low cap rate, 50% rule = negative cashflow?

[Stephen M.]

Hi BP community,

 I'm a new potential real estate investor in the Seattle area.  I happened upon the BiggerPockets podcast and found it to be very informative and am since hooked.  The discussion is fantastic and very engaging.  

I've since read a couple of books from the BP recommended list and have done some analyses of multifamily housing in my general area, including some analyses of recently sold properties. I am considering investing for cash flow primarily, and building equity secondarily. From my readings and discussion with a realtor, the cap rate in my area is in the 4-6% range. In my calculations I used the 50% expense rule and assumed the information on the MLS and various realty websites are pro forma, rosy, and best case scenarios. With this said, all that I have seen and calculated result in negative cash flow.

The example is below from a recently sold property, with financials from the realtor website, and my calculations:

Duplex

Sold price: $385K

With 20% down payment: $77K

Loan amount: $308K

With conventional 30 year 4% fixed loan, yields a monthly mortgage payment of $1470/month

Combined monthly rent (from website): $2350/month; $28,200/annual

50% expense rule : $14,100/annual

Thus, net operating income (NOI) $14,100/annualized; monthly is $1175

capitalization rate : NOI/purchase price : 14,100/385,000=3.7%

cashflow: monthly NOI $1175- monthly mortgage payment (1470) =-$295

I understand you can look at comparative rents in the area to see if the rent is below market value and do some forced appreciation.  However, for a new investor and landlord, it would seem a leap for me to think I can do better, or at least risk a negative cash flow monthly for this gamble.  

Are buyers hoping for appreciation to bail them out? Am I wrong in my calculations?

Thanks,

Steve