Running The Numbers - Newbie Help

[Robert Leonard]

Hi everyone,

I am a relatively new real estate investor. I have completed one deal, and I am sort of in the middle of a second deal (house hack, kind of), but for both of these deals I didn't run the numbers as I should have. Both of these transactions took place before I discovered BP and before I really invested in my REI education. I was lucky on the first deal to have made a profit, and the second deal is looking like it will be profitable as well, but as I have learned, I need to run the numbers.

I am looking to scale my business and take my first steps into multifamily, but before I do that, I'd greatly appreciate assistance and opinions on the numbers I ran for a deal I recently found. It is a two unit multifamily property in an area that I am quite familiar with; it is only about 3-4 miles from my childhood home in the town that I lived in for 22 years. It's in a nice area and a good school district. My numbers seem to show it would earn about $400-$500 per month in cash flow. I would like to follow the BRRRR strategy on this deal, if I were to pursue it, and I need to fund this deal with private and/or hard money.

I would greatly appreciate any feedback you may have on these numbers, this property, this deal, funding it with hard money, etc. I'd like to see if I am heading in the right direction. Thanks for the help - I really appreciate it.

Robert

[Ed Matson]

@Robert Leonard - A few comments if I may. You are assuming a 10% vacancy loss, but estimating tenants will stay for two years. 10% is 2.4 month's rent for one unit. Seems pretty high. Does it take this long to rent an apartment in this market? I normally budget 5% vacancy loss and that has recently been fine. You also have $1300 for vacancy placement. Is this for an agent to lease the place? Is there any way you can do this yourself. I think leasing to the right tenant is one of the most important tasks in the landlord's success. I generally don't like to subcontract this to a third party on a smaller property. The agent's motivation is getting a tenant in place and getting his commission, not necessarily getting the best tenant in place. Plus, you can save significant $. I see CapEx at 10%, but no repairs. For a smaller, older property like this, I think both combined can be closer to 15%. So, on balance I think your numbers are fairly close in total, but I think one area is high, and another potentially low for expenses. Good luck.

[Mary M.]

I would see if the mods can delete the image with the address?

Eta i was worried that if it was a good deal someone would swoop in - however it has been on the market almost a year so obviously the market isnt liking what they see? 

So i would wonder what is wrong with it? 

[Robert Leonard]

@Ed Matson Thank you for your input, I greatly appreciate it. 

No, it doesn't generally take that long to rent it out. The market is strong around there, a lot of job opportunities, commutable distance to a major city (Boston), good school district, etc. I've adjusted the vacancy percentage to 8%, estimating about 1 month of vacancy per year (although this is likely on the high side, I assume being conservative is okay to do, as long as the numbers still work?)

That's a great catch on the vacancy placement costs. Truth be told, I didn't create this template, I just found it on Google and I didn't catch that myself. I certainly do plan on keeping the property management/tenant placement in-house (myself) until my portfolio is big enough to warrant outsourcing. Plus, I don't mind doing that work. I'm not 100% sure what that line item relates to, but I believe your assumption is correct, an estimate for agent commission cost to find a tenant. I've removed these costs. 

Can you elaborate a bit more on "I see CapEx at 10%, but no repairs."? If I understand correctly, the CapEx covers routine maintenance but not major/minor repairs, which is the repairs you were referencing? If so, I'll have to increase my CapEx figures to include an estimation for those repairs.

Thanks again for your input.

Robert Leonard

[Robert Leonard]

Originally posted by @Mary M.:

I would see if the mods can delete the image with the address?

Eta i was worried that if it was a good deal someone would swoop in - however it has been on the market almost a year so obviously the market isnt liking what they see? 

So i would wonder what is wrong with it? 

 I was wondering if I should post the address or not but I likely won't act on this deal yet, as I am still working on running the numbers and getting comfortable with that, so I didn't mind sharing. However, you raise a good point, and a question I was wondering too.

[Ed Matson]

@Robert 

@Robert Leonard - Maintainance is general upkeep of the property like cutting the grass and snow removal, etc. It is often lumped in with repairs, which is defined by the IRS (you can look it up), but is generally understood to be actions taken to restore the functionality of an asset to its working condition. So, fixing a leaking toilet is a repair. CapEx generally relates to costs for actions that will improve the functionality or value of the property or extend its service life. So, big things like a new roof, new siding, new driveway are Capital Expenditures. There's a lot of gray area here in real life. CapEx is not included in operating expenses as they generally are non recurring, but they are very real and equally meaningful to my cash flow and investment decisions. The amount of CapEx to be budgeted depends on the age and condition of the property. We have a 100 year old three family in generally good condition, but still our combined R&M and CapEx costs total about 15%. And that's without any really big cost items like windows, siding, and roof. We also have newer properties where the total is 10% or less. I also like to use the calculators on BP (Tools). I find them easy to use and they make sure I have to actually think about each cost item before making an entry. Lastly, using a high vacancy number like 8% is fine if your numbers work, but it may cause you not to consider a pretty good deal because it could paint too pessimistic a picture of the investment. 8% vacancy means both your units are vacant nearly a month every year. That's twice your assumption that your tenants will stay two year, and assumes that tenants don't give notice that they are leaving (as should be required) on your lease, and that there will be a month's physical vacancy. I normally use 5% vacancy for planning and our actual experience is less. Our properties are B or B-, in good condition, and are fairly priced at market rates.

[Ed Matson]

And, I agree that posting the actual property address is not a good idea. Doesn't matter if you are ready  to make an offer now or not.  You are still doing work on the deal.  Why do the analysis and let someone come in and snatch it up?

[Robert Leonard]

@Ed Matson Really, thank you. All of that information is very valuable and I greatly appreciate it.

You both have made a good point - I have requested that the mods remove the pictures with the address. 

One last question, do you have any recommendations on how to find funding for a deal like this? It doesn't seem like a hard money-type deal, and I do not have capital available for 20% down for traditional financing. 

[Ed Matson]

If its a good deal, you could try partnering with a more experienced investor who has capital. You bring the deal, you act as landlord, he/she provides the downpayment and financial strength to get financing, and you split the profits.  You gain income and experience so that in time you can act alone.  Another option is friends/family private lending.  

[Robert Leonard]

@Ed Matson Any unique insights as to how to find that partner? I would like to go that route, I am more than happy to give an enticing portion of the deal to an investor and to act as the landlord/do the manual work.

[Ed Matson]

@Robert Leonard - While I have no unique insights I can suggest:

Continue your education so you can analyze a deal with confidence.  If you need more specifics, buy Josh and Brandon's new Investing in RE book on BP.  Go to every RE meetup you can in your area.  Many are posted on BP.If there are none, start one.  This is where you can meet people and start to develop relationships that could have you end up partnering with someone with capital.  But you must bring value to this partner.  Make sure its a good deal and make sure you know what you are talking about.  The type of person you want to partner with has cash, but most likely doesn't have a lot of time.  He/she may be willing to invest in a good deal you bring him, but may not want to do a lot of work. Do NOT ask someone to be your mentor. Bring value to someone.  By partnering with an experienced investor you will bring them value and you will get the hands on education/benefit of their experience.  And, truthfully highlight your actual experience.  "I have successfully completed one deal, here are the results.  I am in the middle of my second deal, a house hack.  This is what I have learned, and now I am ready to go to the next step."  Compare this language to your introduction from your first post. Which one might give an investor confidence that you will make a good partner?  They both say the same thing, but one projects confidence, while still being honest and forthright.  Your first deal made a profit.  That's great. Use it as a resume. Doesn't matter if you got lucky.  You got experience from that first deal.  That's more than a lot of people.

Hope this is helpful. 

[Robert Leonard]

@Ed Matson All of your information has been very, very helpful. Thank you.