When I am figuring the numbers for an investment…(I like to use the 2 to 4 unit scenario)…I figure the bottom line. What are my costs, what the income is and what is the difference…the cash out each month. Depending on the property, there’s usually no gain the first year because of all the fix up and probably deferred monthly maintenance.
Principal and interest: So I start with my mortgage…principal and interest. I get this from the lender. (They can give you a flow chart with different scenarios) I find out the interest rate he is offering and I use a chart for 30 year amortization. I’ll include one soon on this website. I also find out from the lender what my down payment will have to be…20% or more? Usually it’s about 255 on non-owner occupied.
Property taxes: right now, as long as prop 13 stays into effect…properties taxes are approximately 1.25% of the purchase price. Ask me how we come to this later.
Home owners policy: You don’t really know this until you actually have a property..Depending on where it is in the city this will fluctuate…but I figure about $100 a month for rental properties. Remember to ask for a landlord’s policy.
Gardener: usually about $50 a month…depending on the property. We can talk about this too.
Utilities: depends again on how the units are metered but you don’t want properties where you have to pay anything more than water. It can run from $100 a month to about $200 a month depending on the landscaping and how many people are living in each unit.
Maintenance: I usually put in a $100 a month for normal maintenance…snaking the drains, broken switches, etc.
Some people like to figure I for vacancies…but I don’t. I usually can get things rented fast and the month it takes to rent I make up in the security fees. You want at least $200 a month cash flow..but I would go more for $400 or more..That’s a good deal!!
EXAMPLE:
Purchase price is $450,000…25% down…loan amount is $337,500 at 5% interest…my principal & interest are about $1711 plus taxes…1.25% of $450,000 = 5625 divided by 12 = $469 a month plus $50 gardener, and $100 a month for water, and $100 for maintenance plus $100 a month for insurance…costs $2530.
So you need to take in rents to cover that and give you extra. So if it’s a four unit building you want to take in at least $3000 a month.
Anyway, that’s how I do it. There are all the fancy ways but it seems to work for me. Then you can also figure your return on your money with the other formulas. If you’re making about 5% a year..that’s great these days.
