I'm working on investing in some more single-family and multi-family rental properties. Please follow my calculations, review them and tell me if I missed anything. My inputs are from historical numbers (based on the past 30 yrs in the town I'm investing). I've used a 5% vacancy rate and 5% of rent for monthly repair costs.

1st Year Analysis
Property Purchase Price: $120,000
Down Payment: $24,000
Monthly Rent: $1,125
Monthly cash flow (deducting Vacancy, repair costs, taxes and Ins.) $288
Avg. appreciation of rental property: 2% or $2,400 for year 1
Equity built from Mortgage paydown in year 1:$1,946.19

So, from these numbers I'm coming up with a ROI of my $24,000 of about 33% or $7802.19, in year 1.

Please tell me, if I can find more properties like this in the same town...why the hell I wouldn't buy the crap out of them?!

Yes, I understand that the repair cost could average higher then 5% of the monthly rent (some investors use the 10% rule here), even if I would though, my return per year is still around 29%...I can't find a stock that can do that over 5 years, let alone 25. Also, I know the ROI is hard to compare to a standard stock purchase, because I have to manage my rental property (which I do), but still for the little work it takes...the extra 20% in ROI is easily worth it, right?

Please tear apart this analysis and shoot holes through it.

Thanks.

where are you buying a place for 120k that rents for over 1k a month? that sounds just way too good to be true

the only places this makes any sort of sense is places with temporary high paying work. like oil fields, mining town etc. in that case you have a completely different risk analysis

I think you're pretty off basis with this statement and would be surprised if you did a little research.

youre basically saying you can buy a place with 5% vacancy rate at a 10% cap for 120k

your breakdown and questions demonstrate very little understanding/experience in real estate investing

instead of suggesting i dont know what i am talking about you could answer the simple and obvious question i asked

at this point i would say that if the subject property is in manhattan then go ahead and snap up a 10% cap. if its on a golf course in alaska maybe re evaluate

Any Midwest, small college town USA.

So, are you telling me you don't think any Jon Doe, with some cash, can buy a house in a small college town and rent it for $1K each month? Did you attend college and see what they get for rent in those towns? Do you know what a house costs in a small town in the Midwest?

Are you also telling me that you think rent in Manhattan is $1k month...I don't think you laid on the sarcasm enough.

I'm happy that you're tossing out the challenge, however, I gave the suggestion that you check into prices and rents before coming back to me, which you obviously didn't.

Why not find a loan where you can put down $12,000 (10%) and double your ROI to 66%?

1) I don't know of a bank, in this market, that will do investment property lending with less then 20% down, most of the time 25%. However, there are hard money lenders that will.

2) 2007/2008 tells me that being over leveraged can be a bitch.

FYI. This quote you gave in my last thread was solid and is something Buffett has said numerous times.

"Morgan Housel: How did you respond in 2008? You had blue chip stocks falling 60%, 70%. How did you respond as an investor?

Mohnish Pabrai: So one of the problems I had at the time is I was caught very flat-footed and very fully invested, so I could clearly see there were lots of opportunities, even 5Xs and 10Xs that we could invest in, but I didn't have dry powder, and I have worked on that since then to always make sure that I'm never caught in that sort of a situation, so one of the lessons that came out is to make sure you have some ammo to go at things."

Ok, so the next question: why is 1/10 down = over leveraged and 1/5 down = just fine? What's the thinking behind that?

Second question: A substantial portion of your ROI is in assuming a 2%/year appreciation in property value. Have you accounted for the 3%/year loss of value in the house itself? Low end houses with some years on them already typically need rebuilding in that time frame. It all depends on the house vs land value, but generally it's only the land value that appreciates, and on the low end properties in the less desirable places it's often a small portion of value.

Third question: Have you accounted for rates being at their historical average (meaning you pay around 7% on your loan)?

admittedly i'm not aware of the college towns in the mid west. i do however understand real estate investment

you have either found a great deal/opportunity or your numbers are off. places with 5% vacancy just dont go for a 10% cap. if youre buying a house and renting it to college kids you obviously need to adjust your numbers. being a slumlord or renting houses to college kids is not my area of expertise but if youre doing that, the numbers should reflect youre renting to college kids or a slumlord. they dont.

this doesnt mean 10% is impossible. airbnb for example gives you the opportunity to earn >% but the numbers should reflect realistic vacancy rates and risk involved

just to be blunt, youre not speaking the same language as knowledgeable real estate investor. theres nothing wrong with that but just take it in to consideration

if this is an income property there is 3 major factors to consider when forecasting future value

revenue/rent
expenses
cap rate

ask yourself about all 3 moving forward

obviously there is things like redevelopment potential but talking strictly as an income property

talking about depreciation is kind of irrelevant when you already have a realistic maintenance budget in your expenses

1st) My ability to make the monthly payments (comfortably) when renters don't come knocking on my door looking for property because my 5% vacancy rate doesn't hold true to the 30 yr average. Also, coming into play, in general, is the amount of money going towards interest and not equity.

2nd) I was clearly getting overly excited about the 33% return in year 1 (which my calculations where based off of). However, I did not bring into my calculation a year, or consecutive years, when value actually would drop, because I wouldn't sell then anyhow, as I'm a long-term investor and not in the general term of the word, meaning 1 year or more. The 2% appreciation is an AVERAGE, which we know means it could be along the lines of 5% one year or -3% one year, as you state. Furthermore, this is complete speculation and I'm investing for the long-term, not trying to time the market when I get a year of appreciation of 6% to sell or buy when we get a year of depreciation of -3%.

The rebuild expense comment you made is very valid. The properties are all up-to-date and I've tried to build into my calculations the average monthly repair costs, but, like you alluded to, there could be (or probably will be) a year when some major expenses come into play. However, I can only do my best to project these are 5% of the monthly rent, which in hindsight should be changed to the 10% rule of thumb. Again, I hope to span these investments out for a life-time, or more by moving them on to family via estate, so a $10,000 expense year shouldn't brake the investment over 30 or 40+ years.

3rd) Calculated using the current market rates due to the fact that the house is already purchased and future purchases would be done in the next several months

Remember, if your plan is to rent to college kids:

#1 You will have tenant turnover every year. (That means lots of work for you!)

#2 They will cause much more damage to your house than most other tenants.

I disagree. Chavez claims this:
The long (long) term rate of land appreciation, without taking into account the depreciation from the aging of the house. You can't have it both ways.

In 30 years his house is going to be worth far less than more modern ones due to its age. Thus if the land is a small portion of the value, the long term capital returns he's imagining and which form a big part of the equation are illusory.

I don't understand this. You use the 30 year historical average for everything else, but the rates you're using for you calculations are at today's zero rates. Unless you're locking in fixed rates for 30 years, you can't do this, and you're way underestimating interest given that we're historically far below the norm.

I was looking at something like this as well but I don't think you will be able to charge that much for rent.

I'll have to do more research though.

Thank you. Now, I can learn from this. Unfortunately, I don't understand everything you've said, so I'll have to research it some.

As far as the current rates being used, you're also right. However, what if I have the properties paid off in approx. 15 years by paying more towards the principle each month with the leftover cash flow? Like you said though, I'd still have to bring in the average historical rate, but just for a shorter amount of time to further the accuracy of my long-term ROI

My analysis isn't hypothetical, I'm doing it now and charging what was stated for rent.

--There is a very real possibility that some of my numbers are off, as far as repair expenses, average historical interest rate (as ToothSlayer stated), but as far as cost of the property and what I'm getting for rent, are not incorrect. My understanding of Cap rate is minimal and I assume it's what google tells me it is: The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.

--Currently not renting to college kids and would rather not, for the apparent reasons. Current owner of the other properties doesn't rent to college kids, unless he needs to, to fill the houses, which has only been done several times in past 30 yrs.

I'm competently okay with not speaking the same language as a knowledgeable real estate investor, because I'm not one, but I need to learn somehow.

youre obviously not dumb but youre misapplying concepts to a subject youre not particularly strong in

a realistic maintenance budget will do just that, keep the house maintained. if its a % of rent therefore its inflation adjusted/protected. if you dont think your rent will keep pace or beat inflation you have to circle back and re evaluate the whole proposition and your goals

if an investor wants to pump money in to a high end renovation they can do that also. if theyre smart about it, they can break even or profit upon selling the property. or they can attract higher rents

obviously looking long term with historically low interest rates is not good idea. more importantly you should be looking how much and likely interest rates can or will move in the shorter term. interest rates affect your mortgage payment. again, if your property isnt beating or keeping pace with inflation long term, you need to circle back and re evaluate the whole proposition. your revenue should be increasing over time while your pmt is affected by interest rates. think about it
oh boy

--- Can you better explain this?I understand what you're saying, but don't know why.

just to be clear. if youre not speaking the same language its not just the jargon but its because youre viewing things from a different angle/perspective. its important to realize this

so think about cap rate. think of it in basic investing terms. higher risk higher reward. real estate investors determine the cap rates. those rates are based on risk levels and opportunity costs, right?

if your getting 10% it automatically raises a flag. the return is high. whats the risk?

again when looking at the investment and future value
think about what can and will influence your property in those 3 categories

i hope you realize im being generous and helpful here. this isnt some sort of attempt to trash you

--I'm okay with this, have to learn some point.

--noted

--Got it

In a line: It's land values that increases, historically. House values don't increase.

A house deteriorates over time beyond a maintenance budget. At some point it needs complete rebuilding to be salable. Whether this matters depends on where you live. If you're in Europe, in the hundred+ year old stone buildings, you can ignore it. As you can in an apartment in New York. If you're in Florida, in a low end wood dwelling already 10 years old, you can't. Your house value is going to go down with time as your aging building becomes less and less desired and more desired places build out around you. Look at how low end 40 year old properties are selling in your market. In a lot of places they're not getting above land value.

I assume you're somewhere between these two extremes being in the midwest.

The long term rate of appreciation you're assuming applies to you doesn't that into account. The rate of real estate appreciation is simply what the average property sells for - including new houses that are far better than yours. So if your land value is low and your house is the type that will age relative to others (or newer developments) in 20, 30 years, your assumption that you'll meet the long term rate of appreciation is completely untrue.

I'd highly recommend going to a buy to let forum or a property investing forum. You need to run numbers past experts in this. They'll tell what's wrong with your ideas and what's right. You'll even find some in your area.

You're improving at not acting like a dick in your posts and I'll do more research.

In general, what would you say the red flag is, in this scenario of investments? Rent is indeed in the $950-$1300 (depending on # of bedrooms) range for older rental houses, that have been maintained and have a cost in the $120,000 to $145,000 range. Is it major repair costs, due to the houses being older, or am I being generally naive?

--I understood this in principle, but didn't know how to say it. I will read more into this, to better understand what my property would really be worth in 3 years.