Is this a good deal? Cash on Cash Rate? Annualized Total Return

[Tonya Thompson]

Hi Newbie Here

Considering purchasing a 3br 2 bath  (1136 sq feet) to rent in the Texas area (rural area near Beaumont, TX)

Price = $59900

Down Payment = 10% (through finance company listing it for sale)

Interest rate = 6% (through the finance company listing it for sale)

No closing costs

Property Tax = $986/year

Mgmt Fee = 10% of rent

Home Insurance = $1100/year

We would rent the house for $900 to $1000/month

This would be our first investment property. House is in good condition. No major repairs needed. 

Is this a good deal?

[Joe Hines]

Hey Tonya,

Just by eyeballing it, I'd say it was okay.  I'd recommend using the Bigger Pockets Calculator:  https://www.biggerpockets.com/buy-and-hold-calcula...

It does a decent job of breaking down the cost and income variables and calculating the key performance measures for real estate investment.  When using the calculator, be realistic with your costs as there are a lot of things newbies tend to overlook or underweight and then they find themselves with an underperforming property.

So some advice about calculating the financials:

Initial Costs: Even though you don't have any repair costs, include maybe $1K for paint or incidentals.  I also set aside 3% of the purchase price into a Capital Expense account.  For your property, that means about $4K of initial costs.  You might be able to get away with far less than $1K depending on the condition of the property, but I've seen few bank or finance company owned properties that didn't need something such as a big yard cleanup, trees removed, paint, carpet, etc.    

Vacancy:  Depends on your market, but I usually go with 5% vacancy.  Using this number, the calculator will subtract 5% of your rent as lost revenue due to vacancy.

Capital Repairs: I set aside 10% of rent into a savings account (which I put the 3% of purchase price mentioned above) to cover capital costs, such as roofs, refrigerators, etc.  I know it sounds like a lot, especially when you are starting out.  Trust me.  You'll use it.  

Other costs:  You'll need to decide if you'll take care of yard work or if you're going to let the tenants do it (they'll expect a rent discount).  Opinions will vary on this question, but I cover the costs and build it into the rent.  It keeps the property looking good and tenants are just like anybody else:  Nobody wants to mow grass on the weekend, especially if it isn't your grass.  

Rent increases:  The calculator lets you factor in increases in rent.  Be realistic about this and follow-through when you include a number.  Depending on the property, I use a figure like 2% annual increases for the model.  

Other cost increases:  Inflation effects all things and that means your costs will gradually rise every hear.  Like the other inputs, be realistic.  I use 1% or 2% to account for inflationary increases.  

With these inputs, the calculator will generate some important metrics, including Cash-on-Cash Return, Net Operating Income (NOI) and Monthly Cash Flow and Cap Rate. These numbers will help give you a sense of the feasibility of your investment.