Newbie - Test my Math?

[Ryan Jones]

Let me just say - thank you in advance!

I've been looking at various places the past few months for rental property that would be a good long-term cash flow investment. I've found a place that I myself would enjoy living in which is a rule I'm using to judge the neighborhood and property. When I run the numbers it seems ~break even. Am I doing this right? Considering everything or missing something?

Additional info: Nice area, unique "condo" but standalone/no shared walls with a fenced yard near the green area and pool. Has been rented out for 6 straight years by a single tenant but they have moved out and the owner has decided to sell. Surrounding neighborhood homes (not condos) of same 3 bed/2 bath and size (1948 sqft) are in the 250-310k range.

Original list price: 239k; Current list price: 225k (110 days on market); Possible purchase price: 210k but let's use 220k for the numbers.

Purchase: 220k

20% conventional loan, down payment: $44k + closing costs = $48,400

Monthly principle & interest payment: $840

Property taxes: $250

HOA: $185 - covers all exterior, pool, and landscaping.

Insurance: $60

Total monthly expenses: $1,335

Estimated rent is $1,600 (maybe higher). A similar unit was listed in 2018 for $1,500/month and is off the market. I assume they got the $1,500 back then.

Cash flow of $265/month - assuming no vacancy and no other expenses.

Annual vacancy of 1 month = $128 / month

Leaving cash flow at $137 before any expenses. Or $1,644 / year ... 3.4% return.

That leaves only 8.5% flex room to $0 cash flow ($137 / $1,600 monthly rent = 8.5%)! Is that reasonable?

Also, as a newbie who owns my current home I know rents will go up but mortgages won't. How do you evaluate the long-term? Maybe it doesn't look so great in year 1 (see above) but what about year 4.. 5... 10...? Why don't investors talk more about that?

Thank you for your help and thoughts!

[Jonathan Bombaci]

Looks pretty good but yeah you can run it through a rental calculator to check it. I think BP gives you 5 free ones. Their calculators are great but there are a few free ones out there as well. 

It looks like you're missing the following expenses:

- Management - typically 5-10% of rent -I know you're self managing but What if you needed to have someone manage it for you at some point?

- Maintenance - typically 5-10% of rents - this is routine maintenance for a condo in good shape maybe this is 3-5% but eventually you'll need to do some things to the unit to keep it nice.

- Capital Ex - typically 5-10% - this is large stuff (roof, siding, furnace, etc), since a condo this could be 3-5% as well but eventually you'll need to replace or fix major systems and its good to build a cap ex account over time. 

These will probably get you down to break even which isn't ideal but you will be gaining equity over time and to your point income will probably increase (I use 3% per year) over time and that will add up. 

Your first deal probably won't make you rich but a break even deal is better than NEVER doing a first deal. If you're comfortable with it then go with it! You'll learn a ton and it'll kickoff your real estate investing journey. Best of luck!