Question about income from rental properties

[Mike Sheppard]

I have a quick question regarding income from rental properties. I am a completely newb as of now, and am trying to learn what I need to learn before I get into anything. I am in Northern VA, and I am looking at possible buying a rental property, or two if possible, in Raleigh, NC. I have family down there, and it's not that far of a drive if I have to go down.

My question is, how much money, in amount or percentage, do you aim to make each month off the property?

I've been looking through a few properties just to get a feel for them. For example, there is a 3 bedroom, 3 bathroom, 1600sq/ft house for sale in Northern Raleigh for $140,000. Lets say I can snag it for $130,000. Mortgage ends up being around $850 a month, including property tax, depending on what I put down. House is in good condition, little or no repairs need to be made. Based on houses in the same neighborhood, with almost exact specs, they rent for around $1,250 a month. So if I rent it out for $1,250, and pay $850 in mortgage, that is $400 in income a month. Is that considered good? Bad? Average? I know there are other expenses, I read briefly about the 50% rule.

Am I close here, or am I way off? What is an average situation?

[Jon Holdman]

On such a rental you are not making anywhere near $400 a month.  That number, $400, is what I call "phoney cash flow".  It only accounts for debt service (the P&I part of your payment), taxes and insurance.  You will have many, many more expenses.  Maintenance, vacancy, legal fees, CPA fees, utilities, capital expenses (roofs, appliances), and many others.  Property management, too, if you use a PM. There's a sticky thread that talks about the "50% rule".  That rules of thumb says 50% of your gross scheduled income will go to expenses, capital and vacancy.  From the remaining 50% you have to cover your debt service.  So, an estimate of true cash flow is rent/2 - P&I payment.

Now, property management is a big expenses and if you do that job yourself you can earn that cut.

My goal is to earn at least 10% cash on cash return after accounting for all my up front investment and assuming I will use a PM.  That's a very tough goal to achieve here in the Denver area right now.