I’ve taken your advice, and we’re going to slow down for the time being and work on being able to accurately predict expenses. I set up a spreadsheet to track the predicted versus actuals and calculate the return by year.

@ D: Thanks for the formula! I’m headed over to read all about it. Ironically, I used that formula on the condo we bought at the auction, and it cash flows better than we estimated.

I appreciate everyone’s help in learning about investing in real estate! It’s always fun to learn something new, but even more fun, when there are people to help you learn.

Sorry, Should read- than you have accounted for.

Here’s how the numbers look on a monthly basis:

Rent: $2310
Mortgage payment: $1230
Taxes: $450
Insurance: $65
Utilities: $65
Management, maintenance, reserves, etc: $350-$450
Based on the amount of maintenance needed each month, it should cash flow between $50-$150 to start off with.

Paying $260K for a house that rents for $2310
$2310 rent
$1155 expenses (50% rule of thumb)
$1155 NOI
$1230 P&I payment ($260K,5.875%, 3/1 years)
-$75 cash flow

This formula is more reliable because it factors in more expenses than you have not accounted for.

This information was found on biggerpockets dot com. Search “understanding 50% rule/ 2% rule”
Disclosure: I am not affiliated with the above site, but I have learned a lot and saved alot of DOLLARS.

Good Luck, D

I would especially point to two elements 1) the vacancy factor, and 2) the maintenance expenses. It looks like your rents are about $770/month. Using your optimistic cash flow numbers of 50- 150/month (assume 100/month), then one month’s vacancy of any unit eats up about 8 months of your profitability for the year. You WILL have vacancies. You will also have plenty of expensive repairs in a 100-year-old building – my experience certainly goes in this direction. Your rental rates will also fluctuate considerably. I wish you all the best, but I don’t think that it is likely that you will have positive, sustainable cash flow any time soon. If I has to point to one more element, I would point to the utilities – if you number is anything other than just water and sewer, you better start a reserve today.

One of the biggest things that I wish I understood better before I bought was that I was NOT, absolutely NOT, buying an “investment” – I was buying a business. That means that a lot of the “investment” ways of valuing things go right out the window. I got my initial value wrong by trying to value it as an investment, and it seems like you are doing what I was doing then. I still have the property that I bought, and after I pluncked a bunch more equity into it, it is now cash flowing, but I would probably be doing only a little less well if I was in bonds – and that’s without all the liability risk.

I would also recommend taking real estate licensing classes in your area – not for the actual license, but to learn about how the business works.

One thing is for certain, when I went to auctions last year, my numbers were solid as hell – like those of Chris and Sebs. (Actually, based on my experience, I don’t even view those numbers a conservative – they are more like minimal realistic numbers. More conservative would be a 15-20% vacancy number.)
At the three auctions that I went to, they didn’t meet my price on any of my target units – and I am absolutely fine with that. I really wonder how many of those people that bought would now be willing to sell to me at my number. I think plenty.

You are a very, very smart person and I really enjoy your blog. Your analysis on so many different things is very, very impressive. However, I would urge you not to buy more investment property until you have digested this one over the course of the next 2-3 years and you get a feel for the knocks. Best of luck.

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When you consider the 9% cap rate, do you take into account the area of the country you’re investing in?

I ask because we’re in an area that has not seen depreciation or problems with real estate from the economic environment plaguing much of the nation right now. I reviewed the comps and none of them came close to 9% in the area this house is in.

I’d love to hear both of your thoughts on our second property which I’ll post about later today. The numbers are better than this one, so I think we’re improving as we go, but I’m open to your thoughts for additional improvement. As you know, real estate investing is brand new to me!

Once we get further from downtown, the cap rates go up, but so do the vacancies and the risk.

Since it was our first property, we wanted to do a low risk, low reward investment. As we learn more, and get better at it, we’ll probably take a little more risk.

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