Net Income And Expenses
I'm looking to invest in a property, whether it be a 1-unit SFR or multi-family (2-4 units), that will provide me some positive cash flow. I'm curious to know from some of you seasoned pros, how much net income should I be seeking? What's considered "decent".
Also, when calculating net income, how do you come up with an estimate on such expenses as reserves for replacement, maintenance and repair, vacancy, and utilities? I can figure out mortgage payments, insurance, and taxes. This info is pretty simple to obtain. But the other expenses, especially for someone who hasn't invested in income property, is a challenge to figure out.
Just trying to make certain I invest in a piece of property that will produce some cash.
...one more thing...the area I'm looking into has very inexpensive home prices. So, the income potential will not come from equity. I'm looking to hold for an extended period of time, hence the reason for some cash flow.
Thanks in advance for your feedback.
how much net income should I be seeking? What's considered "decent".
--I shoot for a minimum of $150 cashflow per unit per month
when calculating net income, how do you come up with an estimate on such expenses as reserves for replacement, maintenance and repair, vacancy, and utilities?
--this depends on your area, I've been OK so far with estimating 5% vacancies and 5% repairs and utils I would place on the tenant, some people suggest up to 20% vacancies depending on the area
HTH
This is not a simple question to answer
I would recommend going to the library or book store and invest a little time in education
There are many good books available on RE investing
The most basic formula is not how much cash flow per unit, but what is your return on investment.
What's decent ? You can earn 5 % on banking your money, so I would assume you would want in excess of that
1. You do not want to pay utilities
Capital expenditures and maintenance will depend solely on the property and area.
When inspecting property you should have a check list of all building elements
and assign life cycles to those items.
ie Roof - Type - age- size - useful life
You can then quite easily call a roof and get a budget quote to predict future cost
I could write a book here, but many other already have, read a couple of them
I estimate reserves to be $400 a unit in my analysis. This is based on replacement cost of all the items that are considered capital expenditures...Repairs and Maintenance depends on the property, a newer property, $25-50 a month per unit, older property $100+ per month per unit. Vacancy is a local variable, I have no idea what you deal with there...
And its generally cash flow after debt service, not Net Income your going to be concerned with. Net Income delves into Depreciation, amortization, and possibly accruals, and does not account for your payment towards principal as an "expense" whereas cash flow after debt service accounts for it as a negative cash flow...
hope that helps alittle in getting you started.
Cash flow is only part of your equation. Since it is directly related to your cash invested (which influences the cost of your debt service), compare these two to find out what's good and acceptable.
If it takes $10k of your cash to earn a yrly cash flow of $3500 you're getting 35% return on your money. Not bad.
If you can earn $3200 a year and it costs you $6000, now your at 50% return.
Absolutely; you want to be looking at your return on investment (ROI), not your net income. What’s considered “decent” varies from investor to investor; Your question should not be “how much net income should I be seeking?” — you need to turn it around the other way and ask “what kind of return do I have to get for this to be worthwhile for me?”
For example, a highly conventional, conservative investment in a single family home might look like this:
Purchase Price: $50,000
Mortgage (80% LTV) 25yrs @ 6%: $258/mo. (approx)
Down Payment: $10,000
Bank closing costs: $3,000
Total investment: $13,000
Gross Rents: $8,640 ($800/mo., 90% occupancy)
Debt Service: $3,100
Prop. Taxes: $1,900
Maint/Rep. $640
Insurance. $600
Net Operating Income (NOI): $2,400
ROI (cash on cash): 2,400 / 13,000 = 18.5%
not so great if you ask me, but not all that uncommon either.
Of course, if you’re looking at a creative investing forum, you’re probably not interested in that sort of deal anyway. Let’s say you find a motivated seller who is willing to carry financing w/ 10% down:
Purchase Price: $50,000
Mortgage (90% LTV) 25yrs @ 6%: $330/mo. (approx)
Effective Down Payment: $5,000
Closing costs: $1,500
(a seller-financed deal doesn’t have to cost anything to close; but unless you are into playing roulette, GET YOURSELF A COMPETENT RE ATTORNEY... and do your due diligence -- home inspection, title search, etc...)
Total investment: $6,500
Gross Rents: $8,640 ($800/mo., 90% occupancy)
Debt Service: $4,000
Prop. Taxes: $1,900
Maint/Rep. $640
Insurance. $600
Net Operating Income (NOI): $1,500
ROI (cash on cash): 1,500 / 6,500 = 23.1%
This deal (which is still kinda conservative) is putting less cash in your pocket, but it’s a better investment, because you have better leverage (you’re using less of your own money.)
Of course, the figures above are just a rough sketch but you get the idea, They also do not include tax considerations, which are very important because you can deduct interest and so forth.
I usually won’t even consider getting into a deal unless I know I can get 25% cash-on-cash, and frankly I don’t feel very motivated unless it’s closer to 50%. A more aggressive investor could be lloking to get all their money back in the first year. The important points are:
1) it’s _not_ the net income, it’s how much money your money is making for you
2) the physical property is not where you make your money; the _terms_ are what determines how profitable (or unprofitable!) the deal is going to be.
You’re going to have to learn the appropriate vacancy rate for the king of property you are renting, in the area you are renting, by a) experience and/or b) talking to other investors in your area. There’s no substitute for experience and markets vary. Moreover, it’s ALWAYS better to err on the side of caution when you are estimating your expenses -- otherwise you could be in for some nasty surprises down the road. From experience, I usually end up with around 5% vacancy rate in my area, but I always use 10% when I’m evaluating a rental property - I want to be on the safe side.
Similar maint./repair. Very dependant on the condition and age of the property, (not to mention the kind of tenants you rent to !). Older property always costs more to maintain of course, plus you may be looking at major capital expenditures and maintenance down the road on an older property. But don’t forget that how your tenants treat your property is also going to have a big impact. Personally, I strongly recommend that you stay as far away as possible from lower-income and public assistance rentals.
The best way to get a feel for deals in your area is to start looking and run numbers on every deal you see. But like hectortoddm said, read up. the most valuable investment you can make is in your education.