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Are my real estate calculations correct?

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TreyAllDay

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I know a very limited amount about real estate, trying to learn more and will do much more research before comitting.

However, I'm wondering if someone can confirm my calculations are correct that 50k invested in real estate can in fact result in closer to 18% return in the first year as opposed to a simple 5% return investment in the stock market? I am wondering if there are things I am not considering in my below calculations?

Quick explanation: using 50k to purchase a $250k home, the end cash flow would be about $1,320 per year. The equity on the mortgage in the first year would be about $5k but grow in subsequent years, and real estate in my country has appreciated at about 1% per year (conservatively) - meaning a total return of $8,820 combined.

18% in real estate VS 5% (if even that) in stocks? Am I missing something?

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ljean

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$2500 annual property taxes??

I use 50% expense estimates for my projects.
 

CareCPA

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I think your maintenance expenses are low, and I don't see any capex reserves.
How much does a roof cost? How often does it need replaced?
Appliances? HVAC? Flooring? Water heater?

Total cost/anticipated life = annual capex reserves for each. I'm sure there's a formula for this in a book so you don't have to run through the whole exercise yourself.

Insurance expense?
Any licenses or fees in your area to be a landlord?
Are you hiring a management company or self managing?
I had three properties turn over in 2019, at an average cost of $5k per turnover...
 

Sethamus

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I had three properties turn over in 2019, at an average cost of $5k per turnover...
This potential turn over cost is why I haven't bothered going up in rent last year like I should/could* have. Tenant is great and for the location I have one of the best priced homes so she doesn't want to go anywhere.

I do maintenance cost along with long term cap expenses like Care mention. I think on my rental they were showing 40%(self managed) so I rounded up to 50% for my numbers.

Edit: These numbers are close to what I had on my rental besides a lower purchase($170k at a 4.3% in 2015) , but my down payment and out of pocket repairs I did was around 50k. In reality I'm getting probably 10% due to unexpected cap ex. that cost more than I calculated for. My appreciation (including the rehab value add) would put me back up pretty high, but I haven't calculated this since I haven't sold it yet.
 
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biophase

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Numbers look tight. I don’t generally calculate principal pay down in my cash flow. Also $5000 principal pay down seems really high. Did you run it through an amortization table?
 

2on2off

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One thing not mentioned is taxes. If the stocks were held in your tfsa then no tax applies. If the rental is held in your name then any net profit is taxed the same as a job.

Also 5 year fixed mortgage rates are under 1.8% right now and I wouldn't factor in principal paydown or appreciation into your cashflow calculations. Insurance is also missing as an expense.

The numbers get much better if you can make 2+ units in the place for example a duplex or basement suite. For example my 5 bedroom house may rent for $2400 but I made a basement suite and the upstairs is $1950 and downstairs is $1350 for a total of $3300. If one tenant leaves then it isn't 100% vacant. There are a much broader range of tenants (so you can be pickier) able to afford the lower prices compared to someone looking for a 5 bedroom unit.
 

alexkuzmov

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I know a very limited amount about real estate, trying to learn more and will do much more research before comitting.

However, I'm wondering if someone can confirm my calculations are correct that 50k invested in real estate can in fact result in closer to 18% return in the first year as opposed to a simple 5% return investment in the stock market? I am wondering if there are things I am not considering in my below calculations?

Quick explanation: using 50k to purchase a $250k home, the end cash flow would be about $1,320 per year. The equity on the mortgage in the first year would be about $5k but grow in subsequent years, and real estate in my country has appreciated at about 1% per year (conservatively) - meaning a total return of $8,820 combined.

18% in real estate VS 5% (if even that) in stocks? Am I missing something?

View attachment 36342

So lets do a breakdown, to the best of my ability.

- 11,400 Mortgage Payment - how likely is this to go up based on economic conditions? Can the lender raise your monthly for any reason?
- Property taxes - this goes up almost every year also, its not static, its mostly static, but make sure to factor the increase
- 1 month vacancy - no way to tell, but like other suggested, you should find a way to rent out the property to more than 1 person so that its very unlikely to be fully vaccant.
- Maintenance - this can either make or break your investment, its worth spending a few buck to get th eproperty evaluated, roof, pipes, electrical, heating etc. Make sure that the most expensive stuff to repair are in good shape.
- Like others said, insurance is missing.

You cant lump the morgage payed off with the return on investment.
First reason is, the property price fluctuates, so 5k is a guestimate at best.
Second reason is, its not cash in your pocket, like say a yearly divident investment would be, its locked in the property and wont be liquid until you sell it.

The property appreciation is likely, but again, not cash in your pocket.

At best you get $1000 yearly in cash which is as you know, very very low compared to what you`ve spent in cash and what you will spend in time.

You need to increase this tenfold for this whole adventure to be worth it.
Split the property for more tenants.
Find a better deal, more bang for your buck.
Make sure that the maintenece cost isnt high by checking the property before buying.
Consider the tax cost, look for lower taxes and consult with an accountant on how much you`ll pay on the profits, maybe you can business expense something to keep some taxes at 0.
 

tpuffer

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I know a very limited amount about real estate, trying to learn more and will do much more research before comitting.

However, I'm wondering if someone can confirm my calculations are correct that 50k invested in real estate can in fact result in closer to 18% return in the first year as opposed to a simple 5% return investment in the stock market? I am wondering if there are things I am not considering in my below calculations?

Quick explanation: using 50k to purchase a $250k home, the end cash flow would be about $1,320 per year. The equity on the mortgage in the first year would be about $5k but grow in subsequent years, and real estate in my country has appreciated at about 1% per year (conservatively) - meaning a total return of $8,820 combined.

18% in real estate VS 5% (if even that) in stocks? Am I missing something?

View attachment 36342


Appreciation generally shouldn't be used in your yearly Net Income return - It's not consistent and not guaranteed. And as @biophase mentioned - principal pay down generally wouldn't be rolled into that either. Using your numbers your cash on cash return is - $50,000/$1,320 = 3%.

If your minimum CoC return is 18% then this isn't a good play for you. The more units you have generally mean you can get that return number higher. Economies of Scale.

Have you also thought about investing with a fund rather than directly buy a property? Just as another option.
 

JohnD Realestate

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I know a very limited amount about real estate, trying to learn more and will do much more research before comitting.

However, I'm wondering if someone can confirm my calculations are correct that 50k invested in real estate can in fact result in closer to 18% return in the first year as opposed to a simple 5% return investment in the stock market? I am wondering if there are things I am not considering in my below calculations?

Quick explanation: using 50k to purchase a $250k home, the end cash flow would be about $1,320 per year. The equity on the mortgage in the first year would be about $5k but grow in subsequent years, and real estate in my country has appreciated at about 1% per year (conservatively) - meaning a total return of $8,820 combined.

18% in real estate VS 5% (if even that) in stocks? Am I missing something?

View attachment 36342
Keep an eye out in your state for regulations affecting landlords.
My state drastically changed the laws around evictions last year.

I would read local news and set an alert for words like landlord, tenants rights, evictions etc. there is a movement out there that believes “housing is a basic human right”
If that movement gets a hold of your market it will affect your yearly income.

The effect on the property value is magnified...bc the asset is valued at a multiple of yearly income.
 

JohnD Realestate

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I agree with that 50% number.

I used to strongly disagree. I ran some properties for an NYC landowner then bought my own and self managed them and after many years..... I came to the conclusion that no mattter how you manage it shit happens and if you kill yourself to get it down to 15% which you should do.... sometimes all the managing in the world ends up being 50%

On some properties it can be much lower....but on other properties it can be much higher...so at the end of the day 50% works across the board
 

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TreyAllDay

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Numbers look tight. I don’t generally calculate principal pay down in my cash flow. Also $5000 principal pay down seems really high. Did you run it through an amortization table?
I did yes - the mortgaged ammount of $200,000 at about 3.5% - principal of $5,096.
 

TreyAllDay

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I agree with that 50% number.

I used to strongly disagree. I ran some properties for an NYC landowner then bought my own and self managed them and after many years..... I came to the conclusion that no mattter how you manage it shit happens and if you kill yourself to get it down to 15% which you should do.... sometimes all the managing in the world ends up being 50%

On some properties it can be much lower....but on other properties it can be much higher...so at the end of the day 50% works across the board

50% of cash flow?
 

csalvato

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This book really helped me understand how to calculate cash flow, and what needs to be taken into account:

What Every Real Estate Investor Needs to Know About Cash Flow​

What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures, Updated Edition: Gallinelli, Frank: 9781259586187: Amazon.com: Books

It was an easy read.

This one is also very good, but a bit more strategic:

The ABCs of Real Estate Investing​

The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss (Rich Dad's Advisors (Paperback)): McElroy, Ken: 8601400316955: Amazon.com: Books
 

biophase

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I did yes - the mortgaged amount of $200,000 at about 3.5% - principal of $5,096.
I get under $4k when I run it through the calculator.

But that is still much higher than I remembered. Then I did a run at 5% at it was at $3k, which is more around what I remembered it to be. I haven't gotten a mortgage with a rate that low yet. My first ever mortgage was at 8.25%, which translates to $1500 principal paydown in year 1. LOL
 

biophase

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With all that said and all the advice from everyone else in here... If this were me and this were my first property and it were in a good area and I have sufficient savings, I would go for it.

You are going to learn so much from doing this that 1-2 years from now.

I don't think everyone should wait around for the best deal possible. This one barely pencils out and may be awesome or may suck, but it will be an adventure and a great learning experience.
 

JScott

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Two things:

1. Yes, you can make upwards of 10-15% on buy-and-hold real estate when you factor in the cash flow, principle paydown (amortization) and tax benefits these days, without too much effort/work.

2. That said, the deal you outlined above is missing a LOT, and is likely not a good deal. You don't list expenses for insurance, capital costs, utilities (when the unit is empty), turnover costs, property management (if you manage it yourself, it's immediately not equivalent to stocks as you're doing a lot of work), lawn care, etc.

If you want to generate more than 10% (with cash flow, amortization and tax benefits), you need to find a property that generates about 1% of the all-in cost in rent per month. For example, if you buy a property for $200,000 (all in), it would need to rent for at least $2000/month to generate 10% returns.

In that example, you'd generate about 6% returns with the cash flow, another 4-6% in equity from principle pay-down (depending on your loan amortization schedule), and another 2% or so in depreciation (tax benefits). That's an overall return of about 12-14% on your investment. Not all cash, but total return.

If you can find a property that rents for about 1.5% of the all-in costs per month, you can get closer to 20% returns. But, you'll spend a lot of time and hard work finding those properties these days.
 

tpuffer

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With all that said and all the advice from everyone else in here... If this were me and this were my first property and it were in a good area and I have sufficient savings, I would go for it.

You are going to learn so much from doing this that 1-2 years from now.

I don't think everyone should wait around for the best deal possible. This one barely pencils out and may be awesome or may suck, but it will be an adventure and a great learning experience.

Definitely at some point he'd need to quit analyzing and purchase something, but that doesn't mean he should buy just anything and be put in a tough situation needlessly.

I think @Johnny boy mentioned earlier that a good option would be to purchase a 2-4 unit. I think that could be a great first property. The other units help to mitigate some of the risk while still offering the learning that would be had from buying a single family. Also, and this may have changed, you are able to use 50 or 75% of the other units income to determine the debt to income ratio.

@csalvato mentioned two good reads to learn more

@JScott didn't plug his books - so I will. Reading them made me a better real estate evaluator. Add these to your list.
 

JohnD Realestate

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50% of cash flow?
50% expenses.
In your example rents are 18k so 9 k for expenses.
1500 insurance
2000 Capex
1800 management
1800 vacancy
2500 taxes
Puts you over 50%. Don’t try to save by cutting insurance. I always had a landlord policy, slightly more but if you need to make a claim the ins company would love you to take out a homeowners then rent it out. They would be off the hook. if you don’t raise rents it’s possible you could keep your tenants forever. Self manage then that cash goes in your pocket but keep it on the sheet.

for your calculations of cash flow go ahead and include mortgage but make sure for the purpose of valuation your not including any debt pay down or interest.
When valuing a property as an investment property most investors do a calculation based on cash purchase bc you never know the variables....interest rates, large down payment or small etc.


You didn’t utilities or water, yard maintenace snow removal and other expenses so this sounds like a single family. So whatever value you come up with as an Investment property make sure you know what the value is of a SF house. Then take the lesser number and that’s what it’s worth. Just keep in mind that all that and more could change for better or worse then your good.


Here’s my comparative analysis sheet might need some work. Look over the formulas and rework them for your market. I’m not sure the calculations are correct in your market or at all for my ok’d market either. Guess it was good for something a few of those buildings I Sold for double or triple what I paid. Wasn’t all mining gold....long story.

I digress. The sheet..... For instance vacancy it looks like I’m using too low a percentage. I would raise that for your purpose

Correction. On my quick figurings above.....I’m not quite sure but I think capex isn’t considered an expense. Think it’s figured into your basis. Good q for a CPA. But it’ll affect your cash flow, so it has a place on your sheet. Think that’s why on my sheet is after expenses are totaled.
 

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tpuffer

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Don’t try to save by cutting insurance. I always had a landlord policy, slightly more but if you need to make a claim the ins company would love you to take out a homeowners then rent it out.

Cool thing about living In a 2-4 unit and leasing the other units out is that you can insure the building on a personal homeowners policy!

But once you move out you'd have to move to a Rental Dwelling policy.
 

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