How to Calculate the numbers?

Question

Good afternoon BP Community. I am looking to buy my first property. I was presented a deal that I would like to purchase (Section 8 SFH), but I wanted to make sure it was a good deal before I pulled the trigger. What are some of the metrics investors use to calculate if it is a good deal or not?

Here are the numbers

$79,275 is the purchase price . Insurance would be around $115/month and taxes $127/month. I want to own this free and clear so no mortgage. Are they any additional expenses I need to account for?

Rent is $1,522

How would I calculate ROI and Cash on Cash Return

Mitch Messer · Answer

Hey @Pam Coleman, congratulations on taking a swing at your first deal!

OK, so it's Saturday night and I'm ready to party... (And by "party," I mean "run some rental analysis calculations!" Yep, I'm a nerd... 😂)

For starters, you'll at least want to calculate Cash Flow and Cash-on-Cash Return on Investment.

To do this, you'll need to know a few more things:

* Renovation Cost needed to make the property rent-ready and Section-8-compliant

* Closing Costs to finalize the purchase

If your rent figure is accurate, you've got $18,264 in Gross Annual Income (GAI). We need Net Operating Income, which is GAI minus Operating Expenses.

Operating Expenses include, at very least, insurance, property taxes, management, maintenance, and vacancy.

You've already got insurance at $1380/yr and property taxes at $1524/yr. (Be sure those taxes don't include a homeowner's exemption, which you won't qualify for after you buy!)

Let's assume management expense of 10% of GAI, or $1826/yr. Let's put maintenance at 5% of GAI, or $913/yr. Lastly, let's be conservative and assume one month of vacancy every year, or $1522.

Add 'em up and you get Operating Expenses of $7,165 (1380 + 1524 + 1826 + 913 + 1522)

So, NOI = $11,099 (18264 - 7165)

Your Cash Flow = NOI - Capital_Expenditures - Debt_Service

You're buying cash, so no debt service. Also, you're going to renovate everything that needs it (right?), so for now let's set CapEx at zero as well.

So Cash Flow = $11,900 (11900 - 0 - 0) or just under $1000/mo!

Not bad, you say?

Well, not so fast...

We really need to know how hard our investment dollars will be working for us in Year One.

That's where Cash-on-Cash Return (CoCR) comes in: The higher the return, the harder our cash is working. Anything over 10% is generally pretty good!

The formula is CoCR = Cash_Flow / Total_Cash_Invested

where Total_Cash_Invested = Purchase_Price + Renovation_Cost + Closing_Costs

Since we're missing some info, let's guestimate, for completeness.

Let's assume Renovation Cost of $20,000 and Closing Costs of $5,000.

So, CoCR = 11.4% (11900 / (79275 + 20000 + 5000))

That's not a bad return! Assuming the numbers are valid, I'd say this was a deal worth doing!

Given all this, could you now calculate the Cash_Flow and CoCR with the actual numbers and post it below?

Vadim F. · Answer

You may want to get some more quotes for your prop insurance. I own a SFH in Cleveland and my insurance is $629/yr. Also, even tho it is a CMHA property and occupied (which is great, since it does a number of inspections) that does not mean the property doesn't have any work that needs to be done. Rarely does a property that is tenant occupied not need any work done, especially in Cleveland.

Alan Asriants · Answer

80k seems very cheap as someone suggested and the rent seems to be pretty high for a property valued so low. Are you familiar with this area?

Understand your potential tenant base and location you are looking to invest in.

Also, remember that you aren't only buying real estate for cash flow. Appreciation is another part of the game. How will your 80k property appreciate in 10-15 years? Is it worth your time?

Is the property really TURNKEY? How old is the roof, electrical, plumbing, windows, etc?

IMO I would rather leverage a 400k asset, have a bit less cash flow, but work in a prime location that will see better appreciation.

This is just me, everyone has their strategies that work for them.

Just consider other factors besides cash flow, and really make sure this property is turnkey

Jaron Walling · Answer

@Pam Coleman The numbers look great on paper, almost too good.

After skimming though the responses the statement "There are no repairs needed. This is a Turnkey Tenant-Occupied Property already"... is a red flag. If you're buying this property from another investor it raises a yellow flag. Unless you have PM experience or know the seller personally I'd bet something is up. Maybe the tenants are behind on rent? Maybe the location is questionable? As a new investor I'd question all of the above. Numbers on a spreadsheet are half the story. The price point is fairly low... in my market that's D class and we're both in the mid west. Get prepared for that if you end up buying it. Cheers.

Bob Stevens · Answer

Yes here is what it will look like

Rent 18k

taxes 2kish

INS 1K

PM 1800

MIS 1500ish

NET, 11,500 DIVIDED BY 80K 13% NET Cap however your all in price is going to be higher as there will be repairs. I am guessing 10k- 15kish.

BTW, how do you know this is a good deal? This is your 1st out there. I strongly suggest you have a team around you as 80k VERY cheap. so the area may be " tough" 'Also have you seen the HAP agreement and called CMHA? Many lie and tell you the tenant is SEC 8 when not.

Mitch Messer · Answer

Capital Expenditures (CapEx) are funds used to upgrade or replace systems in the property. Compare these to repairs and maintenance expenses, which merely keep the existing systems running smoothly. In Year One, if you intend to perform all necessary upgrades, replacements, and renovations upfront as part of the Renovation Cost, you can leave CapEx at zero. That won't be the case in future years, however.

Debt Service is the money paid to your lender, which includes loan principal and interest, but not taxes or insurance, since those are already included in your Operating Expenses.

James Wise · Answer

You'll also want to account for vacany, non pay, cap ex, repairs, lawn care and PM costs.

Mitch Messer · Answer

OK, but let's be very careful here! Remember: You're only one letter away from that "turnkey" property becoming a huge turkey!

Are you saying you've already had the house inspected and have determined there are no repairs needed? Or, did that "no repairs needed" line come from the seller?

In my experience, there's no such thing as a SFH for sale that needs no repairs, much less one that's occupied with a tenant. Have you asked that tenant about unaddressed repairs and deferred maintenance? You definitely should!

A seller cannot and should not be considered a trusted source of info for your analysis.

You must verify EVERYTHING!

For example, is $1522 really market rent, or just what the current tenant happens to be paying? If they moved out the day after closing, could you quickly re-rent at that rate? If not, you probably shouldn't be using it in your calculations of cash flow and CoCR.

The formulas are only as valid and useful as the data we put into them.

Pam Coleman · Answer

How was I calculate Capital Expenditures? And my Debt Service is just PITIA correct?

Pam Coleman · Answer

Thank you Mitch, this was very helpful and I will def refer back to this post when doing my calculation. I often forget the formulas.

In this case the CoCR will be even better. There are no repairs needed. This is a Turnkey Tenant-Occupied Property already.

CoCR= 14.1%   (11,900/ (79,275+ 5,000)

How to Calculate the numbers?

Most Popular Reply