Numbers not working?

[Cory Lucas]

Hey BP, curious if anyone has thoughts on the BP calculator with regards to the Rental Property analysis vs the 50% rule? I've been using the rental property analysis calculator and when I plug the expense numbers in and calculate it out I'm almost always cashflow negative, whereas if I use the 50% rule I'm usually cashflow positive. 

So my question to you all is, am I plugging in numbers that just won't work or is the 50% rule a good rule of thumb to go by and I should be ok on a deal if the 50% rule works out? Thanks in advance, the expense numbers I usually plug in is $75 for water, $70 for insurance, 10% vacancy, 10% repairs/maintenance, 10% CapEx, 8% Property Management, then of course Mortgage payment and Taxes

Thanks for taking the time to read and respond if you do. Sorry if too vague, happy to answer any and all questions, didn't want to make it too long

[Reginald Ross]

@Cory Lucas

I’m somewhat more analytical with my calculations and try to use very accurate numbers to plug into an income statement to analyze cash flow. Here’s what I do for each line item:

GROSS RENT: Ask a realtor to pull rent comps or get you’re hands on the actual rents paid for the previous 2-3 years.

VACANCY: Always use conservative numbers. My rental geography has an average vacancy rate of 7-8%. I use 10% when vetting a new place. Vacancy has a hidden cost too...turnover costs.

PROPERTY MANAGEMENT: if you have a property manager, you already know this number. If not, call around and ask for their schedule of fees. They usually nickel and dime owners but will erode your bottom line. 10% of gross rent, new tenant fees and re-lease fees are usually part of that. Figure out who keeps pet fees and late fees too.

INSURANCE: ask several insurance providers to quote you on the property.

PROPERTY TAXES: you can look up current taxes on your local county’s web portal most of the time. If it’s a current rental, use that number. If it’s owner occupied, double it for your calculations because they likely have homestead exemption.

CAPEX/OPEX/REPAIRS: this is usually the trickiest one to forecast though the age of the home and condition of major components (roof, HVAC, plumbing, electrical, etc) can influence this number tremendously. If you've done your due diligence and tenants are properly screened, there is no reason that this number should be >10% of gross rents.

FINANCING: an obvious element to consider. Origination fees, points, APR, etc should all be factored in to the calcs.

MISC: Don't forget transaction costs. You'll like have to pay for an inspection, an appraisal and title work. These "hidden" or forgotten costs can easily several % to the purchase price. Also, stay away from flood zones and HOA's.

WORKING CAPITAL: Keep a nice cushion to absorb unexpected costs. If you’re conservative, keep 6 months worth of debt service payments.

5-YEAR FORECAST: after you’ve crunched all the numbers, extrapolate out cash flow for the next five years. Assume modest rent increases and project 5% increases in tax and insurance each year.

If the numbers make sense after all that scrutiny, you’ve likely got a good property.

Typically NPV/IRR hits a peak around the 4-5 year mark where it usually makes sense to sell or refinance to increase your ROE. If that's part of your strategy, don't forget to include seller costs or refi fees.

I realize this is a huge departure from using a 50% rule for back of the envelope calculations but if you spend some time putting together a robust spreadsheet, you can use it over and over again. Plugging in numbers is easy. Trying to unload a poorly performing property is not.