Would love feedback on a potential income property

[bosspross]

So I have been evaluating the market of rental houses in my area and I would love to get feedback from people who have more experience as landlords. I have been attempting to determine if my area would be a profitable area to do this or if investing in the stock market would be a better return.  I would be able to put down 20% as well as have a cash reserve for 6 months. The numbers would be as follows:

Cost of double: 180k-210k
Rent: $900 per unit (Area is currently going for $950-1000 however I would like to be conservative in case the market decreases)
Taxes: $2200 per year (Includes garbage)
Insurance: $1500 per year
Water: $720 per year
Maintenance: 4000 per year (Old houses that I would prefer to be conservative on the budget rather than underestimate) 
Vacancy would be less than a month a year.

I do not want to include appreciation and would like to assume the house will not appreciate at all.

I have researched different techniques for determining if a rental property is profitable and have come up with different results. I would greatly appreciate any feedback and if you need additional numbers please let me know.

[Crazydude]

You may have heard of the 1% or 2% rule. People who follow this rule say you should at least get 1-2% of your purchase price per month on a rental property. Some people will only invest if they can get 2% or more, others 1% or more. If you're buying with a mortgage, add closing costs to the purchase price.

Based on the data you've given, your best case scenario is you buy a property for 180k and get 950 in rent:

Both units: $1900
1900 is 1% of 190k.

In this case it seems like you'd be OK. However, do the math with adding closing costs as well. Also, insurance at $1500 a year seems high to me, but that could just be area dependent. I have a 2 unit built in 1896 and insurance is just over $800 a year.

Another "rule" of thumb to consider is the 50% monthly rule. This states that you should plan on having 50% of rent revenue go to the mortgage, taxes, insurance, vacancy and all expenses. If you add them up, and all expenses end up being more than 50% of monthly rent, then you've "broken" this rule.

Based on your info given:

Monthly Expenses:
Mortgage (at 4.5% w/ 20% down): 730
Taxes:                        183
Insurance:                 125
Water:                        60
Maintenance:             333

Total monthly expenses: 1431
Monthly revenue:            1900

Net:$469

Expenses are 75% of revenue!

Here you can see you've broken the 50% rule by quite a bit. And this is kind of a best case scenario as well. ALSO, this doesn't take into account vacancy.

PROS: Seem to get high rents in your area.
CONS: Purchase price is also high.

I don't know what area you're in, but if there was a property like this in my area, I would not go through with it. Mainly because in my area (Grand Rapids, MI) you can find 2-units for ~100k that rent out for $750 p/ unit or more. But you're area is probably different.

Hope this helps! I'm sure if I missed some things others will chime in with answers.

[Megma]

I'm not an expert but you also need to account for vacancy and ideally management. OP says less than 1 month/year but you will still have some. You might also have lawn care and such for a multi-family property.

If....

10% vacancy (36 days/year): 190/mo, new cash flow is: 279/mo
5% vacancy (18 days/year): 95/mo, new cash flow is: 374

If you also account for management costs (either to outsource or compensation for your time) of 10%, you are down to only:

10% vacancy+10% management, cash flow: 89/mo
5% vacancy+10% management,  cash flow: 184/mo

To improve the situation:
- Pay less for the house. Decide what your max price is based on the numbers and if they don't take it, you move on.
- Don't pay for water, I assume you included it because they are not separately metered? But maybe there is a way to pass this along to the tenant (ie rent is 950 + 50/mo water)

Those were my ideas....there are many very experienced landlords on MMM! Hopefully one will chime in :-) If you also look at the past case studies, you can see what they recommended others to look out for, check out the sticky from Iamlindoro for sure.

[bosspross]

Thank you guys for the feedback. I was familiar with the 1 and 2 percent rules as well as the 50 percent rule. I think i just needed to hear it from somone else. I will wait for the market in my area to go down or I will find a different market. Thank you both for taking the time to respond.

[marty998]

Would encourage you not to suffer from analysis paralysis.

There are ways you can cheaply add value and thus increase your potential rent (new paint, carpet, gardens etc).