Investment Analysis Advice

[Fady Riad]

Hi all, newbie investor here. I've done quite a bit of reading and have been evaluating properties in the market I want to get started in for a bit. I really want to get started with my first property, but I am having a hard time finding good deals. I'm wondering if it's because my calculations are unrealistic or if it's because I'm using the wrong approach.

First let me tell you my calculations. Basically, I want a property that will outperform putting my money into the stock market. Problem is that with stock market investments you're paying capital gains tax, whereas with real estate you are paying income tax and those tend to be higher. So I've run my own numbers and made my own spreadsheet to do calculations for me that I use to screen properties. It calculates all the regular stuff like NOI, cap rate, cash on cash return, and all these things but I really don't care about those because I think they are misleading. My spreadsheet also calculates 2 other important numbers. First, IRR (if you want to outperform another investment...the stock market in my case...IRR is what matters). Second, it calculates the number of years it will take for my investment to make more for me from rent than if I put the down payment in the stock market. I've set the return on stocks as 7%, which I think is a relatively good estimate given the Dow Jones average performance since inception. I consider breaking past stock market performance in less than 15 years a win.

So here's the problem. In order to achieve those numbers, I need a property where the monthly rent is at least 2% of the total purchase price! This is obviously based on a bunch of assumptions and I can adjust for these once I know the actual operating expenses but I made reasonable assumptions that are used elsewhere on these forums. Anyway, finding properties like this is just really hard and when they can be found they are in class C or below neighborhoods.

So my question is, am I missing something (maybe I'm making a mistake with my understanding of the taxes involved and I don't need a deal this good to be profitable) or am I just not looking in the right places for deals? I'm using the simple methods like redfin and realtor.com, just don't have the time right now to do some of the marketing techniques explained elsewhere.

Thank you for your insights!

[Joe Facenda]

I like the analysis of  @Aaron Zimmerman.  

But there is nothing like actually doing a deal and getting one on the books.   We can work the paper all we want but there comes a time when you need to take the plunge.  

In my opinion, the first deal does not need to be great or even very good - just good. Make sure it cash flows and don't worry about all of the other metrics - IRR, tax analysis etc. Just make sure it cash flows and is in an area you like.

This first one is sort of an experiment to see if you actually like being a landlord.  You may not.  On the other hand, you may find it very fulfilling and want to do another.  That second deal should be better than the first and looked at more rigorously.

In any event, projecting future stock market gains or housing appreciation or rent increases should not be the critical part of the analysis.  Does it cash flow now?  Does it cash flow enough to make it worthwhile?  Is the neighborhood stable so your investment will hold value with the rest of the market?  And so on.

Last thought - want to eliminate concerns about taxes both current income and future capital gains? Buy it in your IRA but that is a discussion for another day.