1-2% rule, got 1.23% but it still looks like a bad deal

[Tzook Bar Noy]

I have a deal that on the bottom line will cost: 85K

rent is 1050$ monthly,

a year = 12600

and expenses:

- manegement - 10% rent = 1260

- insurance = 800

- tax = 1300

- fixes 10% = 1260

- vacancy 10% = 1260

total income = 12600

total expenses = 5880

yearly profit = 6720

ROI cash only = 7.9%

** this home is on Decatur area in Georgia

Is my calculations right? it looks good at first, but super lower roi then expected...

[Joe Splitrock]

@Tzook Bar Noy the problem with your ROI calculation is that it has nothing to do with the 1-2% rule. That is because it is all about income and expense, which varies. Your low ROI stems from the fact this is an all cash deal. Run the numbers if you were to finance the property with 20% down ($17K).

$68K for 30 years at 5% yields a payment of $365 per month or $4380 per year

So your net income is $1500, which would be an ROI of 8.8% based on $17K down payment.

I would also challenge your insurance number as being too high. I pay half that much for a property worth twice as much. Assuming your actual insurance was $400, then it changes to this:

$1900 with an ROI of 11.1% based on $17K down payment.

You can see how a small change in income will affect your ROI. In another situation if you self manage and have no vacancy, then your ROI increases to 26%.

Financing not only means higher ROI, but also leaves money for down payments on several other properties. You can buy four properties instead of one and your net income increases 4X.