I desinctly remember a post talking about the number of years to recoperate your inital capital investment in a rental property, but as of now, i cannot find it so i am making a post to ask the question…
What is an acceptable time period (in years) to recover your inital capital investment?
For example…
A subject 3/2 1000sqft property will cost $60,000. With $2,000 in repairs to bring to rental standards.
My capital invested would be $17,000(25% of 60,000 + 2,000 = 17,000) assuming it is rented before the mortgage is due that next month.
In this area, homes rent for .90 a sqft or $900.00 in this case.
Remove 35% of rent or $315.00 (repairs, managment, vaccancy, ect…) You get $585.00
$585.00(rent-%35) / $17,000(Capital Invested)=29.05 months or 2 yr 5 mo
The mortgage would be appx $277.00… 585.00-277.00=$308 monthy cash flow…
Does this example sound familular to anyone else or am i doing somthing wrong here. The numbers look good if everything is correct.
The time period to collect your invest capital in real estate is depend on several factor such as type of property, location of property, growth of property market etc. So consider all this aspect before investing.
Maybe I’m doing something wrong, but the way that I’m figuring it is if you are cashflowing $308/mo then it will take you approximately 4.6 years to recover your initial investment of $17000.
Just take $17000/$308 and then divide that by 12 months to get that into years…
Now you are getting a loan out for the remaining $45k, correct? Where are your closing costs? Are they added to the back end of the loan? If so then you probably will owe like $47k.
Well a 30 year mortgage at 5% interest rate, your monthly mortgage will be $252 (you had your number at $277). My question is where is your taxes and insurance come in, is that included in your 35% column? If so, then the numbers look alright. I would like my purchase price to be more around the $45-$50k if my potential rent is $900. It’s just a bit healthier.
Otherwise, I think you are doing your numbers correctly but your evaluation on when you will get your initial investment back is off a couple of years. I like my properties to return at least of 30% yearly ROI.
So for example this property would make you $308/mo or $3,696/yr. Take that divided by the $17,000 initial investment, you are getting a ROI of 21.74%
A lot better than a cd, stocks, or many other investments. Do 2 of these a year and you will be doing nicely in 10 years…
Annual Cashflow / Purchase Costs gives you your CASH on CASH return which is what you are actually asking about. Completely different number than NOI. For Instance here’s the calculations I just ran on a quadplex recently:
Income
+ Gross Scheduled $28,800.00
+ Other Income $0.00
= Total Gross $28,800.00
- Vacancy $7,200.00
= Gross Operating $21,600.00
Operating Expenses
Property Taxes $1,140.00
Insurance $1,500.00
Utilities $1,750.00
Water $0.00
Trash $475.00
Repairs $2,000.00
Supplies $0.00
Other $0.00
Management $3,228.00
= Total Annual Op Cost $10,093.00
NOI $11,507.00
Cap Rate 10.61%
Debt Service
Annual Debt Service $4,980.00
DCR: $2.31
Cash flow
Pre – Tax Cash Flow $6,527.00
Cash on Cash 24.06%
Purchase Price
$108,500.00
Down Payment
$27,125.00
as you can see at 25% vacancy 1 unit at 12 months, or 3 months per unit, we are looking at a cash on cash of 24.06%! If I can keep it 100% occupied its 48%! This is with 25% down.
I’ve outlined my COC % to be ~25% @ 75% occupancy. So I am close here.
Thank you all for the replys! Very informative. In that example I would have argued the bank to pay closing costs. Taxes and insurance was included in the 35%. I’m still looking for my first deal. The example I described went pending so I’m still on the hunt. Its my first deal so I think I’m over calculating everything just because I’m slightly nervous. Are 30 year fixed most common for rentals?? I’m just thinking of the best Apr for cash flow… is this the right logic? Anything else that seems to be missing in my numbers or how I’m going about finding a deal?