Originally posted by @Greg M.:
Originally posted by @Justin Megna:
I understand that a typical rental analysis takes the monthly rental amount, sets aside 5% for vacancies, estimates 50% for expenses, and then makes sure the remaining 45% pays debt service and leaves a profit.
No idea where you got these numbers, but anyone who runs a business using such simplistic numbers is destined to fail.
You have real numbers, use them. Put them into a spreadsheet. Factor in your opportunity cost of capital (down payment) and your monthly principal reduction. Factor in the expected life of major improvements and their replacement cost. Does the area typically experience appreciation? Figure out actual vacancy rates. Average tenant stays around 3 years, so if you're guessing 5% for vacancy, you're factoring in 2 months between tenants. That sounds like a long time for most areas.
As for profit, what is a profit to you? I'm OK buying a unit that has negative cash flow as long as the principal reduction and appreciation offset it to an acceptable return. Other people on these forums would slit their wrists if the unit failed to provide enough free cash flow and they could care less about principal reduction and appreciation.
The 5%/45%/50% figures I heard from Matt Faircloth here:
And Brandon Turner described expenses being about 50% for a rental property in this video, though he included vacancy as part of the 50%:
And I agree that you can't lean on these percentages in making your final purchase evaluation; you have to have the final numbers quantified. These two guys agree with that as well. They both warn against making a purchase decision based on the estimates.
My point in posting was to make sure that I was keeping the expenses/debt service costs straight. In reviewing these videos again, I see that they describe insurance and taxes as part of expenses, not debt service. When I was practicing analyzing a property, I double-counted taxes and insurance because they were included as part of the monthly payment by the mortgage calculator I was using. I'll be sure not to do that when I quantify costs on properties in the future. ;)
