|Purchase Costs||Earnest Money Deposit|
|Funds Due At Purchase|
|Funds Due At Refinance|
|Property Management Maintenance Deposit||$250|
|Total Purchase Costs ||$16,023|
|Monthly Income ||Rent ||$750 |
|Monthly Expenses||Management Fee|
|PITI ||$486 |
|Maintenance Reserves ||$25 |
|Total Monthly Expenses ||$586 |
|Monthly Profit ||$164 |
|ROI ||12.28% |
And now for some discussion of the numbers..
Purchase Costs: This is pretty straightforward. The first entry is my earnest money deposit that I paid to open escrow. The next entry is the amount I needed to bring to the title company when I purchased the house. In other words, this figure includes all the title fees, taxes, appraisal costs, etc. Since I was buying this property using a hard money loan from another company I own, the costs were pretty low. The last figure is the amount I needed to bring to the title company when I refinanced my hard money loan with a conventional lender. This amount includes all appraisals, title fees, taxes, loan fees, and funds the lender required for their escrow account (about $400). This amount also includes my down payment on the property so that I could get the loan to value ratio down to 80%, thus avoiding private mortgage insurance. The Property Management Maintenance Deposit is the amount the PM company required me to give them to hold as a deposit against any repairs that might be needed on the property going forward. The total of these fees, therefore, represents all the money that came out of my pocket to purchase this property.
Monthly Income is, of course, the rent the tenant pays.
Monthly Expenses: The management company charges me 10% of the rent, or $75, for their services. PITI represents my monthly mortgage payments and includes principal, interest, taxes, and insurance. Maintenance Reserves are funds that are saved to pay for any repairs that might be needed during the year. In the past, this has been a big point of contention with some readers, who feel this amount is too low and unrealistic. To each his own. This is a number you can make whatever you want. I chose $25 a month. Keep in mind, I have already put $250 into a maintenance reserve fund when I hired the property management company, so I actually have more saved for maintenance than this monthly number would indicate. Since it's not actually a real expense until you have to spend the money on a repair, it's possible I won't even spend this money at all this year and will therefore, end up with a higher ROI. (OK, unlikely, but still possible!)
Monthly Profit is simply monthly income minus monthly expenses.
ROI is my annual rate of return, calculated as twelve times my monthly profit divided by my purchase costs. I'm happy with over 12%.
One other item to note is that the current tenant's lease is up on November 1. I expect to be able to slightly raise the rent at that time, which of course, will increase my profit and ROI.
Back in February when I bought the place, I estimated a monthly profit of $200 and an ROI of 20%. The actual numbers turned out a bit lower. This might be in part due to the lower appraisal value that I ended up with for the refi, which required me to add another $2,000 to my purchase costs.