1% Rule and still small cash flow?

[Gil Keren]

Hi Community, 

I'm doing the math for the profitability of a rental. It looks like even with the 1% rule for rent and a low interest rate, I don't even manage to get 150$ of cash flow. Would like to know your opinion, where are my estimation is too high/low (did I forget some expense?), or if the 1% just doesn't cut it?

The numbers:

Price: 100k

down payment: 20k

rent: 1000 (based on the 1% rule)

expenses:

mortage: 359 (based on 3.5% interest, pretty optimistic)

homeowners insurance: 100

property taxes: 72 (based on 0.868% of 100k)

repairs: 120 (based on 12% of the rent)

management: 80 (based on 8% of the rent)

vacancy: 80 (based on 8% of the rent)

additional expenses: 50 (garbage, lawn/snow, I don't know what)

summary:

total expenses: 861

cash flow: 139

[Adam Sankowski]

Hey @Gil Keren I'm an Indy investor and I think some of your numbers are close but a bit off - here are my thoughts... also what part of Indy might I ask?  Indy is quickly turning into half cash flow half appreciation market so deals are slim but equity is possible.  So finding anything that is 1% actually isn't bad.  Is this turnkey and already tenanted?   This is another thing to consider because turnover costs are the biggest expense.  Also leasing fees need to be considered- A 1K rent is a 1K rental fee everytime!  I didn't realize that because coming from Boston landlords don't pay a leasing fee (the tenant does that) but they do in Indy. 

mortage: 359 (based on 3.5% interest, pretty optimistic)

Actually I am refi'ing a single family in Indy right now and as an investment property, I got 3.25% with Shawn Huss a TCF bank. Look him up, he's easy to find. I did have to pay a point for that rate but that's not much on a 100k loan so 3.5% is def. do-able even for an investment property. You can always "float" a rate with them for 30 days and then just lock it in whenever it hits 3.5%.  The rates change daily but they are basically the same because the fed is zero right now.  I know the rate has something to do with the 10 year treasury or something but they will send you the rate daily and the points required.  Def. shop around but start with them and you can find sub 3.5% for a point I would think. 

homeowners insurance: 100

This is high.  Check with Jeff Klopp at State farm or NREIG out of KCMO.  It should be $65 or so.  That's the number I'll use in my calculations 

property taxes: 72 (based on 0.868% of 100k)

This is low and you might be using the homeowner rate not the investment property rate.  I don't know what the % out of 100k is but I do know that I have a house that appraised at 80k this year and my taxes are now $1,600 a year or $133 a month.  I'd say $150 a month to not have any surprises.  Taxes always reset at a higher investor rate after a year or two.  Indy is on top of this, unfortunately. I tried to argue my way out of the increase this year without luck.

repairs: 120 (based on 12% of the rent)

I would almost double this.  This should include repairs, capex and future turnover costs.  I agree with Anthony above this should be at least 20% or 200 a month. Turnovers can suck. 

management: 80 (based on 8% of the rent)

In Indy all the good management companies charge at least 10%.  Don't cheap out on property management, its everything! 

vacancy: 80 (based on 8% of the rent)

Now here, I know I sound crazy but I don't figure in vacancy.  In Indy if you are vacant more than a month then your PM is doing something very wrong or you are priced too high.  I have had everyone renew 2 year leases and one of my houses was up for ONLY 2 weeks this past spring even during the beginning of Covid!  So I had to pay the leasing fee but even with turnout I was only out of a month's rent. All my tenants are paying on time still too and I find that if you're closer to the urban core of Indy you can find some good quality tenants.  Let's keep it in to be safe though. 

additional expenses: 50 (garbage, lawn/snow, I don't know what)

Here's the good news.  With a single-family there are no additional expenses.  So that's a plus. You do no lawn, garbage, etc.  Now you can choose to be nice and do like a spring yard clean up, which I do with my section 8 tenants because you kinda have to, but with regular market tenants in Indy, if you're in decent areas, which you should be at 100K, then you don't have to do anything. 

summary:

total expenses: 954

cash flow: 66

Now this is with 8% vacancy and the increased 20% repairs and capex, plus $150 in taxes which you might be able to escape for a while.  So its a slim deal but is there any equity in it?  Is it in an appreciating area, is there any movement up on the rent maybe in the future?  Thing is that if the roof is already in good shape, and the tenant is good this might cash flow well for a while before taxes go up and then hopefully rents might bump up a bit too after covid.  I bought an Indy property a few years ago and I think it already has 30k of equity in it and I'm refi'ing it to pull out $ to do more deals with, you can't do that in just cash flow markets.  But yeah, the 1% rule just says that its a minimum so that you won't lose money and might make some... but its always a skinny deal if the numbers are rights at 1%.  But would the rent increase $50 in a year or two?  Indy is a solid investment.  

If this is your first then its a solid safe deal with those numbers.  I know that $66 seems like nothing but this is a worst-case scenario with a lot coming out for repairs and worst-case taxes.  If buying this would allow you to jump in this might not be the worst deal?  But you're going to find these same numbers with any deal that is a straight 1% deal.  It really has to be at least like a 1.2% ish (ex. 70K purchase price $850 rental rate) deal to make at least 100-200 cash flow.  That's why I also love Indy but invest in KCMO now ha :). 

I hope that this helps and didn't discourage!  If you PM me with address etc happy to let you know what I think of the area or whatever too.