Cash flow calculations. Am I doing this correctly?

Question

Hello everyone, I am new here, and am still trying to figure out whether investing in my area, southern New Jersey,  is worth the trouble.

Any help would be appreciated.

My strategy is to acquire long term rentals on single family homes for cash flow, using the BRRR method. I would most likely be rehabbing these homes myself, as I already have experience in the construction trades. However, I'm having a bit of trouble with my cash flow calculations... nothing seems to make money!

Here is an example:

Purchase price: $50K

Rehab cost $10k

This will ALL be financed at 4% interest (even the 20% down payment).

so...

Assuming I can rent this place at around $1200 /mo (typical for my area)

Principal + Interest = $286 /mo.

Property tax's = $300 /mo.

Home owners insurance = $75 /mo.

Water/Sewer = $50 /mo.

Landscaping = $50 /mo.

Vacancy = $100/mo.

Repairs= $50/ mo.

Cap Expenditure = $50/mo.

Property Management = $120 /mo.

Accounting = $25 /mo.

Total monthly expenses: $1,106

This leaves me with a cash flow of only $94/month, and that is only if I can actually get $1,200/ mo in rent.

Do these calculations look correct and reasonable... or am I doing something wrong?

CB Browning · Answer

Thank you to everyone for your detailed responses.

I'm completely new to real estate investing, and I'm trying to make sure that I really understand what I'm getting myself into. I think an investors first deal is a make or break situation, especially when the person is not starting out with a lot of money. It's crucial that the first deal is a good one.

I'm beginning to see that this is not an exact science, and there will always be some risk involved.

It's amazing how shifting the numbers just a little bit can be the difference between a profit or a loss.

Thanks again fellas. Lots of food for thought here.

Patrick Liska · Answer

CB,

You will get different answers on what you should and should not include, i will tell you that there is no need to figure CAPEX and to just take what ever profit you make and keep it in your bank account, until you get to a certain amount, it will build up faster and not a number that you account for, so the $94 just went to $144/m in your account. i agree with @Jerry W., with a single family home they usually pay for the water and sewer. i think i would keep the landscaping though, you always want to make sure your places are taken care of. so now you have another $50, now your net income is $194/ month. figure out what your most expensive cost would be to replace ( usually the roof) and save up at least that much in the account to cover it ( CAPEX) then after that the income is yours.

Charlie Hampton · Answer

Two thoughts:

1) Be careful with your renovation costs.  Bridgeton is tricky, as there are alot of distressed homes that will keep the value of your property down when you go to do a refi.  I made this mistake early on with a duplex and now have a lot of cash stuck in it (it cashflows great so its not a huge concern).

2) Who promised you a 4% rate on an investment property?  I would be skeptical of that rate. If it is correct, please pm me the lender so I can refi a few properties in SJ.

Good luck!

John Leavelle · Answer

Howdy @CB Browning

This does not look like a typical BRRRR deal.

Purchase price $50K

Rehab $10K

Total $60K

ARV ???

100% financing ???? (even 20% down payment) at 4% APR.  How?

If this is your Acquisition loan is it a conventional bank lender?  What about the Cash-out Refinance loan?  Not needed?  Need more details on this.

Most of the properties I have seen that make good BRRRR deals are distressed.  Conventional lenders will not provide financing to acquire them or Rehab.  The exception is an FHA loan, but, you must occupy the property for a minimum of one year.

I am interested to see how you are accomplishing this.

Daniel Gonzalez · Answer

Hi CB,

If you plan on doing a BRRRR you should run the numbers twice, before the refi and after. You will be surprised by the completely different numbers. As others have mentioned, SFRs the tenant usually pays for all utilities minus the PITI. Also keep a look at for SFRs with bonus rooms that can be turned into an extra bedroom. That usually will increase your potential rent and in the end the value of the property for the refi.

Hope this helps and good luck

Bob Okenwa · Answer

Hi CB,

It looks like your P&I is off. I'm getting $191.97 for the monthly payment on a 40k loan for 30 years. If I'm missing something here, let me know. Also, I personally wouldn't count accounting towards this property as it is an overall business cost and not necessarily tied to one property, unless that is what you are being charged a month for each property. Try running your P&I again through this calculator to make sure you have it right. https://usmortgagecalculator.org/

Thomas S. · Answer

You are dealing with the reality that SFHs are not a good investment for cash flow in many areas. Concentrate on investing in multi units to maximise your returns.

If you are not sure you can get $1200 in rent do you have any idea at all as to whether the rest of your numbers are accurate or are you simply assuming. Did you research the numbers or simply make ball park guesses. $100/month one way or the other makes all the difference. Not being sure of the rent indicates you may not know your market

Jerry W. · Answer

@CB Browning, keep in mind that real estate is local.  What is common in my area might not be common in your area.  First, when you finance the entire purchase and renovation you change what the cash flow would normally be.  So trying to compare your property to someone who pays 20% down payment can be misleading.  Your cash flow will be lower.

Next you have expenses that I do not use when calculating cash flow.  I don't have a line item for landscaping, water and sewer, and accounting.  Your taxes seem pretty high, but that happens in some areas.  On the other hand I would add at least $50, but probably $70 to my monthly repair line item.  I use 5% for cap ex, but 10% for repairs.  It looks like you are using 8% for vacancy, the same that I use, but I bet my actual rate is half of that or even less.  If you can renovate these fairly quickly and the demand is decent, I would bite on properties like this.  You basically meet the 50% rule, but more importantly with a $1200 monthly rent you can operate more safely than a monthly rent of $600 on a $30K house.  The cost of water heaters and roofs are the same or very close for a $30K house as a $60K house.

More importantly can you replicate this and get several of them doing this?

I would buy houses like this all day long in my area if I could.  I am thrilled to buy a $70K house that rents for $800.

Cash flow calculations. Am I doing this correctly?

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