@Michael Baradell
@Thomas S. and I typically don't agree on much, but he's making an extremely valid point here that isn't talked about frequently enough in the forums -- you never really know on cashflow until you're completely done with a property. In our self-managed business with C/D-class borderline properties, our biggest expenses are HVAC-related, roof-related, and turnover-related. It's really hard to be sure what a property will cost you or make you until you're done with it.
Here's an example with simplified parameters.
1. Assume you buy two D'class properties in year 1 for $30K each, rent for $600/monthly each, total property taxes $119/monthly, monthly debt payment $320/monthly each on a 20-year commercial loan. Cash flow after taxes but before operating expenses = $201/month.
2. Assume both furnaces are shot when you buy. Assume you put something like a Goodman furnace in Property A and an American Standard furnace in Property B. The Goodman furnace is going to run you $2700, the American Standard will run you $3700. By year 15, you end up replacing the Goodman furnace, while the AmStand makes it through the 20 years and you sell with the same furnace in place.
3. You do an $8K roof replacement on both 10 years into owning them, but Property A suffers some additional roof damage right after the replacement and requires another $4K to fix before you sell.
4. Over 20 years in Property A you have 4 turnovers that each cost $2K in turnover fix-up costs and lost rent. Over the same period you have 2 turnovers with the same costs in Property B.
5. Assume both properties racked up $4K in additional minor service calls and fixes during 20 years.
6. Assume you break even on depreciation capture and property appreciation when you sell (again, this is D-class) and end up with $30K each cash in pocket.
Over the course of 20 years, each property provided $48240 in cash flow and it paid itself off. So you made $78240 on each $30K investment. Property A cost you an additional $28400 over the course of owning it, Property B cost you $19700. Your cashflow for Property A comes out to $206.16/month. Your cashflow for Property B comes out to $243.33/month.
The selling price plays a gigantic part in getting to that final number. Imagine if you managed to sell Property A for $50K after depreciation capture, thanks to significant appreciation, or maybe you managed a 1031 exchange into the purchase of a new property. $206.16/cash flow per month turns into $291.00 based on that one parameter change.
