Analyzing Local Deals

Analyzing Local Deals

Jacob PhillipsPro Member
Investor · Mid Missouri · Member since 2018 · 63 posts · 14 votes

Hello BP! This is kind of a loaded post so please bear with me:

So I'm starting to really look into deals in my town.  My goal is to invest locally and mostly self manage so I can gain experience.  Eventually, I'll move into better markets farther away.  At this time, I live in a small mid-Missouri town of about 13,500.  We have a local college that enrolls about 1500 students.

I am still learning how to analyze deals, of course, and still don't know all of what I don't know, but, from what I can see, every deal I've looked at, including a few SFRs and a couple duplexes, has barely met the 1% rule.  Average rents in the area seem to hang out in the $700-800 range for 3+ beds.  

I've found an old 4-plex (1910) a few blocks from the college that rent rolls $1540/mo.  So, you can assume it caters primarily to the college crowd (concern?) and isn't in the best condition.  Another bonus (I think) from what info I gather off realtor.com, is that the owner currently pays all utilities, so I think there's a chance to add value that way. From everything I can tell, granting some probable newbie errors, the place should easily cashflow $300, maybe even close to $500.  Everything else I've looked at seems to be lucky to  touch $100 in cashflow.  This place has been listed 436 days.  So, I think I'm keying in on the right stuff, but I'm concerned about the age of the building.  Does this throw any red flags? Anything I should definitely look for?  Does the cashflow negate my concerns to a degree?

How do I continue to look for deals knowing that 1% is about all I can get? I'd really, really like for my first couple of deals to be closer than a half hour to me (rural), so how much should I be willing to sacrifice to make that happen?

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  • Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes
    7y

    @Jacob Phillips Its important to not deviate from your criteria, just because you can't find deals that fit what you are looking for. The 1% rule is a general guideline for single family homes but just make sure the total return on investment is what you are looking for. I would learn how to do a discounted cash flow analysis, you can learn on YouTube, and make that your model for calculating deals. With that said, even if the 1% rule is what you are looking for, make sure you are looking in the right places. With the market where its at right now you have to look harder than ever to find good deals. I'm in NJ and still able to find 1% deals, but they are far fewer and far between then I used to find 5 years ago. But back then I was buying a deal a month and now just a couple a year. If you can't find a deal, don't buy it just to get into real estate. But be creative in how you look for deals. MLS deals probably arent the way to go right now. I would be contacting homeowners directly to find an off market deal you can get for a good price. Yellow letters are a great way to go. I personally prefer mailing yellow letters in your own handwriting, but there are companies that will do it for you. Best of luck to you.

  • Rental Property Investor · Idaho Falls, ID · Member since 2018 · 67 posts · 78 votes
    7y

    Here are my 2 cents, but I'm still new here as well. 

    I bought my first 4-plex at $124k, estimated rehab $26k, total $150k. Rents $2,200 per month after rehab and fully rented, cash flow $530 per month (1.47% looking at the 1% rule). (After all expenses, including taxes, insurance, utilities, lawn care, 10% property manager, 12% total kept aside for vacancies and maintenance ant mortgage of course). Some people have told me that's very low on the cash flow, only about $133 per door. Old building built in 1930. Has had upgrades to windows, electrical, newish roof, etc.

    Now, looking at some other metrics I'm interested in: Cap rate is 9.4%, Cash on cash is 16.7%. Applying the complete cash flow I have, (still rehabbing, so will still take a couple months to actually have it) I will have this property paid off in 9.75 years, with only my down payment (10%) and rehab costs up front. I consider this a good deal. Meets my expectations. When all is set and done, I'll have spent $37,500 per door to buy and rehab.  I think I can probably refinance it and get most or all of my down and rehab costs back out. Would increase my monthly payoff, decrease my cash flow and increase my time to payoff to 12.5 years. My actual plan is to accumulate my contingency fund up to about $4,000 or so with the 12% monthly addition, then add any extra onto the mortgage payoff as well.

    I think there are a lot of people with more experience who would laugh at these numbers. Many people are buying at $25,000 -$35,000 per door and getting way better cash flow per door. But, they have years and years more experience, many more connections and have done this for a while. Also depends on where you are looking. This deal was hard to find, but is also close to home for me. I don't have any off-market connections yet who are feeding me properties locally at huge discounts. Found this one on the MLS.

    Also, I'm learning a ton. Getting your first property is key, I think. I had to fire one property manager already, who completely misjudged the rehab required, didn't rent my unit, so I've lost 5 months of rent while very little rehab was being done, costing me rent and the work was done poorly, so I had to have another handy man redo everything ($3,000 wasted on poor workmanship) and more... Not killing me since I have some reserves, but learning some expensive lessons. But better to learn these on a relatively inexpensive property within close proximity to me - and not sinking my boat. Will still continue to look locally, but I'm interested in rapid growth, which is hard to do locally.

    Now looking to buy in the Midwest and almost ready to get into some properties there, getting into the out of state rental business. More potential pitfalls, unknown people, and not in arms length. Too scary for some people, but if you want greater returns in cash flow, look at other cities in the Midwest or elsewhere. Can get better cash flow per door - $250-500 depending on property. But greater risk if out of town.

    If you want local, I think the deal you have may work. It's not very pretty by some standards, just like the one I have in town I showed above. But, doing your first deal, you learn a ton. You have to start somewhere. Most people read and never start. You'll get to know what you're doing differently in the future. But don't buy a bad deal just to get your first deal done.

    If going out of town scares you and keeps you from ever getting into the game, then you should buy locally and get going. Then learn from it. I now use my first deal as a measuring stick. When I look at other deals, I open the spreadsheet with my first 4-plex. Any new deal I consider, I want to do a lot better than my first deal. Especially when considering out of town.

    Most experienced investors passed on my deal. After all, it sat on the MLS for a couple of weeks. But without it, I wouldn't have had the guts to get into the game. I told my wife that we will probably keep it forever, because it was our first deal. Ugly and all. Of course, we're updating it and the units will look fantastic when we're done. Almost gutting them out, new bath, kitchen, flooring and paint. What got me from reading to doing. Now I'm expanding my mind exponentially.

    One more thing: Keep it simple. Get going. Don't overthink it. I wouldn't even know how to contact people who may be interested in selling, etc. Seems too complicated to me. Now, I'm learning a lot more about all that, but it's difficult when you are just starting I think.

  • Jacob PhillipsPro Member
    OP
    Investor · Mid Missouri · Member since 2018 · 63 posts · 14 votes
    7y

    @Christopher Lombardi I don't necessarily mean deviate from criteria. I guess I was asking where one should draw the line where a decent deal most would pass on is maybe not so bad for a first one in order to get the experience. I won't settle for less than 1% and definitely wouldn't take on a negative cashflow. I follow what you're saying though. Honestly, at this point I think the best think about me kicking the tires on some MLS deals is that I have an agent that seems to really wanna help me out. I'm in the process of getting to know people in the game around here and that ball is really starting to roll. I met with a lady two weekends ago about four duplexes she's selling. They're super overpriced but she turned me on to other properties she's getting ready to sell, and had a lot of advice to offer. She'll be getting her "thank you" letter any day now. So I think I'm definitely on the right track forming the relationships.

    Thanks for your input! It is always appreciated!

  • Jacob PhillipsPro Member
    OP
    Investor · Mid Missouri · Member since 2018 · 63 posts · 14 votes
    7y

    @Christian Becker I think you and I are of the same opinion. I don't need a homerun for a first deal. I need positive cashflow that will allow me to learn and save for the next one.  Thankfully, the prices here are way lower than yours! Unfortunately, so are the rents, which is where the dilemma is.

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