There are a couple key things to consider when deciding if something is a good deal or bad deal in terms of cash flow on rental properties.

Net Operating Income - Debt Service = Cash Flow (explained below)

Income
(+)Gross Rental Income ________
(-)Vacancy Rate (5%) __________
(=)Total Operating Income ________

So when figuring out how much you will have for income you take your gross rent, subtract a vacancy factor (You should always include this because the property may not always be full capacity or always rented out, figure out what is the average time the unit is vacant in a month or year), and you will get your Total Operating Income.

Next figure out your Operating Expenses.

Operating Expenses
Maintenance and Repairs ______________
Management Fee __________
Advertising ________
Utilities ________
Real Estate Taxes ________
Insurance ________
MISC _______

If you don't have exact numbers for the maintenance also use another percentage factor, 5-10% is usually acceptable.

Now take your Total Operating Income and subtract the Total Operating Expenses.

You are left with your Net Operating Income.

Now to figure out cash flow you will want to take your Net Operating Income and subtract from it any debt services (mortgages, etc), and you will be left with cash flow.

The next important factor on considering good deals is your Cash on Cash Return (CCR) like you mentioned. For your example you are going to be putting up 20% or $60,000. You want to make sure you are getting a good return on your money.

Take your Annual Cash Flow Divide it by your Down Payment, and you will get your Annual CCR Percentage or your actual Return on Investment.


Here's an example scenario to futher illustrate the point.

Gross Rental Income: $1000 / mo | $12000 /yr
Vacancy Rate (10%): $100 / mo | $1200 /yr
Total Operating Income: $900 / mo | $10800 /yr

Operating Expenses:
Maintenance (10% of rental income): $100/mo | $1200 / yr
Management Fee (10% of rent): $100/mo | $1200 / yr
Real Estate Taxes: $100/mo | $1200 / yr
Insurance: $50/mo | $600 yr

Total Operating Expenses: $350/mo $4200/yr

Net Operating Income: $550/mo | $6600 /yr

Debt Services. (100,000 dollar house, 20% down, 30 yr fixed, 6% rate): About $480 / mo | $5760 / yr

Cash Flow: $70 / mo $840 / yr

So here you have CCR of:

$840 annual cashflow
divided by $20,000 downpayment
= 4.2%

Anyways, the point I was making is this is a common method people determine to find good deals and they use vacancy and management factors in the form of percentages if they don't have a real number to put in.

Hope this helps.

I dont have any such formauls but tend to follow the market rends. If its going to low then i teey not ot invest else i do it

I like Vanman's analysis... he's done a couple things I typically do, and a few things I don't but will probably incorporate...

The more analysis the better, and you'll also learn that some things are good to be conservative on when projecting, and others are best to be accurate/overstated. Typically, be conservative on any "benefits" to you, and as accurate as possible (or overstated even) on non-benefits, such as expenses.

This way, if things are better than you assume, great! But they'll likely not be worse... *hopefully*

I just do business as per my common sense
I am a civil engineer and i know that all these formulas fail in real life

Yes, I do have a rule of thumb for when we invest in real estate.

It's actually quite simple.

Whatever you can see with your eyeballs that needs to be done to bring a property up to a minimum standard to rent or to sell you can double that amount of money for the things that you can't see or are not readily apparent that will need to be fixed.

The above is not scientific. It seemingly is just the way it is!

To put numbers to this if you could get a $300,000 foreclosure for $235,000 and can "SEE" $15,000 worth of repairs, rehab and upgrades you can take it to the bank you are going to spend $30,000 by the time you are finished.

Here are a couple of examples of what I mean.

You can see with your eyeballs the laundry room cabinets need to be replaced but when you remove them there is black mold growing behind them from when the air handler drain was plugged and soaked the drywall. Now in addition to the cabinets the drywall has to be removed and replaced also. Not a big deal but its extra expense.

Or, you can see with your eyeballs the garage door needs to be replaced because the old doors are a weak point for hurricanes in Florida and you want the new 140 mph reinforced door. No problem, but when the installer removes the old trim they also break off chunks of stucco. Not a big deal but now it's another repair that requires time and money.

But the best one to date was the microwave wiring. You can see with your eyeballs the old microwave above the stove needs to be replaced. What you can't see is that the previous homeowner stripped and wrapped bare wire around the plug ends of the microwave and wired it directly then taped it up with blue painters tape! That's right, simply wrapped the hot wire from attic around the male plug.

True story!

Now no big deal to go to Home Depot and get an electrical receptacle and box for a permanent installation but these little things all have a cumulative effect on time and money.

So what I'm saying is if you can get a $300,000 house for $235,000 and can "see" $15,000 dollars of problems you can bet there is another $15,000 of unknowns.

__________________
Gary Spicuzza, *SAFE
Copyright 1956.
No Rights Reserved.
*Self Appointed Financial Expert

Gary,

believe it or not but I do agree with you on this one.

Great post.

Hermes, we are simply from different ends of the spectrum in the Financial Services Industry and from my readings of Mynion's posts he's somewhere in the middle.

That's a good thing!

As a result the general public readers of this forum hear from a wide range of views and can draw their own conclusions based on what's comfortable for them.

__________________
Gary Spicuzza, *SAFE
Copyright 1956.
No Rights Reserved.
*Self Appointed Financial Expert

Hey, a topic we are all in agreement on!!!

Woo hoo!

Chris

Great posts
but I never make such stiff calculations
I just use common sense and see the conditions of surroudings

I always keep in mind the risk factors that can affect my investments. Also, maintain a log to keep track on my investments. This two things have greatly help in making the best out of my investments.

i think these formulas are fail in real life, so i m not interested in your formulas thank you.