Analyzing Deals and Learning as I Go-Can I get a few pointers?

Question

Good morning BP,

I've been analyzing deals like crazy since I became a pro member couple weeks back. I've got my real estate license so I've been using the MLS but also realtor.com, Zillow, and Redfin. What other places should I be looking for homes? Also, I don't really know what I'm doing and would be extremely grateful if someone could take a look at a deal or two I've run numbers on. Thanks in advance and happy Friday BP fam.

Tim Herman · Answer

@Matthew Novelli Hard costs are easy to get. Property tax, insurance, principal and interest, utilities. The soft costs(variable) are harder to quantify. Understanding what your numbers mean is a key to finding a deal.

Vacancy. What does a  2% vacancy mean, 2/100 0r 1 out of 50. Your tenants would need to stay in your property an average of 50 months. There are some landlords that will be out 6 months rent due to covid. If they used a 2% vacancy in their analysis. To average that they need to have a tenant stay 300 months with no turnover. 6/300=1/50. I use 8%.

Repairs. What does it cost to have a service call. In my area it is normally $150. I want enough of a reserve to have a couple of service calls and be able to paint between tenants. Minimum of $50 per month. If you are in a high cost of living area where your cost for calls are higher increase accordingly. I use 5% or more.

Capex the silent killer of newbies. But everything is brand new, I am only going to use 2%. Wrong,wrong, wrong. Maybe in the first few years that will work, but long term, no way. Say you found the mythical 100k house with the 1k rent. 2% capex is $20 per month. Brand new floors. Assume 1000 sf of flooring. LVP has a 10 year commercial warranty. My area it is $6 sf to replace. $6000/10 year life span/12 months in a year=$50 per month for 1 item in a capex budget. The big $20 you are allocating allows you to replace those floors every 300 months rather than 120 months. Means that roof 25 year life span, appliances and hot water heater 12 year life span, hvac 20 year life span, bath and kitchen remodel 20 year life span will come out of your pocket.

Capex can never go down only go up. Say a roof costs you 5k to replace. $5000/25 year life span/12 months in a year=$16.67 per month. But the roof isn't brand new but 15 years old. 10 years of useful life left. $5000/10 year useful life/12 months in a year=$41.67. 41.67/16.67= 2.5 times as expensive. I use 10%. The way I do it is figure out the capex as if everything is brand new. I take my most expensive item and multiple it by 1 1/2 times and make a reserve. Say it is floors at 6k. So 9k needs to be in reserve. Take every penny not going to fixed cost into the reserve fund. Once it reaches that you can start saving for another property. I f you use your reserve then throw everything at it until the reserve is built up again.

Matthew Novelli · Answer

@Daniel Haberkost

I will check out a local meetup and start networking. Thanks Daniel.

Daniel Haberkost · Answer

I would absolutely recommend going to a local meetup, that's where I met the guy who I consider to be my mentor. Talking to people who are actually doing this on a daily basis in your market will be invaluable, they can show you their process and you can ask questions in real time.

Matthew Novelli · Answer

@Daniel Haberkost

1. I’m searching for homes that have sold in the last 90 days in the same zip. I set the square footage range from a couple hundred below to a couple hundred above the subject  house. I’ll search for the same bed and bath count. If I do a rehab, should I find comps that have also been rehabbed?

2. I’ve been mainly focusing on flips.

3. Rehab estimates have been a guessing game so far. I still need to do some research in that area.

I haven’t been to a local meetup in a while. Do you recommend one I should check out?

Matthew Novelli · Answer

@Tim Herman

I’ve used the fix and flip calculator the most but have used the rental a few times. I believe I factored 5% for vacancy, 7% for cap expenditures, 10% for maintenance, management fee 10%, 30 year loan at 4%. I just don’t know how to figure a hard money loan in there. I guess on rehab as well. I understand guessing will bite me in the ass but that’s how I’ve been doing it up to this point.

Daniel Haberkost · Answer

@Matthew Novelli Okay so address each item.......

1.) ARV- using the MLS should make this fairly easy, are you looking at houses that don't have good comps? Are you unsure what parameters to use when searching?

2.) Holding costs- are we talking about a flip? A BRRRR?

3.) Rehab- this one always got me when I was first starting too. However, you can find the average costs of various repairs in your market online fairly easily. Then you will need to add a buffer, especially as a newbie.

It's slim pickings everywhere pretty much but especially in a market like yours/mine. Do you go to local meetups?

Matthew Novelli · Answer

@Daniel HaberkostI’m not sure about ARV. I’ll run comps but don’t know how accurate I am. I also don’t know if I’m way off on holding costs. Rehab is a bit of a crap shot as well. Even though I’ve been guessing, I still enjoy running the numbers and looking at houses. I have noticed it’s slim pickings here I n the Austin market. As a result, I’ve been looking in the Houston area and mainly using realtor.com.

Daniel Haberkost · Answer

Austin has been a very competitive market in recent years. It's very unlikely that you will find anything that makes sense on the MLS. I would connect with wholesalers and look at their deals, conducting your due diligence in real time as if you were actually going to make an offer. You may find that even "wholesale" deals are selling close to market value since inventory is so low right now (I see that happen here all of the time!) but regardless it will be good practice.

When you say you don't know what you're doing, what part of the process are you unsure on?

Andrew Powers · Answer

Hi Matthew, I recommend looking at the YouTube tutorials of the bp calculator, that helped me get a start with it. Depending on the types of properties you are looking at, REI strategy, and your goals... all plays into what your targets are. For flips, some people want to make at least xx thousand profit. For rentals, some people want prefer high cash flow, some want a solid place to put there money and are OK with just covering mortgages and expenses, etc. Look around the forums to gauge what other peoples criteria are.

Additional to sources mentioned, I used craigslist, FB marketplace, walk bike or drive neighborhoods to see activity in the areas I'm interested in. And tell everyone you are looking to buy a property, you never know who is selling or knows someone

Analyzing Deals and Learning as I Go-Can I get a few pointers?

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