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Updated almost 12 years ago on . Most recent reply
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SFH Deal Analysis
Hi all, was wondering if anyone can chime in on some thoughts I have on a nicely rehabbed turnkey opportunity I am considering.
Great suburb neighborhood, strong rental demand, low crime.
Purchase Price: $90k (recent comps put it's value around $105k)
Monthly Rent: $1200/mo
2012 Property Taxes: $2848 (very high, cleveland OH area)
Rental Registration with City: $150/year
Insurance: $700/year
Maintenance, PM, and Vacancy = 10% Each
Debt Service with 20% down($18k) = $72k @ 4% = $344/mo
I'm getting:
NOI ($544) - Debt Service ($344) = $200 cash flow
With these pretty conservative and realistic expenses the cap rate is 7.25%
Falls short of the 2% rule
1200/90,000 = 1.3333%
50% rule
1200 / 2 = $600 - $344 = $256
What do you think?
I've heard people say that cap rates under 9% never cash flow. But it SEEMS like this does? Am I missing something?
Any advice and wisdom would be appreciated. Thanks in advance
Most Popular Reply
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Hi Mehran Kamari,
Correction on your calculation. The Capitalization Rate should not be calculated using your debt service. The formula is:
Capitalization Rate = Net Operating Income / Value (or Price)
This will increase your cap rate - which is in line with many Cleveland property.
Also, don't get hung up on this "2% rule". It is a very general guideline and is not always correct. In fact, if you look back a few years there were "gurus" preaching a 1% rule. Stick to your pro-forma as it will be the best guide.
Good luck!