SF evaluation - What am I doing wrong?

[Jesal Shah]

Hello Everyone,

I am new to BP and looking to make my 1st investment in Houston area. I evaluated few properties but numbers don't work out. Not sure if I am doing something wrong or it's just hard to find good deals in Houston market. I have posted an example of typical deals that I have been evaluating. I will really appreciate any feedback you can provide. Please help.

Thanks in advance.

1) Purchase price: $120,000

2) Expected Rent: $1100/mo 

3) Property Taxes: $300/mo 

4) Mortgage with 25% down @ 5% interest: $483.14/mo

5) Other expenses (insurance, HOA, Vacancy, CapEx, Maint etc.): $100+$25+$100+$100+$50 = $ 375

6) Total expenses with mortgage, tax, others = $1158 (vs. total income of $1100).

7) Above yields negative cash flow. All the properties I evaluated (northwest houston) so far result in -ve cash flow.  :-(

I thought above numbers are very realistic (actually i am thinking my expenses are underestimated). I am sure people are finding deals in Houston area and making investments. So what am I doing wrong? Is my evaluation method flawed? Should I be looking elsewhere?

[Kevin Coggins]

@Jesal Shah From the analysis I've done, in order to get anywhere near a decent cash flow, you need to be getting at least 1.5% of the ARV. The 1% rule just doesn't work here, especially when property taxes range between 2.6-3.7% depending on the area. And 1.5% is basically the minimum, if you want any sort of cushion you really need to be looking for 2%.