Review closed deal numbers

[Jason A.]

This is my first post. I've read through a lot of this site but wanted some validation that I was calculating the numbers correctly. I bought this property as a buy and hold in 2008 in California where prices were obviously still falling. It was a foreclosure and previously sold in March '05 for $355,000.

I've a assumed a generous reserve to cover capital expenses, at least I think it's conservative. The ROI is low, only 5%, but I'm curious what others think, given that the house will at some point appreciate, I'm using renter money to payoff the loan, etc.
I manage the property as well.

My actual return for the first year of ownership was 16%, as I did not need any reserve or spend as much on maintenance.

This property has been a great learning tool for me, but wanted some proffesional input on the deal (or not so deal).

Purchase price $160,000

Out of Pocket
Down @ 20% $32,000
Closing $6,738
Rehab $9,775
Total Out of pocket $48,513

Monthly Expenses
Mortgage $809
Ins & Tax $217
Water/Trash $100
Total Monthly Exp $1,126

Cash Flow
Rent $1,850
Expenses ($1,126)
Monthly Cash Flow $724

ROI
Gross Rent @ $1850 $22,200
Vacancy ($1,843)
Monthly Exp x 12 ($13,512)
Maintenance ($750)
Reserves ($3,700)
Annual Cash Flow $2,395

ROI = Annual Cash/Out of Pocket 4.94%

[Will Barnard]

Jason,

It appears you have more of a long term appreciation play and that is certainly a viable strategy.
That said, it is common practice to assume that over a long period of time, your expenses will be close to half your gross rents which puts you in the monthly negative. I do know that some areas of CA can offer investments that keep the costs lower than the 50% mark, and hopefully, your appreciation works out, but again, that is a hope, not a certainty.

Here is how most here would analyze your deal:
$160k pruchase + $16,500 acquisition and rehab costs = $176,500 total
Gross monthly rent = $1850
$1850 / $176,500 = 1% monthly rent to acquisition cost ratio which is too low for most.
Cash flow:
$1850 gross
less $925 costs (50% rule)
less $809 debt Service
Equals $116 monthly cash flow but you had to invest $48,500 to get that so your cash on cash annual return is really 2.87% for an active investment which is very poor return. You could get that in a 10 year CD and stay 100% passive.
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