How's my deal analysis? Didn't include Cap Ex - What do you do?

Question

Afternoon BPers,

I'd like some advice and opinions on my deal analysis template. The picture provided is for a multiunit I just did. I'm pretty green to investing but have done a lot of research so would love everyones feedback on my model. I would be using this before seeing rents rolls and expenses to see if a deal looks good on the surface.

I think my numbers are really conservative but I want to make sure it cashflows. Please let me know what you think.

A few things I'm interested to get your thoughts on specifically:

1.) I don't account for any Cap Ex (driveway repairs, new roof etc...) I want to set aside 10% of gross rents in my model to make sure I'm accounting for inevitable expenditures, but don't see anyone else ever account for this and I'm not sure why. Is it because it's a tax write-off? When I do account for 10% of gross rents for cap ex it really eats up any cashflow margin I would get.

2.) Accounting for 8% for property manager.

3.) Accounting for about 10% vacancies

4.) Accounting for 10% in expenses each month.

Tom Shallcross · Answer

@Adam Philpot - I hear you and yes the market is very hot making it really tough. If the deal is sitting on the MLS or Loopnet, chances are numerous of other investors have already passed on it. The long-term answer is to establish relations with brokers and prove you can close, but for newer folks like you and I we need to establish a track record. My advise would be to be as proactive as possible instead of waiting to review something that hits the market. My recent 6 unit purchase was through a wholesaler whom I've grown a relationship with (proved to him I can close quick with a duplex deal earlier in the year) and made it very clear to him that I was interested in something over 4 units. When the 6unit came to him he came straight to me and we closed. He received a healthy assignment fee, but my number was still well below the market value and fit well within my underwriting so everybody won. This wouldn't have happened if I didn't make him aware of this and find ways to check-in and get top of mind. Now, just because you tell a wholesaler you want something, doesn't mean it will automatically happen. However, if you keep talking to them, go to networking events, and make it clear to everyone you come in contact with, eventually something will hit your radar.If MLS deals don't work, still pick up the phone and talk to the listing agent. See if there is room to move on the deal and If not, let them know what you are looking for so they have you on record when another one comes across their desk. Lastly, I'm now digging up owners on the county recording site (you can also purchase lists, but I'm hyper-focused on a select few around my current 6 unit), finding their contact info and calling to see if they are open to selling. I've been surprised how many are willing to talk (remember theses are not homeowners, but other investors) and I'm actually walking the premise of one this Saturday with the seller. Still a long ways to go, but again it's being proactive to try and find a deal as opposed to waiting. I'm also calling the mom-n-pop owners who are listing "For rent" on craigslist. I haven't had any luck yet, but again it's another avenue to to try to create a deal that isn't being viewed by the masses. It's super tough now, but bottom-line I would not bend your underwriting just because other people are willing to pay more. You have to patience while at the same time be very proactive to create/find a deal that works in good times and in bad.

Adam Philpot · Answer

@Tom Shallcross thanks! Appreciate the reality check! I have to stay true to my numbers. My networking is definitely weak so I’ll make an effort to add some focus there. Thanks for your help. Let me know if you ever need someone to partner with in Nashville!

Steve Frye · Answer

@Steve Frye I’m in the Nashville market as well and have a pretty good few template that I’d like to sit down and compare with yours.

Steve Frye · Answer

@Adam Philpot I’m sending you a direct message.

Adam Philpot · Answer

@Tom Shallcross thank you! Your feedback was really helpful. I guess my challenge with the 50% rule is that I haven’t seen a deal that looks that good in over a year and other investors are getting the properties because my numbers are so conservative. I write this in hopes someone can point out why I’m losing... I’m looking in 2nd tier markets and most of them are c class buildings.I fear I may never get a deal if I don’t do something differently. IM OPEN TO ANY AND ALL ADVICE.

Tom Shallcross · Answer

@Adam Philpot - Thanks for sharing. Yes you absolutely need to set aside money for capital expenditures. The percentage you put aside is based on what condition the building is in, what work you plan to do upfront, and how conservative you want to be, but you can't not account for this just because it hurts your numbers on paper. If a 7k cap ex project hits, it currently eats up your entire year's profit.For the 10% expenses.....In this area, and compared to your potential competitor's tenant's pay for water, electrical, heat, snow removal/landscaping? If not, you need to include those actuals which will far exceed 10% ($65/door). If they are all paid by the tenant then your 10% could work. This is one where you can ask to see lease agreements and actuals from the seller if you are serious about pursing. In general - and this is just when taking a first glance and not a hard-rule to make an offer on - your expenses will be roughly 50% of your rental income on a multi-unit. When I say expenses, this does not account for your debt service. If your rents are 2600/m I would expect expenses (not including debt) to be 1300. Add back your 1036/m of debt and you're cf is less than $100/door. For what it's worth the DSCR would be roughly 1.25 at these high-level numbers (please dig into the actuals) Most banks would accept, but that doesn't mean it's a good deal. Maybe some of this covered by the tenant and maybe there are other things not on the surface, but at a first glance I would look at this deal and pass. If you are still pursuing, get the actuals to see if anything changes from the high-level rules/numbers.