Someone please school me on this - what can i expect to earn?

[Jason Schmidt]

$75,000 house with 6.5% interest, 5% down. Assuming I can get $750 a month rent, what can I expect to:

1) receive in profit each month?
2) receive in profit each month after it is paid off?

I would have a property management company do the maintenence and such, and would be doing an insurance thing in case the a/c or something goes out so I wouldn't have to deal with it.

Further, are there any costs associated with buying a rental that wouldn't go toward the price of the house? IE closing costs and such ... would i be paying hundreds of dollars just to buy the dang thing?

[Jon Holdman]

Rent: $750
Expense: $375 (50% rule)
NOI: $375
Payment: $450 ($71,250, 6.5%, 30 years)
Cash flow: -$75

You lose $75 a month, on average.

I estimate 2% of the purchase price for closing costs, so about $1500. Figure 1% for loan origination fee, about $700. So, that's about $2,200 in other fees. Add in your down payment, and you're initial investment is about $6000.

You'll also have prepaids. Figure 14 months insurance at closing along with taxes about two months.

After its paid off your cash flow would be the $375. At that point, with your $75 monthly loss, your total investment would be about $33K. So, you'd be earning $4,500 a year (less taxes) or about 13.6% on your investment.

Not sure where you're getting 5% down on an investor loan. 20-25% is more likely.

[Jason Schmidt]

wow ... just wow. I was expecting about $500 cash flow after it is paid off. Paying in 75k on a house and only getting $4500 on return per year doesn't sound like that swell of an idea, nor does losing $75 a month! /frustrated

[Account Closed]

Hey Jon,

I was wondering when configuring these cash flow deals, do you take the deal based on the purchase price (regardless of equity); or based on the mortgage? I'm slightly confused on that area. Only reason I ask because I saw another post where a few others had posted on the time value of the equity Internal Rate of Return (IRR?). (guy was going to put 50% down so that it cash flowed)

Anyhow, this is what I came up with Purchase price @ 75k:

Rent: $750
P&I: less $474.05 (based on 6.5 @ 30yr)
Expenses: less $375 (based on 50% rule)
cash flow: - 99.05

As far as maximum offer under the 50% rule to cash flow $100 on this particular property:

$43,508

[Alan Brymer]

Yes, getting loans sucks. Your lender will probably provide you with an estimate of closing costs as well as your total monthly payment (PITI).

[John Fedro]

Jason,

The guys are correct! the reality of investing is more brutal than on the tv shows.

If you "can" get $750 is an issue as well. A few months vancany can cost you a years worth of profit. Not to mention letting a management company steal 10% of your profit.

Join a REIA to get a mentor or local coach... i would suggest.

Perhaps if this is your first home, live there then rent it out sometime after.

Learn more "creative financing!" there are deals out there for you.

happy investing :D

-John

[Will Barnard]

Originally posted by Blake Perry:

was wondering when configuring these cash flow deals, do you take the deal based on the purchase price (regardless of equity); or based on the mortgage?

Based on the purchase price which is the amount of cash you need to come to the table with. The equity position is irrelevant for this calculation and placing more cash down does not make the deal better. Base your cash flow projections assuming 100% financing for the entire purchase amount. In the event you need to come to the table with cash for repairs, add that to the purchase price as well. That cash could have been invested elsewhere so you need to account for opportunity costs.

[Jon Holdman]

Hey Blake, sorry I missed you question. Use the entire purchase amount, like Will says. If the deal works on that basis, and you have to put a down payment, the additional return is the return from your cash.

Its fine to do a cash on cash return, to.

As soon as someone starts talking IRR, I know I'm about to be "baffled with BS."

[TJ Thompson]

Curious, what's the 50% rule?

[Jon Holdman]

Help me understand this deal and 50%, 2% rule

Where does the 50% rule come from?