30 Day Challenge – Small Multifamily Property Analysis

[John Leavelle]

Hello BPer’s, in my continuing effort to take actionable steps towards real estate investing I have started the 30 day analysis challenge (Analyze 30 properties in 30 days).  Here are my basic parameters:

Target Market:  San Antonio, Texas

Neighborhood(s):  Primarily areas just north of downtown (older neighborhoods and prime rental market).  Secondary will analyze properties in other areas of town if I need to.

Properties:  2-4 units multifamily and some small apartments.

Strategy: Buy and Hold utilizing the BRRR process (Buy, Rehab, Rent, and Refinance)

Finance: For my quick look analysis I will use the List Price with 20% down payment to determine a conventional 30 year mortgage on Zillow (typically will use 4 – 5% APR). However, for more detailed analysis for actual offers I would be using Creative Financing for purchases.

Cash Flow Goals:  Minimum of $100 per unit per month to warrant more thorough analysis.  Ultimately the property must be able to cash flow and average of $200 a month once stabilized (and refinanced).

I will use two methods to conduct my preliminary analysis.  First I will use the List price and any Seller/Broker provided Performa data to determine cash flow.  Secondly, since I will ultimately be using Creative Financing to purchase properties I must use very conservative methods in my evaluation. I will be adopting concepts used by BP Pros like @Brandon Turner and @ Michael Blanks.  I will use 55% of GAI for Expenses.  That will cover a full cosmetic rehab, capital expenses, vacancies, property management, and other normal expenses.  I will also develop 4 price points to work with any potential offer.  From the List Price, Strike Price (90%), Goal Price (80%), down to a Base Offer Price (70%).

The last part will be Action Required – Move on to next property, Keep on watch list, or Conduct a more detailed analysis.

I will post my analysis results on this post as I have the opportunity .I work a lot of hours so they may happen several at a time.  So if you are following please be patient.  Also, please provide comments or suggestions …. Keep me moving forward.

Lastly I have started a Blog here on BP to record my travel on the road to REI success; https://www.biggerpockets.com/blogs/7176-follow-a-texas-rei-newbie

[Nick B.]

@John Leavelle,

Your look at this exercise from a wrong perspective :-)

Forget the list price. Start from comparable sales. That'll give you ARV or "after repair value".

Then subtract whatever rehab you need to do to make that property on par with the recently sold properties in the neighborhood.

Then subtract your transaction costs

Then subtract your desired equity capture (say $15K as a bare minimum)

That's your maximum offer price.

Then check the rents comps to see if your projected rents * 90% (vacancy factor) less PITI, less management/maintenance/reserves/etc. is greater than your desired cashflow.

Calculate PITI based on ARV, not on your offer price.

For example, a 4-plex that rents for $600/mo:

ARV: $200K
Rehab: -$30K
Trans. costs: -$5K
Equity: -$15K
Max offer: $150K

Rent: $600*4*12*.9=$25920
PITI: ($720 (30yr @ 4.5%, 75% LTV) + $200 tax) * 12 = $11040
Other expenses: $6000 

Cashflow: $13880/year

In this case your loan is 75% of your ARV or $150K.
Your out of pocket is $35K and your retained equity is $15K.

You may want to build an Excel spreadsheet with all these formulas and play with the numbers to see what kind of a deal you want to pursue.

Nick