Negative Cash on Cash because of market rental rate?

Question

We're eyeing a property in the Philippines (my hometown) so the actual numbers are huge (in millions) but I roughly converted the values in dollars for easier analysis. I've never purchased any property before, and if ever, this is going to be a first.

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Type: Single Family (Condo)

Property Price: $109,016

Down: $26,739

Mortgage: 20 years at $590 / month

NOI: $8329 (annual)

Cashflow: -$1309

Cap Rate: 5.29%

Cash on Cash: -4.98%

Total ROI: 12.79%

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The Cash on Cash is negative because, according to my research, the rental rate (average) in this location is just $700 / month although I've seen others renting theirs at $1200 or more (for example, in AirBNB). I need about $1100 / month to have a positive cash flow. If I'll rent it using the 1% rule, the numbers would significantly improve.

Cap Rate: 7.64%

Cash on Cash: 4.70% (still low)

Total ROI: 22.38% (2% assumed appreciation)

The great thing about this property is that, as I've mentioned in other threads, it's a location, location, location type of property. Almost perfectly positioned. It's walking distance to everything (hospital, huge malls, shopping area, international schools), it's within a rising business district (lots of companies are transferring offices here), it's beside a national park (no other building will obstruct its view), and the business district where it resides is sandwiched between two major business districts. In our country, the neighborhood is considered a bit on the high-end.

Any thoughts? Does it look like it's a disaster waiting to happen?

Aaron Montague · Answer

@Ava G.

The sheet here on BP is a good one. I like to see the numbers broken down in my evaluations because it gives me a smaller chance of missing something. Plus if you bring the expenses broken out, your fellow BPers can question why your individual numbers may be too high or too low. That makes for a better analysis for you.

I don't know anything about the Philippine rental market, so the list above might not have an expense involved. If you break everything out for, you'll be teaching us a few new things. BPers love to learn as much as we like to teach :)

That list of expenses is taken directly from the spreadsheet I use to calculate property values. If I were in your shoes, I'd start with the BP spreadsheet and slowly evolve my own for future uses.

Ava G. · Answer

Can you recommend where I can get a more accurate rental analysis sheet? So far, I've been using the Real Estate Analysis Worksheet I found here on BP. Any recommendations would help immensely.

BTW, I did include the expenses into consideration (tax, mgmt fee, vacancy, etc.).

CK Hwang · Answer

Ava, another factor you might want to consider is how you think the Philippines Peso is going to move against the US dollar in the short, medium and longer term. This can make a huge difference to an investment.

I have a client that just made an extra 5% on their money in a year investing in the USA because of the forex movement.

Elizabeth Colegrove · Answer

@Ava G.

I would be very careful. You have some VERY blatant red flags going up.

1) your numbers don't work

2) large discrepencies between rent prices

There was a post on here a little while back about another native Philippians having some condo's that he bought for "investment" years. Well he can't sell or rent them so they are just a big drain.

I personally recommend you doing some research on biggerpockets. Personally we love little "holes" cities where military member's come through and rent from us but won't buy. There not alot of rentals but TONS of renters. From everything I have heard it is the opposite over there. Just thoughts. Good Luck

Aaron Montague · Answer

@Ava G.

Yes, run.

Also remember that the 1% rule, and all other "rules" are only good for a back of the napkin evaluation.  If they pass that number, you can move on to the hard number research to determine if the property is actually going to make you any money.

If it passes whatever rule you want, start finding out the following expenses and compare them to REAL rents in the area:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Ali Boone · Answer

It's a losing property. If you rely in things like rent increases and appreciation to even just make the returns positive, you are setting yourself up for trouble. Rent increases won't always be in your power, they are in the power of the market. And appreciation is never guaranteed.

Unfortunately that one is a wash if you are hoping for profit via cash flow (versus speculation).

Dave Savage · Answer

Quick answer: Run away.

You don't want to get into something like this unless you are fairly confident in significant appreciation.  You haven't factored in management, normal repairs, and a capital expenditure fund.  You will be negative for a long time on this property even with rent appreciation over time.

Remember with AirBNB you will most likely have higher vacancy causing your actual income to be lower.

It is good to invest in an area you are familiar with if you are long distance, but it may not make sense if the prices are this high.

FYI Just as one example I just looked at a 120k quad in Rochester, NY that has a monthly rental income of $2400/mo as one example.  It should cash flow ~$600-800/mo.  Lots of deals like that throughout markets in the US with good property managers in place.