What do you think?

Question

Hi all,

I'm new here and new to renting properties. I've been trying to research my area as much as possible, but I still think I need some help from the experienced.

There is a particular property, priced at $94,000 (I'd offer about 90,000) I'm interested in. It's a 2-unit, good area, and appears to be in pretty good condition. Gross income for the property is $11,700 or $975 per month. Expenses (water and insurance) run $1,420 per year (or $118 per month). The mortage is expected to be around $568 per month.

I read another post where a member said a formula of rent time one hundred is a good indicator. If that's the case, we're well within (975 x 100 = 97,500).

Based on those numbers, would you take up the property? It's in a fairly quiet residential area. (I also tried the analysis tool on the site, and the numbers looked good: gross multiplier at 7.69; cap rate at 10.39; net operating income at 9,348.00; debt coverage ratio of 1.44 at year 1; and pretty good equity).

I really appreciate the help and insight. I also apologize for asking already replied-to questions. You can also e-mail me.

Thank you!
Blake

Judy Ryon · Answer

Thanks Biggerpro.  Nice calculator.  Nice reports generated too!

Judy Ryon · Answer

Parrotletlover, where did you come up with your name?  :wink:

There is a great little rental calculator tool at:

N/A N/A · Answer

Thanks Joshua!! I used that tool already. It was the one that showed me some pretty good numbers.

Joshua Dorkin · Answer

There is a phenominal FREE rental property analysis tool (calculator) here at BiggerPockets:
http://www.biggerpockets.com/recritic.html

BTW - It allows you to enter all the expenses and is quite comprehensive.

Michael Rossi · Answer

Parrotletlover,

Most rental calculator tools are very inaccurate because they don't include all of the expenses you will experience in the real world.  Without getting too long winded, to calculate cash flow in the real world, subtract the mortgage payment (P & I) from 1/2 of the rent.  Anything left over is your cash flow.

Mike

N/A N/A · Answer

Thanks so much for the tool! Using it now.

LOL, my parrotlet, Lily, is my inspiration for my username.  :D

N/A N/A · Answer

Thanks Mike. That is the thing I need to know. I don't know how much to allott for advertising, maintenance, etc. etc. I've never done this before. Seeing as my company would manage the property, we wouldn't pay a management company, except for credit reports or collections.

If someone had an idea on how much these things cost on average... I'd have something to go by.

The owner of the property only pays water and the insurance (and taxes). All other utilities are paid by the renters. 2% of the purchase price would run $1800 per month, or $900 per month per unit. I know there is no way I'd be able to get that in any property.

Thanks again for the help Mike.

Michael Rossi · Answer

Parrotletlover,

This property is a negative cash flow loser.  I would not buy it.

Throughout the United States, operating expenses run 45% to 50% of the gross rents.  In this case, gross rents are $975.  Therefore, your operating expenses are about $487, leaving $488 to pay the mortgage and for any profit (positive cash flow).  Your mortgage payment is $568, meaning that you would have a negative cash flow of $80 per month.  OUCH!

Operating expenses consist of FAR more than water and insurance.  They also include management, maintenance, advertising, entity maintenance, vacancy allowance, captial expenses (not technically operating expenses), utilities paid by owner, office supplies, evictions, legal fees, court costs, damage done by tenants, lawsuits, etc, etc, etc.  (I could go on and on).

Failing to understand the realities of the rental property business is the number one reason that new landlords fail (due to lack of cash flow).  I would recommend doing some serious studying before you buy anything.

Also, that 1% rule does not work.  If you want to make about $100 per month per unit, you will typically need to have monthly gross rents of about 2% of your cost of the property (purchase price + rehab).

Good Luck,

Mike

N/A N/A · Answer

I included all of the numbers I have at the time. I'm planning on looking more into it, but I'm not exactly sure what maintenance or upkeep will cost, etc. Thanks for the info, though - I'll see what other numbers the realtor can give me and see how that affects it.

Thanks again

Minna Reid · Answer

Have you considered vacancy, taxes, PMI, upkeep, any other expenses outside of water and insurance? 211 after ALL expenses sounds like a decent deal with that price tag.