Calculating Cash Flow - Am I missing something?

[Ben Hudnall]

Hey all, first real post here.

I have been looking at units with my broker and trying to analyse every property I can get specs on. The majority of them look similar to the following:

Number of doors: 2
Total Rent per month $2,400 (current rent is at 950$ per side, but I believe the market is at 1200 a month for 2br 1.5b)
Purchase price: $199,000
Mortgage Payment (FHA @ 4.5%): $1,125
Taxes (yearly): $3322
Insurance: $1200
Water/sewer: $100
Garbage: $15

Now I am calculating the following based on input I have found around on BP and elsewhere:
Vacancy - 5% a month: $120
Repairs - 8% a month: $192
CapEX - 5% a month: $120
Prop Mgmt 10% a month: $240

Now if we add this all up, I'm looking at a cash flow of 96.12$ a month total.

Am I overestimating vac/repairs/capex etc? Am I underestimating something here? If I make a bad call and say rents are actually at 1100$, I would actually be sitting on a negative cash flow of -47.88$. 

Is this a get up and walk away type of deal for you? (Note: for an FHA at 3.5% down payment this is a COCR of 16.56%)

[David Faulkner]

Originally posted by @Christopher Phillips:

@Neil Sinha

Depends. Put it this way. $1,000 rent x 10% = $100 per month. $1,200 per year to put into reserve.

If a roof is around $8,000, $100 per month reserve would take 6.67 years to accumulate.

But, assuming full replacement, you still have $1,200 to $1,700 for a water heater, $6,000-$7,000 for a boiler or HVAC, $10,000-$15,000 to replace an outdated kitchen, $7,000-$9,000 for a bathroom.

If you're holding that property for 20-30 years, you'll end up replacing something no matter how new the property might be when you put it into service.

Now you are starting to get closer IMO on the real way to calculate CapEx ... roof is $8000 and lasts 25 years ... that is $27/mo ... water heater is $1200 and lasts 10 years ... that is $10/mo ... anualize all of the CapEx items that will need to be replaced over time and add them up, and whalla, you have a good grass roots estimate of CapEx expense. Take the approximate age of all the systems when you purchase the property and multiply by the annualized expense for that item, and whalla, you have the initial amount you need to have in your CapEx reserve fund. Notice a few things please ... no where in these calculations is gross rent ... CapEx is completely independent of rent ... when the roof goes out, the roofer doesn't first ask you what the place rents for before computing his bid, so you shouldn't calculate it that way (as a percentage of rent) either. Also notice that the monthly CapEx expense calculation does not have in it if the property is newly remodeled ... new stuff wears out at the same rate as old stuff and the CapEx expense is therefore the same ... the only calculation that factors in the age of equipment is determining the initial size (in dollars) of the CapEx reserve fund.