Rent Scout, the application for searching for ideal rental properties is finally generating reports. Here is the report generated for yesterday. You can see that it is estimating a really high rate of return on properties here in Colorado. I don’t believe that is completely accurate as there are many costs I have not accounted for. Anyway, here is a link where you can download the report:

## Calculating rental property maintenance costs

A common rule of thumb is 1% of the property value per year. So for a $200,000 home, you should expect $2,000/year of maintnence costs. This is too general for me as I’m looking to use numbers in my favor. Here is a list of some of the specific items to find details on:

- HOA fees and what they cover. In some multiunit places this might cover bigger ticket items like exterior paint, lawn care, and roofing. Another important detail is how fixed is this number. Has it always been what it is now or is there a history of it being raised regularly. You wouldn’t want a greedy HOA board eating all your profit.
- Lawn care. To answer this you need to know the size and type of landscaping. Then you need to know what reputable local companies charge to keep this up.
- Exterior. Is it brick or siding? If siding, how long has it been since it was painted?
- Roof. This is a big one that can eat your lunch. You should know the history of the roof before you move forward. How long as it been since it was replaced? Who did the work? Is there any sort of warrantee? How much of a problem is hail in the area?
- Interior flooring. Hardwood requires you refinish it every so often and carpet goes bad. Ideally you would have vinyl everywhere with some rugs that can be replaced easily in-between renters.
- Appliances. Does the house come with new appliances? What does it cost to replace each one? How long are they expected to last?
- HVAC and water heaters. When was the last time it was serviced? What does it cost to replace? How long do you expect it to last?

This is a good start. The only way to really know is to go get data. All of these questions could be answered by directed questions for the seller, however there should be someway to do better than that.

A trusted real estate broker gave me the advice that expenses are often underestimated and some investors have found that small condos are better for this reason. The exterior work is handled for all the properties at once and you pay for it together though an HOA fee. This reduces costs of the maintenance. The other way to reduce cost is by having better customers. The single professionals and childless couples that rent condos are generally much nicer to your property than the families that rent single family homes. This makes sense, now I just need to find data to test this. Truth is in numbers.

## How to calculate profitability of potential rental properties

Before we begin I want to state that I am not a realtor nor am I a real estate investment advisor or a layer. If you need any of those people you should contact them. To calculate the profitability of a potential rental property you need a few numbers:

- Price of the property
- Estimated Monthly Rent
- Interest rate on loan
- Amount of downpayment
- Property taxes

For an example let us use this property:

List price is $225,000. There is a slight problem you will notice in the description that this house probably has structural issues. For the sake of argument I’m going to assume that we want this property for it’s monthly return on our investment and not for the value of the asset. I’m not going to live here and so long as it isn’t going to be condemned in the next few years I’ll take the low price as that helps my profitability and pass the low price onto the next buyer in several years.

For the estimated monthly rent I’m going to let zillow help us out. They do a good job of letting us know what a house of about this size in this neighborhood will rent for. Zillow estimates with their Rent Zestimate that you can rent this house for $2000/mo with a range from $1700/mo to $2500/mo. We should be conservative and pick that lower number because from the look of the pictures this is not a prime rental. Here is the link for the listing on zillow.

Next to calculate the interest rate I’m going to also be conservative and go with an easy round number of 4%. This is something that changes and will depend on your credit worthiness but for sake of argument lets say it is 4% because right now it is a bit lower than that.

To calculate what our monthly payment on the loan is we will need one more datapoint, how much we can invest. For the sake of argument lets say that we have $40,000 to put down on this investment. Here is the formula you can use to calculate the monthly payment (in python):

1 2 3 4 |
def pmt(loan, months, rate): """ Calculate monthly payment for loan """ c = rate / 12 # monthly rate return loan * (c * ((1 + c)**months)) / ((1 + c)**months - 1) |

For our example we will get a 30 year loan for $185,000 ($225,000 – $40,000) so the number of months is 360 (12 * 30). The result is a monthly payment of $883.21

1 2 |
In [4]: pmt(185000, 360, 0.04) Out[4]: 883.2182966110896 |

The last thing on our list is property taxes. For simplicity we will use that Colorado has an average property tax rate of 0.63% – Source. If we put in the specific zip code we get an average property tax rate of 0.697% in Jefferson county. We will assume that after we purchase the property they will assess the home at the price we purchased it for, $225,000. This will result in an annual property tax of $1,568.25, or $130.69/mo

1 2 |
In [6]: 0.00697 * 225000 Out[6]: 1568.25 |

One more thing. For the sake of argument we will assume that we will have the property managed by a management company that will deal with getting new renters and answering phone calls. We will nominally set this to be 10% of the rental income. That is easy because we are going to try to rent at $1700/mo so our fee should be $170/mo.

So now we have all the data we need to make an estimate. We add up all our calculated expenses for the year and we multiply to calculate how much rent we could take in during a year.

1 2 3 4 5 |
In [10]: (883.2182966110896 + 170) * 12 + 1568.25 Out[10]: 14206.869559333074 In [11]: 1700 * 12 Out[11]: 20400 |

This means that we will take in $20,400 and pay out $14,200.87 in a year. This is not counting other expenses like homeowners insurance, broken appliances, and time spent paying the bills without a renter while the property is on the rental market. The profit for the year is only $6193.13. The metric that these sort of deals is measured on is called “cash on cash” meaning the amount of yearly profit divided by the amount of money you put down to begin with to start this investment (the down payment).

1 2 |
In [13]: 6193.130440666926 / 40000 Out[13]: 0.15482826101667316 |

15% annual return on your money is much better than any saving account is going to give you. Let me remind you that I am not a layer, investment advisor, or realtor and if you need one of those you should contact one.

## Preview of real estate research project results

I’m working on developing a tool to research properties for their potential as a rental. This is a graph of the 1000 most recently posted properties in Colorado and their list price vs my estimate of their monthly rental value.