What am I missing in this ROI?

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@Ben_Leybovich No worries, to be sure. A little give-and-take on the details helps us all focus -- and it doesn't change the fact that we're very much on the same page here -- helping our fellow BPers make the best deals they can. Look forward to your post -- I'm sure it will be great.

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A qualified "however" to Ben's observations. Theoretically, less money down will increase your cash-on-cash return. However, the lower down payment means you have higher debt service on your larger mortgage and generally also means that you'll get less favorable terms on that financing (iow, if you have little or no skin in the game, you are a high-risk borrower -- perhaps higher rate, more points, shorter term?). All of this translates into less cash flow. You might have a better cash-on-cash with a smaller down payment, but not necessarily. Also, I must respectfully disagree that a more robust analysis is too academic (although, since I teach this stuff in grad school it would be fair to say that my take on this is, by definition, too academic). I feel that cash-on-cash return can be a useful metric for the first year of a property's operation but not beyond. It does not take into account the time value of money, the timing or amount of potential future cash flows, or -- most important -- the timing and proceeds from the ultimate sale of the property. IRR (and MIRR) give a more complete picture. I believe that an investor should take all of these elements into consideration before making a decision. Just my two cents.

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Frank Gallinelli I am in complete agreement with you. 100% results in higher cost of money - naturally. But, this is looking at glass half empty. What if I said that the increased cost of money forces us to only consider above-avarage deals in turms of NOI... I am fearful that you will not be on my side as it comes to the blog post I wrote on the subject which is coming out tomorrow...:)

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You generally won't achieve 2% on houses north of $50,000 except in some war zones and distressed regions. 50% guide simply states that 50% of your gross rents will go to expenses over the life of the rental, of the remaining 50% take out debt service then you have your income. Rent $1600, means $800 a month will be eaten up in expenses, capital, maintenance, insurance, legal, accounting, utilities etc. If the area isn't too bad (no bars over windows, you feel safe walking there) it seems pretty decent to me, then again I am comparing that to whatever you can get in SoCal right now. Andrew

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Will Wiest Vacancy and repairs will eat up 15%-20% of your gross - I promise. I will qualify Jon Holdman: you won't get a conventional loan at 100%, but it can be done. Your analysis doen't take into consideration the cash on cash return, which is the most pertinent. If you put 30k down, then what you really want to know is how quickly you will be recovering this cash: NOI - Cost of Money = Cash Flow CF / Cash Investment = Cash on Cash A lot of analysis that we do are important, but rather academic. COC is real money in the bank. Hint, the less you put down, the higher COC you'll see. P.S. I wrote an article for the BP blog about this very thing. Watch for it tomorrow. Good luck

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Thank you for your comments and suggestions. I do understand the several expenses besides taxes and insurance but how do you put a dollar amount on these (maintenance, repairs, evictions, management, vacancy, etc.)? I am not truly calculating ROI, more return on rents. I was calculating based on if my monthly total going out of my pocket was 50% or less than what I was getting in from the investment, that there was room in case these other expenses arise. That is also why in the equation I listed 0%. I am going to manage it myself. And have 2 sets of tenants already lined up to pay $1700 total rent/month. So I will use a more realistic scenario with this property: Purchase Price 114,000 25% Down ($28,500) Loan Amount = 85,500 Interest 4% Premium + interest + tax + insurance = $8420.28/yr. Rents = $20400/yr. So the 50% and 2% rule – the 50% rule says basically over the long term, a rental will average 50% expenses. The 2% rule basically says you want to generate a monthly rent of 2% of the purchase price. Correct? 50% rule – How do I calculate this correctly in this scenario? 2% rule – 114,000 *.02 = $2280 So my example here would not make 2% monthly rents of the purchase price.

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Hua Lin gave a pretty good analysis. The 60% number used for expenses might be high but you should use at least 50%. You are leaving out Repairs vacancy rate turnover costs; like inspections, advertising, rental commissions, evictions etc. Management Registrations and licenses. reserves for capital improvements and major repairs Your calculation of ROI is wrong. If you invest $0 your ROI is infinite. I think what you calculated was return on rents - not a particularly useful number. Don't forget management Even if you manage the property yourself you need to include management as an expense to calculate ROI. The money you make for managing the property is not a return on the investment of your money. It is the return on your investment of time and labor. If the only money you make from a property you manage yourself is equal to what you would make managing someone else' property your return on investment is $0 (OK your cash on cash return is $0) If you search here for the 2% rule or the 50% rule you will find threads that will help you evaluate expenses more effectively. Good Luck - Ned

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You're missing two things: 1) There are LOTS of expenses besides taxes and insurance. 2) You won't get a zero down loan. $1600 in gross scheduled rents => $800 a month for all expenses, capital and vacancy. 80% LTV on 104,000 is a $83,200 loan. At 4% for 30 years that a P&I of $397.21. That leaves you $402.79 a month in cash flow. Assuming 100% financing, your P&I is $496.51, leaving you $303.49 a month. If you choose to self manage, you can earn the property manager's slice for yourself.

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I am a newbie, here is my input through these days lerning.Hope that would help. tax is high,so we assume 60% gross income goes into expense. NOI=19,200*40%=7,680 Annual Cash flow=NOI-debit sevice(PI)=7,680-5,958=1,722 cap rate=7,680/104,000=7.4%