Estimating Cash flow

[Asher Anthes]

Getting ready to buy my second property, and I want to do a much better job estimating what my monthly cash flow will be. So, first what is the best way to get an accurate measure of what the property will rent for? Zillow's rent zestimate? how accurate is this? Is there a good website that shows what nearby homes are renting for?

As far as costs, what is a good number to use for monthly repair costs? I've heard to use rent / 2 as your expense model. But this doesn't seem to be a very accurate way of calculating the profitability of rental properties, especially because you can get a pretty good idea of what PITI will be before you close a deal. What is a conservative routine repair estimate, and what is a good vacancy factor?

Finally, how much should I take into consideration the value appreciation vs cash flow potential. Obviously my long term goal is to build net worth as high as possible, but short term cash flow is essential to getting going.

Thanks for the help guys!

[Jon Holdman]

For estimating rents, rentometer is a reasonable place to start. I find it tends to be a bit high, but its in the ballpark. Drive the area. Call the for rent signs. Find out the rents, but also deposits, property features, and get a feel for the landlord or property manager. Check craigslist. Watch turnover. If properties turn quickly, there's strong demand. If a property lingers and other turn, its overpriced. Figure out why. If everything lingers, there's not much demand.

For any short period of time, the 50% rule does overestimate expenses. Its those big, infrequent ones that kill your return if you're unprepared.

Don't try slicing the expense pie too thinly. Its easy to break it down into a long list of numbers, then squeeze each one just a little. You end up at 30% for expenses, and you're kidding yourself. Just use 50% for expenses, capital and vacancy and you'll be OK.

50% does include a BIG slice for a PM. Not just the 10% of collected rents they usually charge. But also the half a months rent they're going to charge you for doing a lease. If you turn over once a year with those numbers you're looking at 14% for a PM. On a $1000 rental, that's $1680 a year. Do the PM yourself and put that big chunk of change in your own pocket. I estimate you will spend about 16 hours per year per property doing PM. So that's over $100 an hour you're paying for a PM.