Let’s look at the blended rate return. This calculator is provided by Rental Property Reporter at the link above, and you can follow along on the next page. When we plug in a home value of $200,000 and an initial down payment of 20%, that leaves us with a debt service of $160,000.
Right now you can get a 5% interest rate. In the drop-down menu, we can look at the assumptions: 240-month term (that’s 20 years), which is what I recommend. The cost of sale is fair.
In the income assumptions box, let’s assume we’re bringing in $3,000 per month. That’s not too bad. Right now the cap rate says 18%, but that’s not going to last. I’ll show you why here in a second. When we update the vacancy rate field from 8% down to 3% (right now we’re at 2-3%). Their original figure for rent increases is a bit high.
Let’s say we’re going to rent increase 3% per year. Right now we are raising rents very aggressively, far exceeding 3%. We’re raising them as much as 10%, but you can’t always count on that. That’s just right now and it will only last a few years. On average you can raise rents of about 3%. Let’s imagine we have to spend $10,000 on capital improvements at the outset of this initial expenditure. Maybe a new boiler, maybe a new roof.
More assumptions. Property management, 10% is reasonable. That’s what I charge my clients on average. But maintenance at 1% is too low. That’s only $30 a month. It needs to be about 5%. Higher in older properties, lower in newer properties. The insurance cost figure is about right. Move-in/move-out costs occur when you have a change
in a renter. You’ve got to account for the lost time when no money is coming in. Plus you have to count cleaning and painting and all that. On average let’s say that’s $2,000. In the property sales assumption area, this is assuming you sell the property down the road.
$244,000 sale price, $231,000 after commissions is reasonable. That assumes about a 20% increase in value. I believe they’re using a five-year assumption. Selling cost/commission of 6% is just about right. We just determined annual appreciation should be about 4%, and let’s call the land value $10,000, which is about 5%.
On an annual basis, let’s say the property tax is $5,000. Some of you guys around the country might be licking your chops here, but it happens every day in areas like St. Louis, Pittsburgh, Cleveland, Jacksonville, and many parts of Georgia and Texas. This happens every single day.
Let’s leave the tax rate as provided. 15% for capital gains, 2% for cost and inflation rate. Investment hurdle rate for comparison to other investments, let’s leave that alone for now. When we view the detailed investment performance, you can see cash from sale at the end is $80,000 because we have to pay off the mortgage, of course. You put in $40,000 and get $80,000 out in five years.
That’s actually about a 15% return, which is not that bad of a deal. I’ll let you look at the other tables on your own. For right now I just wanted you to see what you’re Investors are seeing. That total expected rate of return and cash flow summary, you can see in your first year if you just put down $40,000, you’re going to have a hard time making more than that in the first year.
In the second year, maybe a little bit of loss, but you can see by the time you get to year five you’re making some pretty good dough in your net total. This picture looks even rosier now. Cash flow plus the proceeds on the sale. That’s your rental property reporter. I would get familiar with this tool and use it. This is a really critical class. If you understand this material – if you nail this – your investors will love you, respect you, and refer people to you.
My referral rate from Investors is close to 100%. On average I’ve received one referral for every. The investor I’ve already serviced. I’ve serviced 168 different Investors. As a matter of fact, I had 168 while I was working as an active Agent. Now I’m a broker and teacher. Of those 168 Investors, 154 actually bought something. Imagine that. 154 out of 168, is a huge buy rate.89 of those Investors were repeat buyers. Some earned me $20,000-60,000 in commissions over a period of just a few short years.
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