Rental Property #3 Numbers Analysis

As I told you guys in the last post, I’m going to give you the actual break down of my current and future rental property purchases.

For property 1 and 2, I give you the month by month break down of  income and expenses.

For this go around you get all the numbers starting at purchase price.

Why Am I Doing This?

 

I have two reasons for doing this.  The first reason is that I want to be 100% upfront with you.  Many people have aspirations of being landlords and they usually don’t take the time to run the numbers. I’m not here to sell you a dream.  I want you to know exactly what you’re getting into when you decide to get into the residential real estate game.

My second reason is that, it forces me to analyze and review my properties numbers on a monthly sometimes weekly basis.  Running the numbers constantly to ensure you’re on track is paramount to success.  Heck, when I starting writing my income report for April.  I decided that it was time to evict the tenants in rental #1 and #2.

 

Rental Property 3 Repair Breakdown

 

Prior to putting in an offer, I already knew what the repairs would be and the time frame for completing them.  Here is what my property manager / repair guy sent me.

Description of work:

1.Remove old linoleum from bathroom floor, and re-install new Linoleum tiles.  (265.00)

2. Install a used neo-angled vanity and sink. (250.00)

3. Replace 4 interior doors that are cracked/no longer close (375.00)

4. Paint entire interior of house with 2 coats of latex paint. ( 2,650.00)

5. Remove trees growing into foundation. (180.00)

6. Cut back large branches that are extending onto the house.  ( 375.00)

7. Install new side-slider window in kitchen. (425.00)

8. Paint front porch. (350.00)

9. Install new locks/dead bolt sets and master-key them. (55.00)

10. Have all Carpets cleaned: 525.00

11. Repair damaged furnace and re-run missing duct work caused by break-in prior to closing: 980.00

12. Sewer line replacement/lot-line clean out as per prior estimation from plumber last year: 1,600.00-2,000.00 depending on the amount of line that needs replacement.

Total for materials and labor: $ 8,430.00

Time frame for completion of work:  7-10 days.

 *Upon speaking to the property manager, we’ve decided that 8k would be enough to get the repairs done*

 

What’s next?

 Related Article: We are buying another rental property #3

The next step is obvious, we make the necessary repairs.  Then we rent it out.  We should have a tenant within the property 2 weeks after repairs are completed.

The tenant will be a section 8 tenant, because we like guaranteed rent, but I hope the tenant gets 100% support instead of anything else.  Tenants in this area are horrible at paying rent.  I expect between 900-1100 in rent for this property.

After we have a tenant in the property and the county has time to send me the deed.  I will pull 60% equity out of the property to finance the next deal.  I will write another post explaining this process.

 

Cap Rate!

 

OK, let’s discuss best case and worst case scenario for cap rates.  Oh, you don’t know what cap rate is?  Here is a nice definition. 

Capitalization Rate is the Net Operating Income divided by the Market Value, or rather the Capitalization Rate helps in determining the current market value of a real estate property on the basis of Net Operating Income.

 

Worst Case Scenario Cap Rate…

 Related Article: How I Spend Only 30 Minutes A Month On My Rental Properties and Still Have Positive Cashflow

So, in my worst case scenario, one where my tenants don’t pay their portion of rent and I have to solely rely on section 8, the cap rate will be..

Gross Rent = $700(monthly) or $8,400 (annually)

Property Management Fee = $70(month) or $840 (annually)

Other Expenses = $211 (monthly) or $2,532 (annually)

NOI = $Gross Rent-All Fees = $5,028

Cap Rate = NOI / Purchase Price = $5,028 / $29,000 = 17.33% 

But we are not done!  See the cap rate is only acceptable to use if you do not have debt to service.  I just told you I plan on pulling the money out.  So, when I do I will have another annual expense of $1,656.  Let’s take that will bring my NOI to $3,372.

Once I pull the equity the new cap rate will be $3,372/$29,000 = 11.62%

As you can see, that even in a worst cast scenario we will make a serious return on our investment.

 Related Article: Shit My Tenants Say

The I wish Cap Rate….

 

If my tenants pay their portion and section 8 pays their share the cap rate will be….

Gross Rent = $950(monthly) or $11,400 (annually)

Property Management Fee = $95(month) or $1,140 (annually)

Other Expenses = $211 (monthly) or $2,532 (annually)

NOI = $Gross Rent-All Fees = $7,728

Cap Rate = NOI / Purchase Price = $7,728 / $29,000 = 26.64% 

Just like above, let’s calculate the true return once I pull equity.  New NOI = $6,072

Cap Rate when including debt service = 20.93%

 

You may be wondering how we make money if the tenant doesn’t pay.  Well, our properties house government assistance tenants.  Each tenant typically has a portion of their rent paid by the local government.

 

With those kind of returns who needs the stock market!

 

You may be thinning.. “Why pull the equity, your returns are so high!”  Well, the answer is simple.  With the equity I can buy another house.  This will increase my portfolio returns tremendously!

 

So what’s keeping you out of the real estate game?  Would you invest less in the stock market and focus on real estate if you could duplicate my returns?  Hmm… Should I stop investing in my ROTH IRA (Conversion) and focus exclusively on real estate?
 
If you want more information about my deal check out my one on one real estate sessions by clicking this link

 

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0 comments

  • I appreciate you breaking it down. Like you said, a lot of people aspire to own a rental but don't put in the analysis that you do.
    My recent post Simple Steps To Grow Your Business

  • URFinanceSimple /

    No problem, as you can see, this is a long term play. It will take me 5 years to get my money out. But due to favorable tax code and the constant acquisition of properties, I can make a pretty good amount of income, once I cross the 10 property mark.

  • I appreciate your month by month break down procedure. It’s definitely increase your my portfolio and with the equity you can buy more house. 🙂

  • L.S /

    “Where have you been all my life” 🙂 (in my best Rihanna voice) 🙂

    Everything on your site is exactly what I’ve been looking for and best of all, its all in one area and you respond to comments in a timely fashion. Keep up the great work. Now that the pleasantries are out of the way, down to business.

    When it comes to property managers, do they typically go to a potential property, assess repairs before you buy, and then make repairs after you buy the property, or is that just what you have worked out with your property manager/ repair guy?

    Also, what would I need to look out for when choosing a property manager to avoid getting one “from hell”?

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

  • YFS the hustle should not remain side any more. The longer chain you create the more time you'll need to put in to this.
    My recent post Monthly Blog Update – May 2012

  • URFinanceSimple /

    Good observation. There will become a time when I have to put a little more time in, but it won't be much more. A lot of my decisions are made month to month. For example, if there is a problem with all 3 properties my property manager and I handle it all in one 20 minute phone call. This can get tough once you get to 10 properties. But I can't wait to have that problem.

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

  • L.S /

    Scratch the second part of my previous question (i read you blog about the property manager from hell). Still would like an answer to the first part. Thanks 🙂

  • URFinanceSimple /

    I thought I answered you in myblast reply. The answer is, it depends. Everything is negotiable. My guy happens to do it for me.

  • […] Relevant post:  Rental Property #3 Numbers Analysis […]

  • […] could probably even pull out some equity and buy a rental home or two hmmm, my friend Dom, from Your Finances Simplified could probably give me a few tips on […]

  • RichUncle EL /

    Great breakdown of the worse and best case scenario. Rental properties seem like a great way to get ahead in life. As a way to diversify you can take 20% of your net proceeds and put in the stock market and with the other 80% use it to live with and pay down mortgage debt.

  • URFinanceSimple /

    I like that way of thinking. However, wouldn't it be better to just buy more properties. I know I didn't say it in this post, but we already have a good chunk of money in the stock market and to pay down mortgage debt, we would only get a return of 4.75% so, would you buy more properties if the returns doubled or tripled the mortgage?

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

  • […] @ Your Finances Simplified writes Rental Property #3 Numbers Analysis – As I told you guys in the last post, I’m going to give you the actual break down of […]

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