Question Details

Hiyiyi, Both Buyer and Seller in Redwood City, CA

cash flow percentage

Asked by Hiyiyi, Redwood City, CA Sun Jan 24, 2010

What is a good pre-tax cash flow percentage that I should trying to get for a single family home rental property?

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Answers

6
Critical Output Report
Property Name: property1



At purchase Year 1 Year 2 Year 3 Year 4 Year 5
Property Value 200,000 208,000 216,320 224,972 233,970 243,328


Income & Expenses
GSI 18,000 18,000 18,360 18,727 19,101 19,483
Loss due to Vacancies -1,440 -1,440 -1,468 -1,498 -1,528 -1,558
Gross Operating Income 16,560 16,560 16,892 17,229 17,573 17,925
Loss due to Expenses -5,880 - 5,880 -5,938 -5,997 -6,056 -6,116 Operating Income (NOI) 10,680 10,680 10,954 11,232 11,517 11,809


Financial Ratios
Gross Multiplier 11 %
Cap Rate 5 %
Internal Rate of Return 3 %
Yield 9 %
Debt Coverage Ratio 1.21 1.24 1.27 1.30 1.33
Loan(LTV) Ratio 65% 61% 58% 55% 52% 49%
Ownership Percentage 38% 41% 44% 47% 50%
Cash on Cash Return (BT) 2 % 2 % 3 % 3 % 4 %
Cash on Cash Return (AT) 3 % 3 % 3 % 4 % 4 %


Depreciation
Depreciable Improvements 160,000 160,000 160,000 160,000 160,000
Depreciable Allowance -5,818 - 5,818 -5,818 -5,818 -5,818


Debt Service
Mortgage 1 Principal -1,751 -1,849 -1,954 -2,064 -2,181
Mortgage 1 Interest -7,106 -7,007 -6,903 -6,792 -6,676
Mortgage 1 Balance -128,249 -126,400 -124,446 -122,382 -120,201
Total Debt Service -8,857 -8,856 -8,857 -8,856 -8,857
Total Mortgage Balance -128,249 -126,400 -124,446 -122,382 -120,201


Cash Flow
Before Tax Cash Flow 1,823 2,098 2,375 2,661 2,952
Taxable Income -2,244 -1,871 -1,489 -1,093 -685
Taxes Due 561 467 372 273 171
After Tax Cash Flow 2,384 2,565 2,747 2,934 3,123


Rate of Return (RoR)
RoR onLoan Reduction 3 % 3 % 3 % 3 % 3 %
RoR on Appreciation 11 % 11 % 12 % 12 % 13 %
RoR on BTCF 3 % 3 % 3 % 4 % 4 %
RoR on Tax Saving 1 % 1 % 1 % 0 % 0 %
Total RoR 17 % 17 % 19 % 19 % 21 %


Equity Accumulation
Paid Principal 1,751 3,600 5,554 7,618 9,799
Appreciation 8,000 16,320 24,972 33,970 43,328
Down Payment 70,000 70,000 70,000 70,000 70,000
Total Equity Accumulation 79,751 89,920 100,526 111,588 123,127
Estimated Sales Cost -16,640 -17,305 -17,997 -18,717 -19,466
Before Tax Profit upon Sale 63,111 72,615 82,529 92,871 103,661
After Tax Profit upon Sale 53,645 61,723 70,150 78,941 88,112


Investment Results
After Tax Cash Flow 2,384 2,565 2,747 2,934 3,123
Unrealized Gains (Equity) 9,751 19,920 30,526 41,588 53,127
Total Investment Results 12,135 22,485 33,273 44,522 56,250

I ran these numbers with a 8% vacancy rate, 4% appreciation, 2% annual rent increase, 1% expense increase.

Cap rate of 5 I would try for an 8 minimum but it is not easy in your area. Sorry my collums are not lined up pretty the Q&A plays with my format. You need the appreeciation rate to stay up and tenants to stay put!
Web Reference: http://www.Find1Home.com
0 votes Thank Flag Link Tue Jan 26, 2010
Hi David and James,

Here is the breakdown of my calculation.

Monthly rent - $1500
Vacancy loss - (10% of monthly rental) - $150 (About one month rent a year)
HOA - $105
Management fee - 6% - $90
Property tax - $200 (should be lower but this should be conservative)
Insurance - $45
repair and misc- $50

Net operating income - $860
Annual debt service - $700
Pretax cash flow - $160
0 votes Thank Flag Link Tue Jan 26, 2010
Hiyiyi it sounds like on that one you are doing alright. LTV stands for Loan To Value. At 700 a month under this rule taxes and insurance would have to be about 50.00 a month.
As for your 150.00 a month positive cash flow. Are you putting your vacancy and operating expense numbers in the cash flow figure or are you giving a number that is an actual after all expenses are paid.
If that is an actual after everything is paid you may have to reevaluate. 150 net a month is 1800.00 a year. One month vacancy and paying someone to clean the place out after a tenant leaves wipes out one year of proffit. You need to hope that there are no repairs that need to be done and you fill the place in 30 days to prevent feeding the property. Is the property at a fair market rent or is there a way to increase the income? Can you cut back on expenses some how?
At least you are not having to take money out of your pocket for the payment every month. Properties that fit the profile may not be a dime a dozen in your area but no one ever said that this was easy.
Web Reference: http://www.Find1Home.com
0 votes Thank Flag Link Tue Jan 26, 2010
Hiylyl,

I usually like a minimum of 8% return after all expenses( payment, taxes, insurance, maintenance, property management cost, vacancy costs, etc) are paid.
See my page on what I look for in an investment in the web reference below. Also look at the positive cash flow spreadsheet that I run to help analyze a potential purchase. Give me an email and I will be happy to send you the excel doc if your interested.

On your recent purchase I would have liked to see your cash flow at about $150 after all expenses.
Hope it helps...

David McKeever
0 votes Thank Flag Link Mon Jan 25, 2010
To James,
Do I understand correctly? 80% LTV? What is LTV? Is that possible? Even in a depressed market like Las Vegas might be hard to find deal like this.

I recently bought a lovely home for investment at 200K in a very nice neighborhood in Las Vegas. My loan is relatively small. I put down about 35%. I paid about $700 in principal and interest a month. The operating expense and vacancy estimation is about $600. My rent is about $1500. I only make about $150 positive pre-tax cash flow. I thought it's an acceptable deal. But your estimation gives me doubt.
0 votes Thank Flag Link Mon Jan 25, 2010
The way most of the investors I work with figure it this way. Take the loan payment at an 80% LTV. Add in the property taxes, insurance, and any HOA fees. Take that number and double it. If you can not get that amount in rent look elsewhere. This is called the 50% rule. If you are not making a positive cash flow on your investment properties you are a speculator! You can invest for appreciation (speculation) if you do not hit numbers like this but be prepared to feed the property more cash.
Web Reference: http://www.Find1Home.com
0 votes Thank Flag Link Mon Jan 25, 2010
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