Cashflow analysis stumping me

[Naveen Kumar]

I have been crunching numbers on a lot of properties and so-called-deals and not sure if I am missing something, or just not seeing it.

Purchase Price - 100,000

Loan Amount - 80,000 (@5%, 30-yr fixed conventional)

Rents for - 1250 per month

Here are the monthly expenses as I see it:

Mortgage - 430

Insurance - 33

Taxes - 110

Condo Fee - 250

PM - 125 (10%)

CapEx - 62.50 (5%)

Vacancy - 100 (8%)

Repairs - 62.50 (5%)

------------------------------

Total Expenses - 1173 per month

Cashflow - $77 (approx)

CoC returns - 4.6%

People I talk to - realtors, sellers, lenders - they call these a great cashflow property, and I don't see how.

Am I off somewhere? Would you do this deal?  

Appreciate your input.

[Alan Grobmeier]

@Naveen Kumar.  You have a $800 annual return on $20,000 invested. And that is a confirmed 'maybe'.  You will run out of money if you rinse/repeat that model.  You need more cashflow per 'door'.  A bunch of ppl have been saying condo fees are killing, but really ALL the fees are killing you.

Repairs ~ For example.  If this is a nice house in a nice area, you should be able to get good renters.  I get home warranties on all my properties.  The cost is about what you have budgeted for repairs.  The best part is then I don't need a property manager.  I can manage my properties from Mars.  ;-)  Save $125 a month on PM.  ;-)

Property Manager ~  The ONLY reason you need a property manager (IMHO) is to take the 3 am 'my toilet is running' calls and to collect rent.  I collect my rent via ACH on the 1st of the month.  And I use home warranties for repairs.  No one EVER calls me for repairs until AFTER the warranty company comes out and does their thing and it's beyond them.  Besides, a property manager is a risk in itself.  Who is going to watch your 'baby' better than you?  They may put some clown in that trashes the place.  You are out the same amount of money if a PM chooses them vs YOU choosing them.  I'd rather say 'I didn't choose well' than blame someone that doesn't have my interests at heart.  But that's me. 

Vacancy ~ 8% is about one month out of 12.  To me that is 'ouch' material.  My HIGHEST vacancy rate on one of my places is a little over 3%.  I have a number of them at ZERO.  I have a friend/business partner in the difficult multi-family world and he runs less than 5%.  But he kicks ***. If you do 2 year leases you are automatically lowering the vacancy rate to less than 5%.  And if you don't think you can get a 2 year lease, perhaps you are in the wrong area?   I've just saved you another $50, maybe $75 on the vacancy allowance.  

Now it is 'better'. Your cashflow is $250 a month, $3,000 a year. Much better ROI when you consider your risks. ;-) Since it is condo, the association PROBABLY pays for the roof and a lot of the other stuff. But you need to find out.

One problem many investors have is they think it is better to make $100 a door on 50 doors vs $500 a door on 10 doors.  Each property takes about the same amount of work unless you bought a 'dog'.  And each door has about the same risk attached to it.  

AG