Property Analysis Walk Through

[Ben Wilkins]

Good evening BP,

I have seen a few posts asking how to analyze a rental property.

While I was analyzing a property tonight with my wife, I decided to take some screen shots and go through how we analyzed it. It's a lot of pictures, so hold on tight!

Tonight, we took a look at a 5 unit property that we found on Trulia.

The first thing that we did was plug the numbers into a quick 60 second calculator to do a fast evaluation of the property. The calculator uses the 50% rule to run its numbers.

 When I started going through the basic information, I saw that the property was listed as a 5 unit, but it stated that the fifth unit was vacant and needed some work. Because of that, I added in $20,000.00 for repairs as an estimate

I left the financing details as the "standard" conventional 25 year, 20% down.

I also only used 4 units at the $500 per unit rent that was listed for each unit. The outputs looked promising:

Cap rate came in at just over my target of 8%, with a positive monthly cash flow and a suggested value of around $110,000.00 - and this is accounting for only four units.

So with this, I decided to take a deeper dive using a more in-depth calculator. I knew that taxes were higher in this area, so I had a feeling that the 50% rule was going to be a little off.

Basic details:

Again, assuming 4 units at $500 per month each. I also got some more details for the taxes, insurance, and utilities.

Property taxes weren't actually too terrible. A surprise was the $6000 annual sewer and refuse bill, which seems high for the area. That's possibly a value-add opportunity that could be looked into.

Don't forget those percentage expenses! This is for maintenance, CapEx, vacancy, and property management.

Now take a look at the outputs. Cap rate is low, thanks to the utilities and the percentage expenses. This makes me think that the 50% rule might be better run at a higher percentage going toward expenses, but that's an argument for a different day.

Cash flow is negative, but $500 per unit seems low for the location. To compare, I took a look at RentJungle and ironically found this exact building listed, as well as a few others in the neighborhood. It looks like closer to $650 per month is what the units should rent for. To use RentJungle, I put in a the location of the property and a range of posssible rents, then looked for comparable rentals.

To get a better future estimate for the property, I went back and changed a few of the inputs:

Renting all five units at $650 per month, and including property management, this property would get a relatively decent amount of cash flow.

Conclusion: Value add opportunities such as fixing up the fifth unit, increasing rent to just below market value, and reducing utilities fees might make this property worth purchasing.

What else do you take into account when evaluating a property? What did I miss? For a 5 minute drill, this seems like a fairly in-depth look at a property without even leaving my couch (or in front of a fan on the floor, in this case...)

60 seconds to do a quick evaluation to determine if a property is worth going further, another two minutes copy and pasting numbers, and two minutes digging into RentJungle to find comparable rents. As Benjamin Riehle mentioned in his earlier forum post, you can find good deals on the MLS - you just need to be quick on the analysis.