Rental Calculator too harsh?

[Adam Webb]

So I find that when I evaluate properties according to the BiggerPockets method, including CapEx monthly, including 5% of gross rents for repairs and maintanence, including 10% for property managers, etc, NO property passes any test. 1% rule, 50% rule, or even being positive cash flow. Should I be viewing this process of evaluation as worst case scenario and run a good, better, best analysis and move forward if it makes sense on the better?

[Daniel Dietz]

@Adam Webb, 

I think it is a GREAT tool, but there IS a lot of 'subjectiveness' that goes into it too. To me, especially if you 'expand' that categories it really makes one think of all the small miscellaneous things you might forget otherwise. 

A couple of things I WISH it had, if you are listening @Brandon Turner :-), are the ability to export to excel so we can do studies covering ALL years and a 'depreciation feature' like the Investment Property Calculator over at Dinkytown.com. 

As to your questions, it *might* be that your market like many around the country are just truly NOT profitable when ALL costs are considered. Will you have big cap-ex EVERY year? No. Same with repairs, etc.... With that said I just recently had about 12K of capex on a duplex unexpectedly the first year we owned it. 

You can somewhat 'play' with that scenario by upping your appreciation input, but to me that is gambling if you push it too high. 

A good rule of thumb to me is this; as a ballpark can you get 1% of purchase price (including any needed capex) per month as a minimum in rent? That seems to be the 'break even for us'. We factor in about 2.5% of purchase price for yearly taxes, 5% vacancy (ours is closer to 2%) 15% of rents for repairs and capex combined, we self manage so no PM, and use 2% for rent growth (ours is about 4%) and 2% for property value growth (ours has averaged about 3.75% in our area over 30 years). 

If we hired PM we would need about 1.25% of  purchase price per month to cover the extra expenses. The reason we use more conservative values than our actuals is that we would rather be pleasantly surprised with our returns than having to come up with cash out of pocket to make ends meet over time. 

Some great advice I read here a long time ago is 'dont make the deal fit'. 

Dan Dietz