Am I analyzing this correctly?

Question

I'm trying to educate myself about turnkey properties and have stumbled across this property on Roofstock. I know nothing about Indianapolis or if the house itself is well-priced or really any of the due diligence that would go along with buying a house.

However, I ran some rough numbers myself and came up with a cash-on-cash return of over 15%.  I then punched everything into the BP rental property calculator and came up with around the same numbers, depending on things like vacancy and repairs and whatnot.

These seem like good numbers at first glance. Is there some huge error I'm making or something major that I'm leaving out? I just want to make sure that I'm doing this the right way moving forward.

Thanks!

David Faulkner · Answer

What? You mean you actually have to have some local and investment knowledge? And you can't just figure it out based on numbers and advise given online? And you can't just cut a check to a stranger out of state to figure it all out for you? Man, this real estate investing is difficult stuff :)

Mike Knowles · Answer

Thanks, @Brent Coombs

Sam G. Couple things to add on this one. I'd say that your calcs are off because those assumptions likely won't hold in this neighborhood. Your vacancy/repairs/capex could be higher than 10% each. What about non payment of rent? Court costs for evictions? Those are real issues.

Now, let's assume this same property were picked up and moved straight East to German Church Rd. Then I would say your numbers should be:

Rent - $825

Taxes - ($106)

Insurance - ($60)

Mgmt / Maintenance / CapEx / Vacancy @ 10% each - ($330)

Monthly cash flow = $329 (5.7% annually)

Rodney Kuhl · Answer

Sam G. Well. Let me start by saying I don't know this property, I don't know this company, and I have no interest to either party. I'm not trying to sell anything, just to point out my thoughts.The first eye opener to me is that on that exact webpage that you linked to the property shows the property valuation to be $31,000-$58,000. But the sales price is $69,000!Second, I'd always recommend for a person to come see the property in person. Pictures can hide a lot in a house.The numbers can say whatever you want them to, but that doesn't always happen in reality. I'm not sure what assumptions you used for your calculations. Based off what you said about not knowing how to go about the due diligence, I'd suggest using 10% for vacancy, maintenance, and management, and then you can figure out actual taxes and insurance costs.I can also tell you that this property is located in an area that will not be seeing appreciation any time soon. There are plenty of areas in Indianapolis that have seen and will continue to see appreciation. But there are also plenty of areas that don't and will not appreciate. I bet in 10 years this house will be worth the same as it is today (or very close to it).I'm admittedly conservative with my numbers, but I don't calculate the same returns.Best of luck!

Mike Knowles · Answer

You're welcome. Happy to help.  Taxes are $1,273 per year according to the county records. In Indy, for non owner occupied properties, they are about 2% of the assessed value.

If you find insurance for $400/year, please let me know where.

The one thing you can count on is that the pro forma numbers a turn key seller gives you are not going to materialize. Actual returns will be south of that. (exceptions may apply to this, but I haven't seen it)

Larry Fried · Answer

Sam G. I know you are only using this property as an example, and don't plan to buy it, but I would add some things to your DD in addition to the things already mentioned.  You want to know what kind of condition the property is in, what was rehabbed when, and what items in particular might have a shorter life than you'd hope for on a truly turnkey home.  Get a scope of work if possible, and particularly look for the major capex items including roof, HVAC, plumbing & electrical. For example in the inspection report on this house, the HVAC is listed as "Average" having an expected life of 3-5 years.  In my mind that is something that it going to need to be replaced soon, and probably would be in a major rehab.  But even more important is the Structural concern, where it says "Repairs Needed".  This could be huge or not, but would definitely be of concern, and I must to assess fully.  Finally, Roofstock works in a way that doesn't allow the buyer to do their own third party inspection.  That can be pretty difficult issue for many investors.  All best in your REI.

Brent Coombs · Answer

Sam G., who wrote: "That one is a hard no. I recommend you stay away from anything within spitting distance of 38th and Post".

I certainly recommend giving heavy weighting to the advice of such LOCAL experts who know the CURRENT worth of neighborhoods (as against those who try to guess FUTURE increases).

ie. There's a lot of "esoteric" factors to take into account - not just plugged-in numbers. Cheers...

Rodney Kuhl · Answer

Sam G. I tried to click on your link but I couldn't access that page. I'm not sure how you'd calculate it to be 8% COC returns without seeing the numbers. Especially if you used 10% for those 4 expenses (40% total), as you'd still have taxes and insurance.

Sam G. · Answer

@Grant Anderson That makes a lot of sense. Thanks for the help. All this information will be super useful once I find a property that I want to take action on.

Grant Anderson · Answer

Hi Sam - Based on your follow up question. It is very difficult to give you a clear answer to your question because every area and every property itself is different. An older home you might need to increase your maintenance and cap ex percentage than a newer or just rehabbed property. Also, the area the property is in as noted here may come with higher vacancy rates (economic vacancy and physical vacancy) and higher repair estimates. It is very difficult to generalize vacancy, cap ex, repairs, and management.

Sam G. · Answer

@Larry Fried Good advice and good points. Thanks

Am I analyzing this correctly?

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