How Do You Determine If A Rental Property Is A Good Deal!
I'm looking at an REO for possible rental property.... 3BR/2.5BA in good school area where local 3BR apartments are renting for $950.
REO list for $122,500 but has been vacant for almost 9 months and still needs 2 or 3K of repairs before rentable. Is there a certain percentage above PITI that you use to determine if the rental is worth it? Or do you use a dollar amount and say if I make $50/month over PITI then it's a go.....
Just looking for some guidance in this arena...
Thanks!
Any positive cash flow is good but make sure you factor in those hidden costs besides PITI.
Holding costs
Maintenance
Repairs
Clean up after they move out.
Those...damn I wasn't expecting that to happen costs.
I'm not a landlord so I can't give you a good break down of all the hidden costs, but I'm sure someone will reply with a more detailed list.
back of the envelope calculation is that if it's selling for $100,000 you should recieve 1% of the price in rents each month.
Or do a cash flow analysis and see if it will cash flow.
Quote:
On 2003-11-24 15:32, hibby76 wrote:
back of the envelope calculation is that if it's selling for $100,000 you should recieve 1% of the price in rents each month.
Or do a cash flow analysis and see if it will cash flow.
But what would you look for in the cash flow, just a positive cash flow or 10% above the monthly outlay?
I want a positive cash flow that is at least 25% of my debt service, and an Internal Rate of Return that is better than any other investment vehicle available to me at the moment.
I would consider the %of roi , the cap rate, positive cash flow rate, grm and most importantly will you be happy with just the positive cash flow or is there an expectation of appreciation.
This one looks a bit thin, but run numbers. It might also depend on your area. A small positive may be acceptable if you expect considerable appreciation along with large future rents.
I tend to go along with Dave T and go for the flow. This is particularly so if large appreciation is not in the future on this one.
Don't forget vacancy rates. Also, if your not so inclined to do it yourself, management fees, which can take a huge bite out of your income - easily ruining an otherwise good thing. [ Edited by Zach on Date 11/24/2003 ]
You mention that apartments rent for $950 but you don't mention what a 3br house rents for in this area. However, assuming you are planning on getting the $950/month, I think the numbers are way to thin. As I have mentioned in other posts, there are many detailed ways to determine how well a property will cash flow but I find the simple ones tend to work about as well. The one that I have mentioned in the past is multiple of gross annual rent. Personally, I never pay more than 5 times GAR and often much lower. I do this by only buying a property if it is an exceptional deal that needs rehab. Also, the 5 times GAR is the most I will invest including rehab costs. So, it might sound outrageous, but I wouldn't pay over $60k for a property that rents for $950. Costs are always much more than what you think.[ Edited by davmille on Date 11/25/2003 ]
Each person will do things a little different. And you did not give enough info.
I expect more cash flow in my areas depending on the appreciation.
Bottom line is your return better than you can get in stocks or the bank.
You have to figure in appreciation, all other costs and your time. And each persons time is worth a different amount.
Good appreciation and dont have to make the money up front with the cash flow.
Try using the applications in the 'MY TOOLS' section of your 'MY TCI'. that may be helpful.
click on this link. this is the calculator you are looking for
http://www.thecreativeinvestor.com/modules.php?name=Tools&op=ProForma
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(A division of: Half Vast Enterprises)[ Edited by WheelerDealer on Date 12/20/2003 ]