Is this newbie using the rental property calculator wrong?

Question

Okay, so I've looked at 3 properties right now in the Salt Lake City area. All of them have produced a negative CoC ROI of about -5 to about -9% on the rental property calculator here. Am I doing something wrong? Maybe I'm calculating the gross monthly income all wrong because I'm basically using Rentometer and taking the average rent from that area. I mean Cottonwood Heights is supposed to be a decent area. How common is it to get a negative Coc ROI from the calculator. I'd really appreciate some advice on this.

Tim Herman · Answer

@Edward Agadjanian Certain areas do not cash flow. A quick way to see if it will cash flow use the 1% rule. Monthly rent divided by 1%. $1500/.01=$150000 max purchase price. I have to disagree with @Rachel Stewart, your  expenses are low. Vacancy of 5% is your tenant staying an average of 20 months. 5/100=1/20. I use 8% or 1/12. My capex budget includes but not limited too: roof 25 life span, floors 10 year life span, appliances and hot water heater 12 year life span, hvac 20 year life span, bath and kitchen remodel 20 year life span, etc. Assume 1500 sf of flooring, Put it in new when you buy. My area it is $6 sf to replace. 1500 sf*$6=$9000/10 year life span/12 months in a year= $75 per month for 1 item that was brand new. You can't replace anything else in my capex budget. I use 10%.

Alexander Bacon · Answer

@Edward Agadjanian Management prices are going to be the same. It doesn't matter if you live next door to your rental or across the country. It also doesn't matter if you're extremely hands on or not at all. To the management company, you will hire them, they will likely take about 8-10% of your monthly rent as payment, and they will do their job (hopefully). I know that isn't a great response but I don't want you to be confused or misguided thinking that you will be able to work a better percentage with the management company just because you are close in proximity and willing to help out. If you just need an extra hand every once in a while, I would manage the property yourself. It is not as difficult as people sometimes make it out to be. Also, if you do need help somewhat infrequently, you can easily hire someone individually for part time which will be cheaper than management and also has no contract. Or, you could ask a family member or a friend. Management companies are honestly not necessary until you have multiple units and I am a strong believer that you should manage your own first few properties because then you will know and understand what a good vs bad management company is. Taking care of one or two rentals is very manageable. Just go replace the air filter once a quarter to check in on it and if any maintenance comes up, you can call the plumber, electrician, handyman, etc. No need to pay someone 10% of your rental income to do that.

Edward Agadjanian · Answer

Or maybe I'm not plugging in the information from the actual property, right, especially when it comes to the income I can get from the property in addition to just the rent I charge? I'm looking at properties in the Midvale/Cottonwood Heights/Sandy area. The 5 or so I've calculated so far yielded negative CoC ROI. Does that just indicate a bad market for real estate?

Kenneth Garrett · Answer

@Edward Agadjanian

Your rental income is just not enough to support the purchase price.  The P&I eats up the majority of the income $1137 of $1500 that’s almost 76%.  Keep looking for better deals.  You might need to look at a BRRRR type project in that particular market to get the numbers to work.

Edward Agadjanian · Answer

Thanks for the feedback, Rachel. Yeah, a lot of these are rough estimates based on average prices in Utah. I was watching a BiggerPockets webinar and kind of just applying the same percentages to areas that Brandon was applying. What are your recommended percentages for those fields (assuming the property doesn't require any significant repairs)?

As for management, I would like my first property to be close to where I live so I don't have to spend so much on management, but let's say I have a full-time job, and I don't want to have to manage it all the time, what do you think is a reasonable management percentage to apply in that case?

Rachel Stewart · Answer

@Edward Agadjanian

It doesn’t look like you’re using it wrong, just a bad deal.

See how your expenses are greater than your income? That’s how you get a negative return. Either your mortgage has to go down (more down payment or pay significantly less) or other expenses, but those look pretty good to me. OR you need to get more rent.

The only thing I can see is you’ve got 20% for capex, management, maintenance and vacancy all together, that might be a little high if it’s a newer SFR. Are you going to manage yourself or pay a management company.

I think we need more information but with that you’ve got here, sorry to say it just looks like a bad deal.

Edward Agadjanian · Answer

Can you try it again? Maybe report-sharing wasn't enabled when I linked it. Thanks!

Wyatt Franta · Answer

Hi Ed,

The link you attached previously doesn't work. If you could post it again, I'd be happy to take a look for you and see what's going on.

Edward Agadjanian · Answer

No, nothing? Alright then...

Edward Agadjanian · Answer

Nope, this is what it looks like:  https://www.biggerpockets.com...

Is this newbie using the rental property calculator wrong?

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