it is suggested that when doing research of a property that the operating cost of a SFH is around 20-30% and the OC of a multi unit is about 50% my question is Does this include the mortgage payment and taxes and ins…I have found that many properties will not suport a mortgage if not included… ???
Howdy Islander:
The mortgage is not included in the expenses. Taxes,insurance,utilities. management, maintenance, and the like are included and a reserve for replace should also be included. The rent collected less your property expenses will give you the NOI net operating income. This when divided by the sales price will give you the cap rate. As an example a $1,000,000 property with rents of $120,000 per year and expenses of $60,000 per year will have a NOI of $60,0000 and a cap rate of 6%. At a price or value of $600,000 the cap rate would be 10%. All the above is figured no matter what the mortgage amount or rate is. With a 6% cap rate you would need a mortgage rate below 6% interest only if you financed 100% of the purchase price to break even. It is all about the numbers. I am currently looking an office building the is for sale at $800,000 that is supposed to have an NOI of $160,000. It is a NNN lease which will alter the expense side of the equation. This is equal to a 20% cap rate which is GREAT and unheard of. I will check it out today as something has to be wrong unless it is just a super deal.
Hope all this helps. Best thing is to look at many deals perhaps loopnet.com and just compare price to rent to cap rate and get a feel for the different numbers.
LOL
thanks that does help…when budgetting for reserves what % or what amount per month for reserves should be budgeted in the OC?
when looking at these number I would think the max mortgage this property could support would be $1475 is this the right way to analise a property to see if it would be Pay for its self?
NO. OF BLDG: 1
NO. OF UNITS: 5*
RENT/UNIT $525.00
MF ANALYSIS WORKSHEET
ANNUAL GROSS INCOME MONTHLY ANNUAL ESTIMATE
RENT SCHEDULE: $2,625 $31,500 100%
VACANCY FACTOR: 10% $210 $2,520 10%
I. TOTAL INCOME $28,980
EXPENSES
Monthly Yearly
1 ADVERTISING $40 $480
2 LEGAL & PROFESSIONAL $0 $0
3 REPAIRS $210 $2,520
4 SUPPLIES $0 $0
5 Mortgage
A. Princaple $0 $0
B. Taxes $250 $3,000
C. Ins. $250 $3,000
Total $500 $6,000
6 Maintnance
A. Lawn $20 $0
B. Building $210 $2,520
C. improvments $210 $2,520
Total $440 $5,280
II. TOTAL EXPENSES $11,280
Yearly cash flow$17,700
Monthly cash flow $1,475
I would be holding this property for the long term for retirment So as the property builds equity over say the next 10years the property if gains 5% in value each year would be valued @ About 407,000 being that the propety is valued @ 250,000 today and if purchased at 198,000 with 7.5% intrest the balance owed in 10 years would be about 172,000 this would be 235000 in equity in 10 year note that rent rates stayed the same over 10 years on this example…for me if the property pays for its self and I can build equity in 10 years I will then sell and retire at the age of 40…LOL but its my goal…im 27 now so I need to get that nest EGG of over 1million
Thanks for your help…