Are my assumptions reasonable?

[Thomas Loyola]

Hi BP,

We are out of state investors looking to buy our first property in Indianapolis or Columbus. Been having trouble finding properties that cash flow, so I’m wondering if our assumptions are part of the issue.

I use 10% of rents for vacancy, 10% for capex, and 10% for property management. Are these too conservative? If we are analyzing a turnkey property, is it reasonable to decrease the repairs and capex to like 5% each?

Any feedback is appreciated!

Thomas

[Drew Sygit]

@Thomas Loyola you haven't addressed the Class of property you intend to buy, so your assumptions could be too low or too high.

Your biggest challenge is you are assuming you have to pay asking prices!

Who told you that?

An investor should actually work backwards from their Target ROI, to determine what to offer on a rental property:

• Determine reasonable market rent, NOT the highest!
• Deduct NEW property taxes after you buy
• Deduct home insurance costs
• Deduct maintenance percentage, typically 10%
• Deduct vacancy+tenant nonperformance percentage
  (we recommend 5% for Class A, 10% Class B, 20% Class C, good luck with Class D)
• Deduct whatever dollar/percentage of cashflow you want

Now, what you have left over is the amount for debt service.

Enter it into a mortgage calculator, with current interest rate for an investment property, to determine your maximum mortgage amount.

Divide the mortgage amount by either 75% or 80%, depending on the required down payment percentage - this is your tentative price to offer.

If the property needs repairs, you'll want to deduct 110%-120% of the estimated repairs from this amount.

Be sure to also research the ARV and make sure it's 10-20% higher than your tentative purchase price.

As long as the ARV checks out, this is the purchase price to offer.

It is probably significantly below the asking price. Who cares? If you pay more, you won't meet your metrics and will probably have negative cashflow and/or equity.

You may have to make 10, 20 or even 100 offers to get one accepted at the price that meets your numbers.