How to make low-rent properties cash flow?

[Abi Wegman]

Most of the expense assumptions I use are based on rent. For example, I budget 10% of rental income for PM, 10% for vacancy, and 10% for capex/maintenance. Then there are fixed costs: I generally budget $700/yr for insurance, and $200/mo for water+sewer as it must be paid by the owner (I'm looking in Cleveland, OH).

Given that I have fixed monthly costs of $258 (insurance + water/sewer), and 30% of my income will go to variable costs (I haven't even touched on property taxes, which runs ~10% to rental income in my analyses), how can you ever cash flow on a property unless it has disproportionately high rent?

Let's look at an example:

Price: $20,000

Rent: $450/mo

Sweet! 2% rule passed!

But now I have $45/mo for PM, $45/mo for vacancy, $45/mo for capex, $258/mo for insurance & water/sewer, and maybe $40/mo for property taxes...and now I'm looking at monthly expenses of $433/mo, which leaves me with $17/mo positive cash flow. There goes any hopes of getting a mortgage! It also doesn't leave a lot of room for error.

Now, I understand that Vacancy and Capex/Maintenance are not true monthly costs, but a $1,000 water heater in Year 3 is what I'm planning for, right?

So... please help me understand how this works. Are my expense assumptions too high? What am I missing here?

[Aaron K.]

I think the problem is in the insurance, you are paying $700 to insure $20,000 worth of property.  Is it state law that water and sewer be paid by the owner?  If not that is a cost to pass along.