Quickie, investment #'s question.

[Keith San]

I've read a ton of investment numbers here, but I need to do this for clarity.

I need to know what % the mortgage should take of the incoming rents. Should I include tax in the mortgage when calculating this?

This example is close to the reality i'm looking at. I'm moving the numbers a bit.

Im looking at a 2 family for 300k it takes in 3k a month in rents. Thats about an 1800 mortgage payment at 6% not including Tax etc.

If I offered 250k this would be a 1500 mortgage payment at the same 6% rate not including tax etc. while still taking in 3k

Question: would purchasing the home for 250k put me in that area where rentals should = 50% of mortgage payment, or am I missing something.

TIA.

[Gary Dayton]

I'm going to take a crack at this.

2% of the purchase price of the property should be the rent. If your example house rents for $3000 (as shown by comparable rentals in the area) then multiply by 50 to come up with the max you should pay to see positive cash flow. That would be $150,000. Then take your $3000 and divide by 50% to come up with how much you can expect to pay for repairs+vacancy ($1500). the rest of it is a bit fuzzy for me so Mike_OH or Wheatie might chime in here. There is also a decent excel analysis tool in one of these threads.
Take care
Gary

[Jon Holdman]

I calculate the P&I on $300,000 at 6% for 30 years at about $2500. For $250,000, I get $2100. Not sure how you're getting those lower numbers.

With rent of $3000, the 50% rule would give you NOI of $1500. That puts you $1000/month in the hole at $300,000, and $600/month in the hole at $250,000. Manage them yourself and work for free and you'll pocket another $300. But that still leaves you in the hole.

EDIT:
I blew these calculations. $1800 and $1500 for P&I are about right. So, at $300,000, you lose $300/month, and at $250,000, you're just about break even.

Jon

[Michael Rossi]

Wheatie is 100% right. This example would be a TERRIBLE deal. You are doing the right thing by learning the business before you buy. I would not make an offer on anything until you fully understand the realities of the business. The truth is that the vast majority of newbies fail and they fail for two reasons. 1. They don't understand operating expenses and cash flow issues; and therefore end up losing money, and 2. they don't understand how to properly deal with tenants.

Good Luck,

Mike

[Keith San]

Thanks all.

for those "low numbers" i just threw the purchase price into a mortgage calculator. Did not add tax or insurance.

currently on my 290k morgage at 6% with tax and insurance I pay 2300 even. so thats the only # I know for sure.

Figuring if I bought this property for 290k that would leave me 700 left over a month. using other threads here, I figured that wouldn't be enough for all the expenses. and that I would need 1/2 the rental income (1500) to make it work.

As prices are dropping i'm trying to get the right numbers so I know what I'm looking for. My quick eye test is rents coming in at 1% of the price. Its a starting point and was looking to see how low my offers should be. etc...

Thanks for the help.

(what really scares me is the awfull deal part from mike.)

[Michael Rossi]

Now I see the problem - you need new glasses! Rents at 1% of the purchase price will just about GUARANTEE failure in the rental business.

Good Luck,

Mike

[Jon Holdman]

Well, 1% MIGHT work under the right circumstances. If you're willing to work for free (meaning you can cut the 50% expense ratio to 40% since you're property manager's doing it for nothing), you're willing to accept a net of $100/month, and you can buy a $9.6 million dollar house you can rent for $100,000 a month. And, you can get a 6.5%, 30 year loan. With that multitude of assumptions you are looking at rents of 1.06% of the purchase price, collecting $100,000 a month in rent, and netting $100.

If you work backwards from the rent, assume the same loan terms as above, assume 100% financing, assume you want to net $100/month, and assume expenses = 50% of rent, then a property that rents for $500 cannot exceed $23,731. That's a simple calculation. That's equal to rents of 2.11%. With rents of $1000/month, you can pay $63,284, which is a ratio of 1.58%. At $1200/month, you can pay $79,105 for a ratio of 1.52%. And so on.

Keith, note that taxes and insurance are included in the expense category, even though you may have to pay them as part of your monthly PITI payment.

I messed up the calculations in my first post, your calculations look correct. Sorry.

I've attached the very simple spreadsheet that does the calculation.

I think this "1% rule of thumb" may date back to before the passive loss tax law changes. If anyone is fully able to deduct the passive losses created by a 1% property against their ordinary income, then net would be better. My calculations still show a $100,000 property with a rent of $1000 as a loser even after the tax benefit. But, if you manage it for free (40% expenses), then I show it making about $30 a month. A break even property over a long term (10+ years) hold may well be a good investment. Unfortunately, many people can no longer take those deductions, so this becomes a money loser.

Jon

[Keith San]

Thanks again Mike and wheatie.

MIKE OH: I know you like the 2% i'm in the boston area and using 1% to catch a number and follow the place. currently about 110% of properties are under even the 1% so I dont have many to check out. (I'm not jumping in to losing deals either)

WHEATIE: thanks for the attachment and #'s when I get out of work I'll check that out. #'s are too complicated here where I cant focus.

Thanks again.

[Adam Miyata]

Originally posted by "keithsan":

Thanks again Mike and wheatie.

MIKE OH: I know you like the 2% i'm in the boston area and using 1% to catch a number and follow the place. currently about 110% of properties are under even the 1% so I dont have many to check out. (I'm not jumping in to losing deals either)

WHEATIE: thanks for the attachment and #'s when I get out of work I'll check that out. #'s are too complicated here where I cant focus.

Thanks again.

Yeah, the Boston area is tough huh? I've read MikeOH's book, and it seems like, at least in this area, the hardest part is going to be finding a positive cash flow deal. You're lucky if you find a SFH for <$200k around here...

[Michael Rossi]

Just remember that the math doesn't change depending on where you live. If you can't find positive cash flow properties in your area, I'd go to Plan B.

Good Luck,

Mike

[Keith San]

oops, thread was moved. I wasn't asking about the deal, just trying to work the numbers, on my 1st post looks like at 225k it would fit the bill.

Akre, boston zone is tough at least an hour drive to find anything in the 1% range and that doesnt even cut it. MIKE is right though if the numbers dont work, they dont work.

Good ole mer.lynch just stated they felt house prices will fall 30% over the next 3 years if that happens, we just might get in the range.

[Keith San]

Using wheaties calculator I found 2 properties that work for me.

(i'm also thumbing through a book but haven't finished)

basically i'm looking at 2 different 3 families

Cost is between 160k and 200k what they are asking and where I offer.
Rental income is 2900.

I was told i could get a rate of 6.25 if I put 25% down, this can be done if I take out a second mortgage on my home. Or take out the equity some how.

My questions are: with the calculated numbers through the excel spreadsheet or elsewhere.

Do the expenses reflect heating expenses if they are not separate utilities.

Is it a problem picking a home with an unrented apartment?

Thanks.

[Joel NA]

Interesting discussion. This is my first post, by the way.

Where does appreciation of the property fall into the cash flow consideration. My wife and I want to buy rentals because we have experience managing properties and I can work on them. I also know a lot of reliable subs. Rentals seem like a perfect fit. We are interested in holding onto them for retirement and letting renters pay the mortgages.

That said, not a lot of places we look at provide cash flow according to the standards set out on this thread. Our market is unique in some ways as it's a university town. From our searches a 1% rent to price ratio would be a good deal.

thanks for all of the sage advice

[Michael Rossi]

How exactly would losing money every month be a good deal?

Mike

[Joel NA]

Point taken. I'm not really ready to respond further...still learning. Perhaps more later. Thanks.