Using your example above (all numbers annualized and assuming 4% appreciation over TEN years)…
CF = (1185*12*0.95-(180+141)*12-2000-11496)=-3839 per year
CF = (yearly income* 5% vacancy rate – tax – assoc. – maintenance – amortized loan amount using 7% interest)
7% to 8% interest is normal for investment property. 6% is normal for owner occupied property. Also assuming that owner will be the property manager (property management fees would be an additional 10%*income hit to cash flow).
AP = (180000*0.04) = 7200
You can only use 4% appreciation if you are planning on holding the property for around 10 years. Otherwise you will have to calculate in 0% appreciation for the California market.
So by real estate terms, it is an ok investment. Cash flow sucks (as does everything in California). You’ll still come out ahead but that negative cash flow will be tough to maintain. Still 18.2% is a decent investment return unless you’re really good at picking stocks. Still there are hazards for owning property for ten years or more.
Most seasoned investors would not buy a property like this because of the negative $3839 cash flow per year ($-320 per month). Unless you are deliberating trying to decrease your taxes, probably not a good investment buy.
The cost of the property at which it would cash flow? $120k.
Anyways if you want to evaluate any property for its investment potential, use the calculation above. If a property goes to around 25% to 30% ROE, it is considered a good purchase (assuming optimal conditions!).
