I am thinking about purchasing a property in Northern Cali and was wondering what the rule of thumb is for looking at a rental property. I read on here before that there was some sort of percentage of the rent for maintenance, morgage, etc and that after a certain point the house isnt a good investment correct?
I am thinking of purchasing a house for 100k and renting it out for 1500 a month.
Its a 4 bed 2/1 bath house with a pool in an ok neighborhood. I think the monthly morgage would be around (worst case senario) 7%, I know alot about working on houses so i wonder how much of the budget should be wrote off for maintenance.
Throughout the United States, operating expenses run 45% to 50% of gross rents. Therefore, here is how I see your proposed deal:
Gross Rents: $1,500
Operating Expenses: $750
Mortgage (30 yr, 7%, $100K): $665
Cash flow: $85 per month
This is not too bad, but I prefer $100 per month positive cash flow.
So, using this 50% rule, simply subtract the mortgage payment from 1/2 of the gross monthly rent. That will give you the cash flow.
If you do the management and maintenance, you will EARN some of the operating expenses back.
I don’t mean to derail this thread, but I see you post this equation a lot, and I was curious about 1 thing. If the landlord is to pay some of the utilities, that would come out of the NOI also correct?
Utilities are operating expenses just like management fees, property taxes, repairs, maintenance, insurance, etc.
NOI is debt service and cash flow.
I don’t know if Justin answered what you were asking. Justin was of course correct, utilities are part of the operating expenses. If the landlord is paying utilities, the rent should be higher to compensate for the utilities. In other words, a rental with paid utilities should rent for more than a rental in which all utilities are paid by the tenant.
Mike - I like the way you called out the fact that if you do the maintenance and management, you will EARN back some of the money. You didn’t say that if you do maintenance and management, your cash flow will be higher… This is an important distinction that I wanted to point out…
[quote]If you do the management and maintenance, you will EARN some of the operating expenses back.[/quote}