. You're paying your agent? There should be closing costs/prepaids (attorney, lender fees, appraisal + tax/insurance paid upfront) which might altogether be in the $5K ballpark for this type of property.

Gross rent is key. *Do not* take the listing's advice for this. Go on CL or any other rental site common for your area and see what similar houses in the same bed/bath count and condition are renting for.

Typically, and some markets are different, the tenant pays utilities. That is if the utilities are detached and a tenant can pay them, they should. Very rarely does it work in a landlord's favor to build utilities into a tenant's rent. That is, not only is your price higher than everyone else's, but you have to build in the higher end assumptions for utility usage of your tenant (because they seriously won't care).

Find out the actual property tax. States are different. Mine is the mill rate * appraised value * 70%. That is assessed value is 70% of appraised value because land is not taxed.

Read up on this site about cap-x and repairs and maintenance. I would not use IRS depreciation.

Cap rate is NOI. There's ROI with a mortgage, but there's no cap rate with a mortgage.