Rough real estate numbers?

I am comparing the potential profit of investing in rental real estate vs. other investments, and I wanted to sanity check some of my numbers. Do any of these numbers appear out of whack or terribly not-normal.

Assumptions:
Property is not financed, but fully owned
The property can be rented for 6% of value per year.
The property increases in value at the rate of inflation.
The property is vancant 20% of the time.
Expenses are 2.5% of property value per year.

If it is relevant, the property will cost about $200-$250k, probably be a single-family residence, and be located in the Indianapolis area.
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I intend to do most/all prospecting, renter screening, and bookeeping, but plan on outsourcing most home maintenence.

-->Adam

Owning outright is not the best option in my opinion.
Leverage contributes to the overall return,and you didn't mention depreciation on your taxes of the dwelling.

If you have a single family home in a decent area, I'd say that your vacancy factor would be closer to 5%.

Are you saying that a $200K home only rents for $1000 a month ? With a 20% vacancy and no leverage, it's a crappy return.

You can put the cash in the bank with zero risk and compounded, it will prob beat inflation numbers as presented by the govt, but maybe not true inflation.

The beauty of real estate is the leverage, if it pencils out.

Whatever inflation rate that you want to use is fine, say 3%, on a $200K property the $6K increase is the same whether you pay cash for the property or only put 50K down, and finance.

The first thing that jumps out at me is your assumption that you would not finance any of the property. The BEST advantage about investing in real estate is the use of leverage. Most banks will allow to only put down 10% of your own money and give you a mortgage for the remaining 90%. Think of how many properties you could buy instead of putting it all into one property. This same leverage reaps some really high cash-on-cash returns. For example, assume you have $100,000 to invest. You could buy one property for $100,000 or you could be 10 properties if you finance with a bank that allows you to only put 10% down. Now for the cash on cash return. For simplicity, assume you can recieve $1,000 a month for rent. With the first scenario of using all of the $100K on one house your annual cash-on-cash return would be 12%. In the second situation you could have 10 properties making $1,000 a month equaling an astounding return of 120%. There are many other advantages to get into but that was the first assumption you had that stood out at me!

Potential income = $250K x 6%, which is $15,000/year (or $1250/month)

minus anticipated vacancy rate = $12,000/year (or $1000/month)

Indianapolis property tax rates average about 3% ($3.00 per $100 assessed value), so your annual property tax bill will be around $7,500. (Or $625/month)

Which leaves you with $375 a month to cover repairs, insurance and your profit.

You need to charge more, spend less, or pray the property NEVER needs any repairs!

Good luck!

Greetings Adam,
If the property is fully owned, that means there is no mortgage, so any rents you receve are pure profit minus taxes. If I am mistaken and you have financed the place, 6% of $250,000 is 15,000 which means you need to get atleast $1250 a month just to be mostly in the black each month. Properties do not increase in value at the rate of inflation in San Diego. I would assume that your property would not be vacant 20% of the time if you are pro-active in getting your tenants. I am a Property Manager here in San Diego and I also own quite a few. I do not allow this much vacancy for my owners. Where will you find a place for $250,000 that will get $1250 a month in rent is another story entirely. This sounds like a one bedroom condo or a very small 2 bedroom home in San Diego. Rents are not that high at this time. However, in Indiana...this might be entirely feasable! Good Luck My Dear! Andrea.

I think most of your numbers are okay, in that price range or vacancy rate might be a little high, in the $1200 a month range your tenants are more stable.

In my personal opinion if you are planning on outsourcing most of the home maintenance, I would consider outsourcing the property management also. Property management companies are well worth the amount of money spent on them. Personally I think I would give up everyone of my rentals if I had to deal with the crap I pay the property management company to deal with.