Analyzing a Rental Property Deal

[Liam Morris]

I'm still new, but trying to practice evaluating opportunities as I see them.  Could you guys help me make sure my thought process is correct for the below opportunity?  Tell me where the holes are.

There is an opportunity to purchase 6 adjoining townhouse units for $77,000.

The listing claims Gross Rents of $38,700 (about $537/month/unit) and Net of $22,238 ($308/month/unit or $1853/month as a whole).  I'm unsure of what they have included in their evaluation of operating expenses to figure out the net.  That would be a question to ask.  Taxes are about $500/year.

If I were to bring $20,000 cash to the table and finance the remaining $57,000 around 4%, Mortgage payments would be $275-$300 (approx $50/month/unit).

So, if I subtract from the stated Net of $1853, 10% vacancy ($185), Mortgage payments ($300), taxes ($40), and 10% repair budget ($185) I end up with about $1,140/month.

So $1140/month x 12 = 13,680.  Divide that into a $20,000 initial investment and I'm seeing a 68.4% Annual return... which makes me feel like I messed something up somewhere...

Even if my numbers are a little generous, I still feel like I might be missing something.

[Wainwright Yu]

Other costs you may want to consider baking into your model are (a) property management costs of 8-10% per month plus an amortized placement fee of 50% of rent and (b) CAPEX reserve when you will eventually need to replace appliances, carpets, paint, roof, etc.

Even if I plan to manage the property myself, I always like to build in property management into my model. It gives me the opportunity to fall back into property management if needed. It also helps me count the cost of my labor in the model.

Otherwise, I think you've got the right expense line items!