Deal Analysis Help

[Sara Conner]

Hi everyone,

I am brand new to all of this. Currently in the information gathering stage. I'm looking at properties with Rent to Retirement. The numbers on their properties look good. But when I check them against the bigger pockets calculator, I come up with negative returns. In fact, every property I look at comes up with negative returns on the BP Calculator. Am I doing something wrong?

[Zach Lemaster]

@Sara Conner This is very helpful. Thanks for sharing details. The pro forma the builder put on our page shows 11.5% CoC ROI (if you look at the bottom of the page where the ROI is broken out). The 16% ROI includes the loan pay down after year one coming from the amortization schedule along with breaking out other ROI considerations. I think the other discrepancies are likely from these inputs:

-closing costs at 5% would be too high for this type of home.  We are not seeing closings costs at the $8K range on a $150K home.  You are likely about half of that if (unless you pay points to buy the rate down).  Please note the builder on this is buying the rate down for you already some.

-20% down vs 25% down will affect ROI as well.

-Property management is 0 for first year since mngt is covering that, but you would want to increase it to 8% for year 2.  However, you would also need to increase rent by 4% for year 2 since the team builds in a 4% rent increase year two.  Don't forget to increase rents over time just as you would increase maintenance, etc.

-Insurance seems accurate.  You certainly could include 5% capex, but this seller has not as the home has been recently renovated or newly built, meaning you would not expect large capital expenditures within the first 5 years at least.  I think after that timeframe it would make since to include capex.  Completely up to you of course, but on a new construction home or renovated property, the first few years should limit capex unlike a home that is not new construction or renovated.  I assume that is where a good portion of the variance is coming from.

Great job diving into the numbers on the properties as that is always good practice and allows you to better understand what numbers you want to input on the various types of assets you explore investing in.  On the RTR website under education, then tools, we have a free portfolio calculator that I highly encourage you to play around with as well as that allows you to evaluate both individual properties, but also a portfolio as a whole.  Most importantly, it helps you future project anticipated equity, cash flow and net worth based on whatever variables you want to input for things like appreciation, rental increases, loan terms, etc.  We developed this out of necessity for our own investment planning as we simply could not find a portfolio calculator online that also allowed for this.  I'm sure that will be a very valuable tool.

Hope this all helps.  Don't hesitate to reach out with any questions at all.  We are here to assist you with any properties you are looking to invest in on our site or anywhere.

To your success, 

Zach