I am seriously considering purchasing another rental property. I currently have two, the homes my wife and I owned before we got married. Combined, they have a free cash flow of about $500 a month, after management fees and expenses, in addition to approximately $600 a month in principal payments. Mortgages are at 3.25% and 3.75% and I'm in no hurry to pay them off at that rate. There are several homes for sale in a very good neighborhood, great public school system, attractive area for families with good long-term growth prospects. The ones I'm looking at fall in the middle of the market, with an estimated rental rate of $1,200 a month. One of our rentals is in the same neighborhood and rents for that and is comparable to the homes I'm looking at.
The numbers: approximately $150k to buy the house. I'm thinking about putting 50k down which is around 1/4 of my liquid net worth. This would generate a mortgage of around $650 or so after taxes and insurance are included at today's 30 year 4.25% rates. After management fees, the free cash flow monthly would be around $500, with an additional $300 or so of principal payments. Factoring in an average vacancy rate of 10% (which is very conservative for the area), this is around 8k of profit a year, or a 16% return on my investment. Am I missing something in my math? Thoughts?