Dipping My Toes in Rentals - The Lure of 25% Return

Seeking some tenants

I just put in a offer on a rental property. I have been analyzing properties and options for over six months now and with the weak housing market - bargains are starting to appear. The property I put an offer on is a 'short-sale' and offers some price discounts below the market price.

The Numbers
Here is how the magical 25% return number is derived. The propety is a 4-unit townhouse (2 bedroom, 1.5 bath) in a nice neighborhood.

• Sale price = $200,000K
  
  
• Down = $40,000K (my investment)
  
  
• Mortgage = $160,000 = $800/month @7% interest
  
  
• Tax & Insuance/month = $570/month
  
  
• Rental/unit = $600/month
  
  
• Positive cash flow = $830/month or $9,960/year
  
  
• ROI on the initial $40,000 = 25% ($9,960/$40,000)

The Headaches
The 25% ROI is generally not possible when you factor in other costs like maintenance, repairs, utilities, fees, taxes and vacancy. That is the expense side of the equation. Maybe favourable tax treatment (small business, expenses, amortization etc.) will reduce the cost strucutre but that is an unknown as yet.

Then there are the typical hassles of being a landlord. Fussy or difficult tenants, damage to the property, 24/7 'on-call' are some of the obvious pain points. There might be more in store - I guess I will find out.

The Rationale
To me this is diversification. I could put the $40,000 in the stock market or buy some bonds but if majority of my investment are in equity markets - am I diversified?

Another benefit of investing in real estate is - expereince. I am sure I will learn from this experience. This venture may open other doors or provide me with the insight to do different deals in real estate. I can speculate on how and what - but unless I do it - there is limited learning.

There are risks and cautions but as they say nothing ventured - nothing gained.

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