Originally posted by
@Joe P.:
Mike -- I urge you to read up on any real estate rental book. I like Brandon Turner's "The Book on Rental Property Investment" because I believe he has a straightforward way of explaining things and breaking down the keys on investment and management.
The biggest issue with your deal is, it isn't a deal. You think it is because you took taxes, water, insurance, a mortgage, and then see what kind of numbers would come out. You see a positive number and think...hey, this is a deal.
Here are the many, many problems I see before you even give us more details -- and I've shown this visually on the attached pictures. First, lets look at this from the numbers you provided:
- You don't hit the 1% rule (monthly rent / purchase price). This isn't the be all/end all, but I avoid properties that don't hit it, unless something tells me its a great property for long term projections and it'll be worth not having good cash flow.
- I took your numbers and input into my spreadsheet (you should confirm the taxes/insurance actuals). Putting them in my spreadsheet, (you think, but it won't be...) your cash flow is about 6.5% -- not great, but not horrible, especially if you are in it for appreciation. You'll get your money back in just over 15 years (it'll be way longer than that, stick with me).
- Notice all my conditional items at the bottom are false except for positive cash flow. These are the conditions I use when evaluating a property -- whats my cash return, what's my cap rate, does it hit 1% rule, will I get my money back before my balls hit the floor, etc. And you aren't there on any of them with the numbers you provided.
Now, here's your dose of reality, @Mike A. -- and I think I'm going to save your financial life right now. You have no idea how to properly evaluate a property for profitability. You will lose your shirt on this deal. At this point, you're probably thinking I am a jerk, but I'm telling you, this property is going to be a black hole of lost income and I don't even know a thing about the property itself. Why? You haven't accounted for ANY other expenses -- not a single one! Even if this house is brand new you will still encounter issues. You will still encounter vacancy. You need someone to manage this property for you (or pay yourself for your time). You will have other costs like paying the city for registrations, inspections, licenses, etc. You accounted $100 per month for water -- which I think is incredibly low -- but nonetheless this is also on your plate. These expenses cost money and if you aren't financially prepared you will be sucked in.
Here's the real sheet with the numbers I use when evaluating a property:
Congrats my friend -- you are LOSING $7,000 a year on this property. You might think this is extreme, but it probably isn't. Most properties early on will typically need about 10-15k in stabilization monies to fix deferred maintenance and CAPEX, and you have vacancy walking in you want to prepare for. Houses cost money. The real estate investment vehicle itself is wildly different than the stock market -- you don't put your money in, close your eyes for 15 years, and hopefully make 50% on your deal and sell your stocks. Its an active, breathing lifeform that needs interaction, management, maintenance, et al.
Ok, lets try a different model. Lets say you come back and say, "Joe, there isn't a thing wrong with this property. I'm going to manage it myself and not pay myself (you should, but that's besides the point), everything is brand new, I think you are putting too much aside for maintenance, and while a couple of units are vacant now, I think our vacancy will only be about 3% per year because demand for rentals is so high. So -- I removed the PM costs, dropped maintenance and CAPEX to 5% each (a catastrophically low number, but better than nothing)
In this bare bones model, you'll make about 3% per year. You could put 200k in a high yield savings account (saw something yesterday on TV that was FDIC insured with 2.5% - 3% annual return) and basically end up in the same place with cash return. This model, depending on your age -- your kids might see payoff point, not you.
So, basically, this deal is garbage. It looks fine to you on paper but you've accounted for nothing that will happen when rubber meets the road. Since you haven't accounted for those items, it tells me you either don't know what they are, or haven't thought through them. Do yourself a favor and put the 200k back in your pocket until you have a better grasp of what it'll take to invest in real estate. I'm sorry to be so rude, but I want to make sure this message gets through to you -- unless you are investing for long term appreciation (a stupid idea, because you're buying at a peak market heading into a very likely recession) this will cost you money.
TL;dr version:
- You make money when you buy in real estate. The only person making money here is your seller, who's selling at a peak market, at the market price, and will cash out in spades.
- You haven't accounted for basic property expenses, and therefore, will lose money.
I hope this is helpful -- if I were you, I would use this extra diligence period to get out of this property, somehow. And if someone thinks my numbers/evaluation are wrong, let them talk you out of it. But if I had 200k in my pocket, and this property came across my desk, as per my own investing criteria, I'm not considering this property as a viable investment.
