Investing in Rental Property: Doing the Numbers

I had dollar signs in my eyes instead of on paper during the Dot-com boom and had eye-popping, humiliating losses during the bust. I can feel my irises starting to morph into symbols when I read articles like Are You Ready to Be a Landlord? in the Wall Street Journal:  "With interest rates near record lows and property values still slumping, getting into the landlord business is cheaper than it has been in years."  I can, however, be taught.  To quote Kai Ryssdal, host of Marketplace on NPR, "Let's do the numbers."

I had dollar signs in my eyes...In Investing in Rental Property: Getting Ready, I used numbers from the Wall Street Journal's Are You Ready to Be a Landlord? to explore what it might mean to be "ready" to invest in rental property in Blacksburg, Virginia, USA, home of Handshake 2.0's headquarters.

Using "worst case scenario" numbers, I estimated that a prospective rental property investor would need $68,200 near-at-hand to make the down payment and to have risk-reducing reserves to purchase a $200,000 3-bedroom, 2-bath, single-family home in Blacksburg, VA.

With a down payment of $42,400 on a total amount of $212,000 ($200,000 purchase price + $12,000 in closing costs), our loan amount would be $169,600. We'll assume a 5.0% fixed rate, 30-year loan. According to Bankrate.com's mortgage calculator for Blacksburg, Virginia's ZIP code, our mortgage payment would be $912.06 per month.

The Wall Street Journal's source estimated $2000.00 per year for insurance, taxes and association fees. That's an additional $167.67 per month.

In asking "Are you ready to be a landlord in Blacksburg, VA?", I consulted Tommy Clapp, our real estate agent with client Coldwell Banker Townside, REALTOR(R), and used his lowest estimation that a single-family, residential rental property in Blacksburg, Virginia would rent for $300 per bedroom. Using that figure, our hypothetical 3-bedroom house would rent for $900 per month.

I'm running Handshake 2.0 and other enterprises of Handshake Media, Incorporated, so I would have little time to be a Do-It-Yourselfer (DIYer) and assume I would need property management services. The Wall Street Journal's estimates are 8% to 10% of annual rent for property management, so we'll choose 10%.

$900 x 12 = $10,800 x .10 = $1080 divided by 12 = $90.00 per month for property management

Our total estimated fixed expenses – which doesn't include other costs such as property repairs or improvements or rental vacancy – are:

$912.06 (mortgage payment) + $167.67 (insurance, etc.) + $90.00 (property management) = $1169.73

Let's do the numbers.

$900.00 (rental revenue) – $1169.73 (costs) = -$269.73 (monthly income)

A whopping 12 x $269.73 = -$3236.76 in debt per year?!

These numbers examining rental property exclude repairs and vacancy costs – and they don't include potential tax benefits or potential property appreciation. They assume a single purchase, buy-and-hold income and cash flow strategy.  And they use worst case scenarios – as does the Wall Street Journal in Accidental Landlords.  With a lower purchase price, a lower interest rate, higher rent, an optimum location and DIY, the numbers for investing in rental property for income might be more appealing.  But if my doing these numbers in any way inspires those with dollar signs in their eyes over rental property to do their own numbers for themselves before they buy, my eyes will be smiling.

Our series on investing in rental property:

Investing in Rental Property: Doing the Numbers
Investing in Rental Property: Getting Ready
Guide to Managing Rental Property in Blacksburg, Virginia

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