SFH Deal Analysis

[Mehran K.]

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

[Marco Santarelli]

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!