This Math Will Make You Broke

This math will make you broke if you are a real estate investor.  I received this math in an email from a local real estate investor who has turned agent and property manager, too.  I won’t call him out by name, but this is the type of real estate math that makes rental property owners think they are going to get one thing but end up getting another.  Take a look;

The Numbers:
Rent – $750
Mgmt – $75
Taxes – $75
Ins – $40
Net Income – $560/mo x 12 = $6,720/yr
ROI = 10% ($6,720 NOI / $65,000 Purchase)

Doing the math I calculate about 25% of the Gross Operating Income being set aside for expenses.   I more believe the math would look something like this, especially in the neighborhood I know the house to be in…

Rent 750
Mngmt 75  (that’s if there are no lease out fees, we charge $67/mo plus 75% of first month’s rent .  Many property managers charge a lease out fee, as well.)
Taxes 75 (estimated at 900/yr)
Ins   65 (remember, this is now a rental property)
Vacancy – 37 (and that’s at a 5% vacancy, in this neighborhood figure closer to 10%)
Repairs – 50 (anything less than 600/yr is not realistic)

And what about a sinking fund for major appliances and a roof?  What about a future make ready when the tenant leaves?  What about….?  I’m not even going to get in to the purchase price for the neighborhood in question.

At a very quick glance I’ve reduced the Net Operating Income from $6,720/yr to $5,376/yr.  That  is a significant reduction of the expected NOI, which will greatly impact however you choose to correctly figure your return on investment.

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