Strategy and Property Analysis: Am I on the right track?

Question

Hi BP Community of Grand Rapids!

I joined BP earlier this year with the goal of learning everything I can about real estate investing and to purchase my first home in 2021. Through reading a few books to listening to a bunch of podcasts (my favorite being the RPOA podcast with Brian Hamrick) I have set my sights on Grand Rapids.

Could someone please review my strategy and Grand Rapids assumptions and let me know if I am on the right track?

• Strategy: “Buy and Hold” in a market with good (not excellent) cash flow and good (not excellent) appreciation. I want to reap the benefits of net positive monthly income but want to ensure I have some appreciation potential upside as well as rent increase potential. Too much appreciation and I am priced out of the area, too much cash flow and I risk more capex and higher vacancy rates. I am assuming my biggest risk with Grand Rapids will be competitive and difficult to find the best deal as a new investor. My goal is to become comfortable with my analysis, apply for a letter of pre-approval, and find an agent who will help me find the best deal.

• Mortgage and Home Price: I have excellent credit (790+), a good W2 job, no other major debts, and roughly 40K I can use up front. Based on this, and a quick conversation I had with a mortgage lender I will need to put 20% down and will get a 4%-5% rate. Meaning I can likely afford no more than a 200K home with limited rent-ready capital expenditures.

• Appreciation Rate: 3.5% to 6% depending on the neighborhood.

• Tax Rate: 1.51%

• Average YoY rent Increase: 4%

• Vacancy Rate/Credit Allowance: 3%

• Property Management: 8% to 10% + placement fee of half to all of first month’s rent.

• Repairs and Maintenance: 10%

• Yearly Insurance: ~ $1200

I hope I am not oversharing, but I want to ultimately receive honest feedback on my specific scenario. From my perspective I feel pretty good about my analysis and overall assumptions, but I have no validation from a seasoned investor. Any feedback is good feedback and would love to connect with anyone willing to help!

Thank you and appreciate your time in reading this!

Connor Anderson · Answer

Welcome Bryan! I think you have some great numbers here!

Right now it is hard to predict rent increases since there are a number of factors that go into what rent rates are including supply and demand of housing, interest rates for mortgages (low interest rates turn renters into buyers), inflation, and prices of homes sold.

I know the BP calc has a box for implementing rent increase but I usually leave that as 0% and only plan on what current market rents are and count on any increase being the icing on the cake.

Tax rates are also more complicated than just a % of the sales price but a great lender can help you estimate the exact tax amount of a property you are going to be buying. I have a great lender.

A few other things I would be happy to discuss with you though.

Let me know how I can help!

Bryan Tupper · Answer

Thanks for the insight Connor!

As for rent increase, in my 30 yr cashflow model I am assuming inflation at 2%, so any rent increase under 2% will begin to show a downward trend as my costs gradually increase. Is that typical when trying to forecast future cash flow of an investment? Or should I assume my inflation % is not so solid either?

Or maybe I need to be less concerned of what the far future numbers look like (15 yr, 30yr). I don’t want to over analyze but also don’t want to under analyze.