Buy and hold Rental SFR numbers

[Franky Juwana]

I'm in Dilemma in figuring out the number on couple properties that I about to submit an offer. 

Prop1: 

Asking price 170k

I'm submitting offer for 160k

Dp : 25%

tax  4688/year

HOA 350/annually

Ins 80/month

flood ins: 40/month

Rental is $1495/month,  it can go up max 10% in 3 yrs lease, so i'm thinking to have 1545/month cuz the lease is due in Feb 2019. 

Tenant will take care all the maintenance (Mowing lawn), Landlord is only responsible for Tax and insurance

But when I add Vacancy, Repair & maintenance, cap-ex, and management fees,  never in my life I see cash flow positive, even when the rent is 1% or 1.5% from the asking price. 

I'm not sure if I could have positive cash flow without putting huge down, even then my cash on cash will be very low. 

Prop 2

asking price $211.500

thinkin to submit offer 200k

the amount of fixing isnt that much, just paint and cosmetic ($5000)

Dp : 25%

tax 5668/year

HOA 250/annually

Ins 80/month

flood ins: 40/month

Rental is approx $1750/month, 

I put 5% on Vacancy, Cap Ex, repair and 7% for prop mangmt

Which came out negative for cash flow and cash on cash

So, do I have to low ball every offer, which I've done, but because it is competitive market, of course some of the seller didnt even bother to counter. 

This is out of state investment , because at my backyard the price is double and some triple, it just doesnt make any sense. 

Any advice, from y'all experience investor would be appreciated, just to make sure I didnt miss anything. 

Thank you

[Patrick Britton]

I'm always amazed and disappointed how investors from one area of the country say something can't be done elsewhere.  What's possible in St. Louis or Houston is going to be very different than Miami, Seattle or SF.  And I am perplexed why investors care so much about this 1% rule.  Firstly, it's not a rule, it's a guideline.  Second, it doesn't apply in most areas of the country.  Third, how did the rule creator get to 1%?  Why is it not 0.8%, 1.2%?  Why is it not some other function?  

I think the answer is to simplify things so even the most novice investor "believes" they know what they are doing.  But this simplification has done more harm than good.  How many deals have people not done because of it?  There really needs to be a caveat that 1% is applicable to this area, whereas 0.5% is appropriate for that area.  

And now onto the vacancy, repairs, cap-ex and maintenance allocations.  People seem to allocate monies to those based on the rent.  This is just stupid.  Repairs and maintenance depend on the property's value.  Cap-ex depends on a lot of things that are pretty much impossible to predict.  And while it's not the worst idea to allocate an amount to vacancy, don't let that arbitrary number dissuade you from buying a decent property.  And this brings me to the final point, relativity.

Returns are relative and should be with risk in mind.  And just because something has HAD a high return in the past is no guarantee of future results.  The concept that higher rewards require greater risk is much closer to a rule than the 1% rule.  So yeah, some turnkeys providers are able to get 14%, just double check what's included in that calculation.  

When looking at cashflow you really need to figure out what sort of area you're in.  Is it appreciation only like Seattle or San Francisco?  Is it cashflow only like Cleveland, Memphis, Indy, etc?  Or is it a blend like much of Texas, parts of Washington, Illinois, etc?  After all, maybe breaking even in a highly appreciating market is acceptable?  Just check to see if there are many independent reasons for that growth and not just a single industry.  

@Franky Juwana ascertain what sort of market you are in.  Then, when deciding between two properties (assuming they are your first) I would suggest buying the less risky of the two which also means considering the down payment.  If two properties are identical on paper but one requires a larger down payment, does that not mean you have more money at risk?  

yup.  

Until you've got 4 - 5 rentals under your belt I'd lean towards something that has a little less total risk.  This means cheap, cashflow-rich turnkey properties.