[quote=enron_by_the_sea]What does “number work out” mean in context of a rental property?
I always consider getting one and do a mental calculation of
cap rate = (rent – vacancy – tax -insurance – HOA – maintenace – Prop. Management) / Price * 100
In and around Central San Diego county, the result is typically 3% to 6% depending on whether I assign any value to maintenance and prop. mgmt. or not… While it is better than bubble days, that still does not interest me so I give up.
For those, who are into landlording now, what is the flaw in my calculation? or is 3%-6% now considered a good cap rate?[/quote]
I buy condos, SFR’s and 2-4’s so I don’t use cap rates as they are more for larger apartments. I use more cash on cash return. How much down payment do I have + fix up to make it rent ready, and then what is my monthly positive cash flow + loan amortization pay down. From late 2008-end of 2011 you could get better than 10% cash on cash return on leveraged condo’s, SFR’s and 2-4’s. In come cases WAY better then 10%. And that isn’t even factoring in appreciation. Where are you going to get that type of return year in and year out? With appreciation that return can go though the roof. It already has for 2008-2011 rental buyers who bought well.
A lot of people do not factor in loan amortization into their return, and with these low rates it is HUGE. With a $350k loan 30 yr fixed loan at 3.75%, over just 5 years your tenant pays down $34,729 towards the loan principle for you. And loan amortization not taxed! So you get that huge loan amortization pay down + the positive monthly cash flow.
Also if you really scoured the market and put a lot of time in & became a really good buyer, you can find properties with hidden value and then add value. This can add to your return big time. There might be something you can do to greatly increase the rents, or you may have bought on the edge of a rapidly gentrifying area, or you can create extra parking, etc…
These are reasons why I think applying standard vanilla “cap rates” to certain regions for mom & pop type rental investors that buy condos, sfr’s and 2-4’s, doesn’t really work well.
Of course personally I don’t think the cash-on-cash return is nearly as good anywhere on the coast of CA vs. what it was in that short window from late 2008-end of 2011.
