What Do You Think About These Numbers

[Wade G.]

I am tired of buying properties that basically need to be gutted. I am a landlord that has in the past bought SF properties like a rehabber would but instead of selling them I keep them as rentals. This is sort of a long post with alot of numbers but I would like to get some other people's views on this strategy and I appreciate anyone that takes the time to examine the details.

-Buy at house from a motivated seller for 100k that would retail for about 115k.
-20k down
-4k closing cost
-4k some repairs before rent ready
-30 year loan at 5%
-so all in for 28k
-10 year expected hold time

-Rent for $1175
-taxes $290 mo
-insurance $120 mo
-mortgage payment $430 mo
-total is $840 mo PITI

-above numbers give $335 mo cash flow
-after 50% rule = 157 mo but I adjust this up a little because I don't use a PM so I figure $195 mo is acceptable (maybe!).

195 x 12 = $2340 yr cash flow
$2340/28000 (cash out of pocket) = 8% return per year over the 10 year hold time

8% is not worth it to me considering all the hassle

If I could add on appreciation (which I know we can't depend on) it would be better. So how about adding in 1% a year, so lets figure 10k over ten years (for ease lets just say 1k per yr).

Now if I sell in ten years I figure my profits from cash flow (23,400) and appreciation (10k) and the 15k in equity when I bought comes out to ~48k.
-That 48k spread over 10 years is $4800 yr
-4800/28000 (cash out of pocket) = 17% return each year over ten years. That is not so bad.

I did not include mortgage pay down over the ten year period because I recognize there will be selling cost and repair cost upon sale. So I figure the 15k in mortgage paydown abolishes itself upon sale. Any tax advantages I do not consider and actually the 17% may be less due to capital gains taxes and depreciation recapture upon sale. I also am not considering rent increases or insurance or tax increases for this example. That would just make it too complicated. I understand that less out of pocket would raise my returns but thats for a different scenario.

So in the above scenario am I breaking any accounting laws, or formulas, or is there something I am missing. I have no accounting skills, suck at math, and am in general not a very smart person so I figured it would be good to post this and see what others think.

[Justin Trudell]

Being new to this, I'm doing a ton of modeling and calculations, etc. If you are looking for positive cash flow, don't try to convince yourelf you're getting 17% by adding in appreciation. Your numbers give you ~8% (using 50% rule). I suggest making your decision on that number and if that's acceptable, then the appreciation is just icing on the cake. I'm trying to be as conservative as possible in my modeling so that any deviation from model is (hopefully) positive. You can do a lot worse with your 28k in capital than 8%...but you may also be able to do better with a different deal. And I'm almost positive I haven't said anything you haven't heard before.