CF vs 50% vs 2%

[Brice Noonan]

OK, again (if you didn't read my 1st post) I live in a nice college town with high occupancy rates, good rental rates, inexpensive properties, etc.
I have been wanting to get this going for years, been reading/studying on & off all this time and am now getting things going.
After lurking on this forum for some time, I realize that my reading has focused on motivational books with little substance and I am now struggling to come to grips with the cold calculations of the REI experienced here on BP. So can someone run through what I consider an average purchase here in the area and tell me why what looks to be great CF is mediocre when viewed through the lens of these 'rules'?
(NOTE: I am not interested in purchasing trashy places cheap ($20-40k) for higher CF. Just not my thing. I know it works well, just not much of it around here in rentable areas and I'm not in to it.)

OK. Lets consider a hypothetical 3/2, recent (<10 years old) SFH is about $80k.
Lets assume, for the sake of argument, I pay this.

Cost: $80,000
Down: $16,000
Closing: $2,000
Rate: 5%
Mortgage (incl Tax): $430
Say I even go with a PM: $120/mo
Insurance: ~$500

Rent: $1100

Gross income: $13,200
Expenses: $7,100

This looks like solid CF to me.
But compared to the 2% rule, it seems borderline (1.3%)
Doesn't meet the 1/3 rule.
Not sure which end of the 50% rule PM fees are taken out of, but with Insurance CF from this metric is thin too.

What am I missing? Why am I excited about properties that it seems the most experienced of you would avoid?

Thanks for your help.

B

[Matt Devincenzo]

Brice Noonan one thing to remember is the "rules" are not rules but guidelines. You have to look at the actual numbers to determine true cash flow.

The 50% rule is used as a quick method of accounting for things you need to analyze yourself like vacancy, maintenance, turnover ect.

The 2% rule is most accurate at about the 23-35K price point and begins to get less accurate as you go away from there.

Something that you can look at that will help determine the value of the cash flow you are getting is cash on cash return, the value of the dollars you bring in measured against how many dollars you had to put out to get them.

My analysis looks like this with your numbers:

Purchase $80,000
Down Payment $16,000
Interest 5%
Term 30 year
Closing Cost $2,000
Rent $1,100
Payment $343.57

Tax $86.43(430-343.57)
Vacancy 10% $110.00
Turnover $500/yr $41.67
PM 10% $110.00
Maintenance 20% $220.00
Ins 500/yr $41.67

Net monthly Cashflow $146.67
Cash on cash return 9.78%

All those expenses are in monthly terms so obviously you might have some good months with no maintenance and you won't be spending $220/mo fixing things, but when a roof needs replacing you've accounted for the expense of it in the years of cashflow you've already experienced.

Hope this helps you see where the numbers are.