Am I calculating cash on cash incorrectly?

[Dan Falco]

Hi all,

Either I’m doing something wrong or this property doesn’t cash flow very well. To be clear, the deal isn’t done quite yet. This would be my first ever home (duplex) purchase. I’ll be living in one unit and renting out the other. I’ve been calculating cash on cash based on renting out both units. Here are some details:

Price: $275k

Down payment: 15%

Down payment and closing costs: $54k

Upgrades before renting: $3k

Gross monthly income: $2,450

Mortgage payment: $1485

Vacancy: $240

Property Management: $240 (I’ll be self-managing but was told to still account for it)

Maintenance: $215

Capex: $215

Trash/Sewer: $110

Water: $100

Monthly cash flow: -$155

I'd then calculate out CoC, but clearly it won't look good with these numbers. Am I doing something wrong? Or is this as bad as it looks… Appreciate your input!

[Cassi Justiz]

Is it common in your area for the owner to provide water, trash and sewer? That's the one thing that sticks out to me with these numbers. In my area, tenants almost always pay for their own utility services. 

Something to keep in mind is that even though you are "budgeting" for it, vacancy, cap-ex and maintenance is still income until you spend it. You'll have $700+ deposited into your account each month after paying fixed expenses. It won't take long to build up a hefty reserves account with that cashflow amount. You may end up spending that money on maintenance, repairs, etc, but it still replenishes the next month. I don't budget specific percentages anymore. I look at total cashflow after fixed expenses and how long it will take me to build up 5-10k in reserves. (In your case, it would be about 6 months to build up 5k in reserves). With 10k in reserves, I know that I can handle almost any vacancy/cap-ex/maintenance combo that is less "insurance claim" damage. 

 I wouldn't budget as much for vacancy since it's unlikely that BOTH units would be vacant at the same time. Unless you're really unlucky, you shouldn't have to pay two months of mortgage out of your reserves per year. 

Hopefully that helps! It's a different way of looking at expenses and it's definitely not for everyone, but it does help to remember the difference between true fixed expenses and budgeted "expenses."