Hello everyone: sorry if this is a repost, I couldn’t find my original to reply to. I’m getting close to putting in an offer on a 2br condo. Before pulling my money out of the stock market to make this happen, I’d like to get your feedback as to whether or not this looks to be a smart investment (my first rental property, first property purchase overall. I’m currently renting for $550/mo).
Sell price: $190,000
20% dp: $38,000
Loan amount: $152,000
Monthly Interest/Principle @ 4%: $917.34
Monthly Taxes: $141.66
Monthly HO6 Ins Policy: $50
Monthly Maintenance: $100 (estimated)
Property Mgt: $0 I plan on taking care of this myself
Vacancy: One month’s rent estimated per year ($1450)
Closing Costs: $7000 estimated
I plan on spending $2,000 up front to upgrade the bathroom.
Assuming I did my Cash Flow Analysis correctly, I have a 9.5% rate of return, 5.6% Cap Rate, Debt Cover ratio 1.23 (not sure what this is?).
Well, lets start with what you have. I did not see HOA fees (or was this the “HO6 Ins Policy”? If it is, then I did not see an expense for property insurance.
Okay. Using your expenses. You have a NOI, before tax, of only $96.00. Most investors target for $100 per unit. Your annual cash flow will only generate $1,152 after you pay the mortgage. This will give you a cash on cash return of 3% - YUCK. (Your down payment divided into NOI before tax.)
Here is the problem. Your expenses only total 12%. Unfortunately, that is just not realistic. Investors require that properties can make a return on a 50% expense allocation. At the 50% ratio, you will have a negative cash flow of $2,308.
NOI is Net Operating Income before debt service. Cash flow is what you have left after debt service.
I agree with campbellsimon, you have left out a lot of operating expenses. I would expect a property in this price range to have a monthly association fee in the $300-$400 range, perhaps even higher. Even though you plan to manage yourself, there is a cost of doing so. You have advertising expense when the property is vacant, it costs you money to inspect and show the property, to run credit and background checks, and to go to court to have your delinquent tenants served notice of eviction. It costs money to have an attorney draft your initial lease, then review and update it every year to comply with changes in state law.
Your association may also have a special assessment for the association master insurance policy that you have not considered. What about the cost of a locksmith to change the locks whenever you have a tenant turnover? Annual Fire and safety inspection to check fire extinguishers and change smoke detectors? Preventive maintenance contract on your HVAC system? All these costs are missing from your analysis.
I don’t know if $100/month is a sufficient maintenance reserve fund contribution to replace the major appliances, water heater, and HVAC when they die. Might be if all the appliances and major systems are new. If not, then you might need a larger monthly contribution.
As I see it, this is a negative cash flow property that will take money out of your pocket every month you own it.