Hi all, super long time lurker, first time poster! I have found that I like this forum much better than BiggerPockets just because of how it's organized so I'm going to try and hang out here more and hopefully contribute some valuable information.
A little background first: My wife and I have been wanting to get into real estate investing and put together a plan a year ago to get to the point where we were comfortable buying our first property. We are almost there! We have read a ton of real estate books, put together a business plan, and have enough money to buy our first property cash. We are getting to the point where we will soon be looking for a realtor that can help us get into REO's and short sales as well as driving for dollars on our own.
What I'm really struggling with is the investment returns and identifying a good deal. I would greatly appreciate it if you guys could look at my sample deal below and tell me if it makes sense or if I'm doing something wrong. I put together a nice spreadsheet that takes everything into account and automatically calculates my mortgage payment and my returns. I'm confused because when I calculate my returns with an imaginary property that cash flows at 2% cap rate the returns are still not that good. My goal is to purchase properties that give me at least a 15% CoC return to justify buying it instead of throwing money in an index fund.
Here are my assumptions:
Home: 3 bd/1 ba
Area: C+/B- (Nice older neighborhood with nice normal houses, schools suck, I would gladly live there without kids because of the schools)
Asking Price: $56,000
Purchase Price: $50,000 (it's been on the market for a long time)
Improvements: $0 (to keep the example simple)
ARV: Ignoring for now (no improvements, no ARV)
Closing Costs: 3%
Finance Amount: $37,500
Cash Outlay: $14,000 (down payment + closing costs)
Interest Rate: 5%
Mortgage Duration: 30 years
Income: $1,000 a month (Similar properties rent for $1,100 but I'm being conservative)
Expenses:
Vacancy Rate: 10% (conservative for SFH I think)
Maintenance Rate: 5% of rent
Property Taxes: $2,373/year
Insurance: 50/month (guess)
Property Management: 10% (I would self manage but I still gotta pay myself)
Capex: 220/ month (based on biggerpockets articles and making a table of capex and dividing by useful life)
Total expenses: $7293/year
Gross Income: $10,800/year
NOI: $3,507/year
Mortgage: $2,416/year
Total Cash Flow: $1,091 on year 1
CoC ROI: 7.80%
Total ROI: 11.75% (assume no appreciation, added return over CoC is from mortgage paydown)
Based on these numbers this is what I see, a property that meets the 2% rule (wow amazing!) that doesn't beat the market by a significant enough margin to warrant acquiring it. However, people on BP buy properties like this all the time and post about the great deal they got and how they're going to make a ton of money. What am I missing? Am I shooting myself in the foot with numbers that are too conservative?
I could remove the property management expense and my CoC goes to 15.5% but I'm just tricking myself because I'm not paying myself and what happens when I do hire a property manager?
I could also leave PM but remove my Capex for the first year and my first year's CoC return goes to 26.7% return. Again, I'm just tricking myself because my $220 number is a long term average so even if I pocket it the first year I will have to shell it out at some point in the future.
Thanks for reading and I appreciate any and all feedback!