Need help with number crunching formula.

[Michael Randle]

Hello BP,

I need some help with numbers and my thought process. I have owned 2 investment properties, but those where kind of accidental and hobbies rather than a business. Something fun and interesting to make some side cash.

Now I am transitioning into a more serious approach and I am in the process of  crunching massive amounts of numbers and I  wanted to get input on my process and let some more eyes look over the numbers and see where my logic is breaking down.

I am using a formula of 20% down, 4.875% Interest 30 year fixed, 10% CapEx, Repairs, VacRate, PropMgT. All cash flow is diverted to a 6 month reserve at which time everything extra then comes to me as cash flow.

First, what is wrong with the above approach? I know I can adjust some of the CapEx, repairs or Vac rate up or down if needed, but 10% is generally a good rule of thumb for number crunching.

Second, do any other investors have a 6 month reserve fund that they stop funding or do you just constantly roll in your CapEx and Repairs accounts?

Third, and I suspect it is because of the MLS, why am I unable to find any sort of deal using the formula? It seems like off market deals are the only deals that will make sense to me.

Thanks!

[Chad Kastel]

@Michael Randle.    Cap Ex is going to be subjective.  Depends on the age of the property and what repairs it needs done.   I've been using 5% but I don't think 10% is wrong.   Vacancy rate can be determined using the data that craig's list or zillow presents.  You can also create "dummy" adds on craigs list to see if the price point you are advertising for rent will actually be attainable, you can base your vacancy based on that and the type of tenant you may obtain.  I've been using between 5-10% depending on the neighborhood.

6 months is conservative. Three month is the supposed minimum.  The more properties you have can push the number down, if you had 100 properties maybe 4.5 months on average is fine.   For now 6 months probably gives you the most leeway to make mistakes and for bad things to happen (and for you to worry a lot less).

In terms of the MLS, where are you living? I know in Florida I could not find cash flowing deals using a similar Florida, But I've been able to use the MLS in other states.