A real estate investor I met in West Covina overlooked management fees while calculating rental income. They included property taxes and insurance but did not account for management fees. While it may seem like a small difference, it adds up to a significant amount over the year.

Looking at rental prices, the median rent across all property types is $2,713. For apartments, the average is $2,418, while single-family homes are around $3,195. Over the past year, the overall median rent has decreased by 1.5 percent. The median home price is $850,000, and single-family homes in the South Hills area can go up to $1,275,000.

By bedroom size, studios average $1,803, 1-bedroom units are $1,987, and 2-bedroom units are around $2,262. Compared to the single-family home rent of $3,195, the gap between apartments and single-family homes is quite clear.

Here are the key items to check:

• Property Tax - When adding Los Angeles County local bonds and special assessments, it can rise to 1.1 to 1.3 percent of the purchase price.
• Insurance and Maintenance Costs - Maintenance costs are typically estimated at around 1 percent of the asset value annually.
• Management Fees - If you hire a management company, expect to pay 8 to 12 percent of the rent as a fee.

Addressing these items in order will help reduce errors. Let's return to the investor's calculations mentioned earlier.

According to the 1 percent rule, 1 percent of the purchase price of $850,000 is $8,500, but the median rent of $2,713 and even the single-family home rent of $3,195 do not meet this standard. However, since rents have decreased by 1.5 percent over the past year, we should also consider the trend of rental levels adjusting relative to the purchase price.

Applying the median rent of $2,713 to the purchase price of $850,000 results in an annual total rent of $32,556. The total return rate is 3.8 percent. Up to this point, these figures do not account for any expenses. If we base it on the apartment rent of $2,418, the annual total rent drops to $29,016, and the total return rate decreases to 3.4 percent. It's important to note how the numbers can change depending on the type of property considered.

When only property tax, insurance, and maintenance costs are factored in, the net operating income is calculated to be around $19,500 annually. The cap rate is 2.3 percent. However, if we additionally deduct 10 percent for management fees, the net operating income decreases to $16,255. The cap rate drops to 1.9 percent. Just missing one item can lead to a significant difference in returns.

Revisiting the management fee item, some management companies charge 8 percent of the rent, while others charge 12 percent. If you plan not to handle tenant interactions and repair coordination yourself, you should budget for this cost from the start to avoid surprises later.

If you are using financing, you also need to calculate the cash-on-cash return separately. Assuming a 20 percent down payment of $170,000, the cash-on-cash return is calculated by taking the pre-tax cash flow after deducting the monthly mortgage principal and interest from the net operating income of $16,255 and dividing it by $170,000. Accurate operating cost calculations are essential for this step to be meaningful.

There are areas like South Hills where the purchase price exceeds $1,270,000, as well as relatively lower-priced areas, leading to significant variations even within West Covina. Vacancy loss is another item that is easy to overlook. If you estimate a vacancy period of about one month during tenant turnover, the total rent could drop to around $29,843, and the cap rate may be lower than previously calculated.

From a total return perspective, you should also consider capital appreciation and asset growth due to loan principal repayment. Since there are school districts that Korean families are interested in, please refer to GreatSchools ratings. This article is not investment or legal advice, and it is recommended to consult a professional before making any actual contracts.