Anyone managed to generate cashflow when RTV is less than 1%?
Investor · Member since 2021 · 5 posts · 3 votes
I feel it extremely difficult to have positive cashflow when RTV is lower. I searched through zillow for several promising places like Tulsa OK, Indianapolis IN and Memphis TN, the best RTV I can find is around 0.75% in Tulsa. Here's the breakdown of all the cost and incomes:
home purchase price: 140k, rent per month: 1100 (RTV=0.79%)
Income: 1100*12 = 13,200 per year
Down payment 30%, interest rate 4% => mortgage per year is 5,600
1.5% property tax, 1% maintenance, 1.5% home insurance => another 5,600 per year
PM fee: 10% rent per month + 100% rent for new tenant (assume tenant stays for 3 years) => 1,320 + 1,100/3 = 1,686 per year
Total cost: 5,600 + 5,600 + 1,686 = 12,886 per year
There's barely any cashflow and does not even include the vacancy time between lease, legal fee in terms of a dispute/eviction etc.
So the question is, should I try harder to find 1% properties in these areas, or there's something that I miss in the calculation above?
Las Vegas example:
Home price $260k, rent per month $1300 (RTV 0.50%)
Income $15,600
30% down 4% interest mortgage is $898 x 12 = $10,775
0.35 % property tax ($902), WAAAY less than 0.5% maintenance ($1300 extra safe), 0.16% home insurance ($435)
PM is 8% plus $300 for new tenant. Assume 3 years $1248 plus +300 - $1548 per year
Total cost $10,775 plus $2637 plus $1548 = $14,960
So I get about double the profit with double the cost of house, BUT, that’s at 0.6% RTV, if I could get your 0.79% I’d be getting $2054/mo in rent, brining in $24,648, clearing almost $10,000 per year. So yes. You can make a killing at .79% RTV.
Don’t forget, in my first example even the first year you’re making another $275/mo in loan pay down. So you’d be making $4,000/year even year one at 0.6%. Then you’d take $7,563 in depreciation showing a taxable loss of $3500.
It only gets better each following year.
Your PM isn’t helping matters but your insurance and property taxes are killing your cash flow. If you could cut them in half you’d go from $315/year to over $3,000.
If cashflow is super important to you put more money down, but you’ll actually be hurting your returns. You might get better results with 20-25% down (depending on lender) having that cash in your pocket and having a little negative cashflow.
@Matthew Gu You're not really missing anything in your calculation. What you're missing is a better price. Sounds like you're aiming for a turn-key type property. I'd encourage you to work with a turn-key provider, find something distressed (value add) or go off market otherwise you'll continue to get the same results.
Those numbers are identical to the neighborhood I live and invest in. The nice and shiny properties on the MLS will NOT cash-flow in today's market. Properties I purchased only 2 years ago barely met my criteria for a future rental and they were all distressed and negotiated to a lower price.
Do not quit trying. Keep up the good work and networking and connecting with locals in your market. Find people that understand the 1% rule and what your criteria actually means.
@Matthew Gu You're not really missing anything in your calculation. What you're missing is a better price. Sounds like you're aiming for a turn-key type property. I'd encourage you to work with a turn-key provider, find something distressed (value add) or go off market otherwise you'll continue to get the same results.
Those numbers are identical to the neighborhood I live and invest in. The nice and shiny properties on the MLS will NOT cash-flow in today's market. Properties I purchased only 2 years ago barely met my criteria for a future rental and they were all distressed and negotiated to a lower price.
Do not quit trying. Keep up the good work and networking and connecting with locals in your market. Find people that understand the 1% rule and what your criteria actually means.
@Matthew Gu what you're missing in your calculations are property taxes and insurance. Both can vary greatly across markets which is why RTV is not a very meaningful metric. Prices are going up a lot in many markets so it's getting hard to hit that 1% ratio but you should be able to come close in Indianapolis.
Las Vegas example:
Home price $260k, rent per month $1300 (RTV 0.50%)
Income $15,600
30% down 4% interest mortgage is $898 x 12 = $10,775
0.35 % property tax ($902), WAAAY less than 0.5% maintenance ($1300 extra safe), 0.16% home insurance ($435)
PM is 8% plus $300 for new tenant. Assume 3 years $1248 plus +300 - $1548 per year
Total cost $10,775 plus $2637 plus $1548 = $14,960
So I get about double the profit with double the cost of house, BUT, that’s at 0.6% RTV, if I could get your 0.79% I’d be getting $2054/mo in rent, brining in $24,648, clearing almost $10,000 per year. So yes. You can make a killing at .79% RTV.
Don’t forget, in my first example even the first year you’re making another $275/mo in loan pay down. So you’d be making $4,000/year even year one at 0.6%. Then you’d take $7,563 in depreciation showing a taxable loss of $3500.
It only gets better each following year.
Your PM isn’t helping matters but your insurance and property taxes are killing your cash flow. If you could cut them in half you’d go from $315/year to over $3,000.
If cashflow is super important to you put more money down, but you’ll actually be hurting your returns. You might get better results with 20-25% down (depending on lender) having that cash in your pocket and having a little negative cashflow.
Corona has been hiking up home prices around the country and rent are not going to catch up soon, especially in cashflow areas. I've been investing in turnkeys in Indianapolis and others in the mid west and I haven't seen anything that make sense for me over the past year. It's been great for my refinancing strategy though. With those numbers, it's better to find an off-market property or change to a more appreciating strategy than a cashflow one.