Brand New Investor - Deal Analysis Help / Various Questions

[Cameron Joseph]

Hello BP Community!

This is my first post on the BP forums and I would really appreciate the input of my fellow members on a sample deal analysis as well as an array of relating questions. Before I get started, I want to apologize for the length of the post.. but I figured the best way to get the most helpful information would be to lay out some preliminary details in order for the community to get a better understanding of where I am coming from.

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Background - I just turned 21 and have been reading on these forums, talking with an array of other investors, etc. and have been trying to absorb as much possible information about real estate as possible. In terms of real estate, I would like to believe that my investing philosophy (in terms of approaching deals) is very calculated and always looking to take as much risk/luck out of the equation. A mentor/friend that I really look up to gave me the advice to work so hard and put in enough diligence on every deal (essentially, never become satisfied and or lazy.. keep pushing always) in order to best ensure that luck plays as little of a variable as possible as well as ensuring the best probable chance of success. With all of that being said, because of the way I think I like to view things, I have grown incredibly found of the BP community as everyone here seems very welcoming, honest, and forthright about growing their business and sharing an immense wealth of knowledge. 

Now to get into the actual deal portion of the post..

Plan - For my first property, I plan on house hacking by targeting a multifamily residential unit (no preference for duplex, triplex, quadplex) and living in one of the units while renting out the other. I plan on doing this by obtaining a FHA (3.5%) or conventional (5%) to get in as cheap as possible. I understand that some deals allow the buyer to cover the entire cost of PITI, but as long as I can ensure I pay a significant amount less than it would take me to live in an apartment, it is a win win as I'm building equity, learning the business, and doing it for cheaper than I could elsewhere. With that being said, I will obviously do what I can to try and get everything covered in order to ensure a positive cash flow when I move on to the next house hack. While that is my personal goal and I will have various questions posted towards the bottom concerning house hacking, I would like to post a standard duplex deal (this deal is purely for education/learning purposes.. not an actual deal I am looking at purchasing) in order to get the BP community insight on if I am analyzing deals properly. As mentioned above, I am trying to have as much of my basis covered as possible so when I do buy, I am well equipped to handle any potential miss happenings as I will have nearly all of them accounted for prior.

Deal - Again, this deal is a random deal that I pulled off of realtor.com in order to get advice on anything I could be missing (I'm positive there is something) in order to better prepare for future deals. Now, let's get into the numbers!

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Property Information -

• Property Type - 3 bed, 2 bath Duplex (Arranged as top and bottom unit.. NOT side-by-side)
• Purchase Price (Listed) - $200,000
• Sq. Ft - 1,290 (5k+ sq ft lot)
• Assume bought at full purchase price (20% down) - $22,500 out of pocket ($2,500 for closing costs)

Income/Expenses (All numbers are annual) - 

• Gross Income (Scheduled based on current rents) - $21,300
• Vacancy Reserve (8%) - $1,704
• GROSS INCOME (ADJUSTED) - $19,596

• Property Taxes (Recalculated at new assessed value * city millage rate) - $4,400
• Property Insurance - $1,200
• Property Management* (10%) - $1,960
• R&M** (8% up to $5k, else $0) - $1,568
• Capex*** (10% or calculated figure) - $1,960
• Mortgage Note ($180,000 @ 4.75%) - $9,390
• TOTAL EXPENSES: $20,478

*I plan on managing all of my rental properties at first to truly divulge myself with knowledge and learn as much as I can about this business. However, I think (please correct me if I am wrong) that it is important to include the property management in the deal so, that when in the event, I grow my business large enough, I can easily switch over to a property manager and positive cash flow. You have a better chance of the cows coming home before I would ever consider, under any circumstance, buying a negative cash flowing deal. 

**I consider all capital expenditure items one that are over $1,000 in repairs. Anything else, I would put into routine maintenance. With that being said, based on what I have read and people I have talked with, I believe a $5,000 cash reserve per property could give me a sufficient cushion to handle routine maintenance. Furthermore, it would allow me to use excess cash flow to keep acquiring more properties and or de-lever myself. Again, this comes back to the BP community, do you think this is enough for a duplex? Should I go higher with triplex, quadplex, etc?

***As mentioned above, I consider anything over $1,000 to be capex. Upon inspection of the property, I will compile a checklist of all items that would have a price tag over $1,000 and essentially create a paydown schedule. See example below:

EXPENSE              USEFUL LIFE               AGE               REMAINING                TOTAL EXPENSE              AMOUNT NEEDED PER MONTH              

 Roof                              20                         5                            15                              $15,000                                $83.33 (15,000/(15*12)

 Driveway                      50                         12                          38                              $10,000                                $21.93 (10,000/(38*12) 

So in this scenario (I understand there are other things such as heaters, appliances, etc.), I would need to save $105.26 per month in Capex. I understand the estimation technique can be a quick way to analyze a deal to see if it is worth it. However, as said before, I try to take out as many 'guessing' variable as possible and be as methodical as possible in determining actual cash flow. So, while the estimate is nice, I prefer the actual calculated numbers as it might be less or more than the 10% estimated.

Finally, let's look at the overall results of the deal. As you can probably already tell, at that current purchase price, this deal is a loser. 

$19,596 - $20,478 = ($882) per year in cash flow or -2% COC return

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I understand there are other things to consider such as tax advantages (adding back principle, taking depreciation of the building into consideration, etc)but I'm just really trying to understand if I am approaching the analysis side correctly. I am always looking for brutal honest help. If you think what I laid out up top is total garbage, that is completely fine.. let me know. However, please then tell me what I need to do to get better. 

OK! Phew! I know this was a little lengthy and I appreciate all of the BP members time. With that being said, I have a couple various questions that I hope will stir up a little bit of conversation as well as help me start hammering some things down. 

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Questions:

House Hacking:

1) Does the BP community feel it is imperative to only buy a deal where all of the PITI is covered or just a deal that makes your housing expense lower than an apartment and allows the deal to positively cash flow once I have moved out?

2) I have heard a lot of back and forth about this.. do you guys think I should try and be as close as I can with the tenant when living next to them to ensure a positive relationship or strictly business? I am just trying to do my best to ensure a positive experience for both, but I also don't want to get ran over. I think people who trash on their tenants all the time are garbage.. I will be running a rental real estate business. My customers are my tenants and I want to do my best to ensure their is a mutual respect there so that they do their best to take care of my property. I understand that there will be problem tenants and they need to be handled appropriately, but for the most part I want to have a respectful relationship with my tenants to ensure lower turnover, lower R&M, better relationship and most important, more cash flow! However, I feel this relationship might be harder to achieve optimal condition when I'm living 20 feet away from them.. so any advice here is great!

Rental Investing in General:

1) There is so much debate around this and I understand this question will be market dependent, but this has been one of the biggest things I have struggled with. I want to determine an optimal COC/monthly cash flow. Some people say all you need is positive (I tend to disagree hard with this), some people say $200 a door (I'm not sure about this as a 100% bullet proof method either.. especially when dealing with multifamily. If rents drop 5-10%, I feel you start getting into that uncomfortable zone.. again the risk/luck factor mentioned earlier), and some people say minimum 10% COC return. From what I feel my goals are, I would want a 10%+ COC return always (I want to outpace the stock market, else why am I putting in the time here? Again, I know there are tax advantages out there which help overall return in other ways.. just a figure I thought was reasonable. Furthermore, I don't know how achievable that rate is in this current market). So to summarize, a 10% COC return and a ~$300 ish per property monthly cash flow. Is this solid or should it be reasonably way higher/lower for a multifamily and should it change based on duplex, triplex, quadplex?

2) How often do tenant/landlord laws change and should I be looking to get a yearly contract overview renewal? Trying to mitigate legal costs especially when starting.

3) At what point do you think it is appropriate to start approaching investors? After 1, or 2, or maybe even 30 deals? I know there is no silver bullet, but I just want to ensure the best chance of success. When I first started learning about a year ago, I wanted to go at everything alone (maybe out of some sort of pride I guess lol), but I realized the best way to grow is to leverage other peoples money and talent. I'm trying to make the determination about the best way to grow and I'm not sure if that should be seller financing, outside capital, etc. 

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Ok, I just realized the literal length of this post and don't want to bore anyone off (if you have made it this far.. thank you so much. This communities time is very appreciated and doesn't go without being recognized). I have millions of questions more, but this should suffice for now!

Again, much love and appreciation for this communities time! :D I look forward to all of the responses!

Best,

Cam