Deal Analysis (Just learning) - What am I misunderstanding?

Question

I found a property on Zillow and ran the asking price numbers through the BP calculators and came up with $439/month cash flow at 39% ROI. Both BP and Zillow agree on the rent estimate and it doesn't seem out of line for the area (maybe 15% higher than I expected but still in the ballpark) I've only been researching properties for a couple of days (and still not made a first deal) - and this feels like it's too good. I have linked the report here:

https://www.biggerpockets.com/...

My question is if you were looking at this report and wanted to validate that the numbers were sensible - how would you proceed?

Thanks!

https://www.biggerpockets.com/...

My question is if you were looking at this report and wanted to validate that the numbers were sensible - how would you proceed?

Thanks!

Kim Crouch · Answer

Hi Robert - I live in Wilmington, my daughter is at NC State, and I know a little bit about the Raleigh area. First, just regarding your assumptions, if you're buying this with a primary residence loan, you can put 10% down (or less, usually 3%-5%). If it's an investment or even second home loan, it will likely be 20%-25% unless you're getting private financing. Second, I'm not sure what you can get for $109K that would be ready to rent. I would start by touring the property and getting good estimates of costs to renovate in order to be able to rent it. Both of these will affect your numbers.

So next steps:

1. Talk to lenders, get pre-approved, and determine your buying power and how much cash you need to close.

2. Tour the property and figure out what renovations, if any, are needed, and how much they cost.

So next steps:

1. Talk to lenders, get pre-approved, and determine your buying power and how much cash you need to close.

2. Tour the property and figure out what renovations, if any, are needed, and how much they cost.

Adam Schneider · Answer

@Robert Horvick.

Hey Robert. (I'm in Raleigh, too). Here's my two cents:

1. Bigger picture, what's your goal? Are you looking for appreciation or cash flow (assume you need to lean one way or the other). That goal will influence your decision making.

2. If you are buying a property for $109K, likely you either have lots of required repairs or you are about an hour outside of the Triangle. If it's on market, and still available, it's either over-priced or requires lots of work.

3. In terms of your numbers, my strong recommendation for people getting started is to find a property that looks like it will be okay and just buy it. See what happens in real life. If you mess up a little and that's not a big financial strain, you can just chalk that up as "education". It's better to get educated on a low risk / low reward deal than a high risk / high reward deal. The one you presented looks ideal as a low risk / low reward on paper.

4. Very few first time investors look back and say that they over-estimated costs...

Mike Dymski · Answer

Nice work on running analysis on real opportunities...that will get you farther faster than books and podcasts!

Increase management from 5% to at least 10%...will vary by market but is typically at least 8% plus lease up fees.  I would recommend moving vacancy from 5% to 7% to be more conservative (and also cover utilities during turns).  Maintenance and cap ex at $1600 per year total is likely at the low end of the range.  I'd suggest bumping that up another 5% between the two.

Run this on 50 properties and you will start to get a feel for the market and your criteria.

Jim K. · Answer

@Robert Horvick

Where is this place? I'm in Pittsburgh and only buy locally, so you can send me the address if you'd like. Is it possible? SURE. Is it a good deal? A lot is going to depend on variables that there are no calculators for -- location, neighborhood, tenants, etc.

Robert Horvick · Answer

@Jim K. - I sent you a message.

Robert Horvick · Answer

@Adam Schneider - nice to meet you!Our initial goal is rental providing positive cash flow ($250+/month to be worthwhile) and just getting something going. Appreciation would be great but I'm not counting on it as a short-term goal (i.e., we're looking to rent this for years, not flip).  We have other goals, but that's the goal with this first property.The house is an hour+ out of the Triangle but in a populated area. It also has a dated, but a clean/rentable interior. If we invested in updates we could likely increase the rental value but it would not be necessary on day-1.I think "just go it" might be our best bet. After digging into the more realistic rental numbers (looking at non-updated comps) the numbers don't make as much sense but I'm watching it. I'm a very analytical person and have a habit of enjoying the learning and research so much I sometimes get stuck,In terms of cost estimating, a close friend is a GC in southern wake who does commercial renovations and rentals.  He has offered to join me on my first 5 or 10 tours to help evaluate properties and put together repair estimates. It costs me a decent lunch and a six pack but will definitely help mitigate the risk of big surprises.Thanks!

Robert Horvick · Answer

@Mike Dymski - thanks! Changing those numbers does dull the shine on this a little as the rent is what BP and Zillow say but I think it's a little high for the market. There are comparables with similar rent but they are a less dated.Appreciate the feedback and advice!

Joe Villeneuve · Answer

You're only putting 10% DP?  Why not 20%?  Who is allowing you to only do 10%?

Also, when you stop using the phrase, "...sounds/looks too good to be true...", you'll know you're ready to start REI.  Until then, you probably haven't gotten good enough yet analyzing Markets.

Jim K. · Answer

Not a crap hood, relatively modern build, actually looks pretty good, Robert. I asked because usually, you look at the place and it's clear the OP has a really bad case of wishful thinking. Nope, not here. This looks plenty legit.

Deal Analysis (Just learning) - What am I misunderstanding?

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