What info is needed to make an offer?

Question

I am using the method from the Rich Dad Poor Dad book the ABC's of real estate investing, for figuring out offer prices. The equations are pretty simple:

Income= income-vacancy.

NOI=income-expenses.

Cap rate = NOI / comp price.

Offer price= NOI / cap rate.

Also, one of the expenses in the book is replacement reserve. How do you figure out what that needs to be on a monthly or annual basis? I don't know the difference between this and capex. Also do I just ask my realtor to retrieve all of the expenses? They are  repairs/maintenance, utilities, taxes, insurance, and the replacement reserve. Seems tedious for the realtor, especially if they are doing this a bunch of times with no payoff. I want to be conscious of their time.

Thanks in advanced for any advice you can give me!

Chelsey Hamill · Answer

@Joseph Hoot I've only been actively networking for a few months and I am already starting to see that rejection is a big part of the game, haha. I've had my fair share of unanswered emails. Thanks for the suggestions! I love rentometer, I use it all the time.

Joseph Hoot · Answer

@Chelsey Hamill - Although I'm still new to this game-- sounds like you are too-- one thing I've learned from the BP podcasts and these forums is that you have to be outgoing with real estate investing.  What's the worse that can happen if you call someone and ask for the information?  Maybe they don't answer you?  or hang up?

I have called both residential and commercial listing agents to ask them for more detail.  In order to try to not waste their (or my) time, I make every attempt to keep the email or telephone conversation as concise as possible.  I find everything I can about the numbers first-- go to rentometer.com, zillow, trulia, redfin, mls, etc..etc...  Between those sites, you can usually find most of what you're looking for.  Then, I estimate my own numbers using some defaults.  I use similar ones that @Adam Bartomeo uses.  However, I am typically a bit more conservative and estimate a little higher on the CapEx.  Overall my numbers usually still work out to be about 50% Income vs. expenses-- the 50% rule.  Sometimes you have to check if their are HOA dues and things as well.  Then, I call the listing agent and try to find out things like rent, who pays for utilities, what are the current rents, where there any new updates done that I should be aware of, such as roof, windows, driveway, HVAC.  And then I always ask if they are aware of any glaring repairs or updates that will need to be completed soon.

I also agree with Adam in that most realtors aren't going to bother too much.  But I've received at least a 40-60% positive response in hopes that they can make a deal.  From their response, you can usually find out what else you need to do to your numbers in order to give you a better/more accurate estimate on the property.

Chelsey Hamill · Answer

@Adam Bartomeo thanks, very helpful. So do I get the number of the owner from my realtor, or do I have to speak with the selling agent to get that info?

@Ned Carey Okay, thanks for clarifying. I thought that they were the same thing, but it was strange how he explained it in the book. So far I have been overestimating costs, so I am trying to call and actually price things.. otherwise I may never find a deal, haha.

Ned Carey · Answer

@Chelsey Hamill Cap ex is just short for Capital expenses. In other word major repairs like a roof that are depreciated vs smaller repairs that are expensed the year they are made. So yes "replacement reserve would be pretty much the same as CapEx.

Most people will simply pick a number. I estimate $1500 a year for repairs and anything left over goes  to a capital reserve fund. The real way to do it is break down all of the components of a building and figure the cost of each and the remaining life of each and figure how much you need to put aside to have the money to replace the item when the usable life is up.

A simple example would be a water heater is $800 installed and if it lasts 8 years then it is costing you $100 a year. Of course if you are buying a used property and the water heater is 4 years old, then you need to be putting $200 a year aside. Do that for all the components of a property and you have your capital reserve requirements.

Something you will hear about here on BP is the 50% rule. While is is just a rule of thumb it is based on real numbers. It says "Over a portfolio of properties, over a period of time your expenses not including financing costs will be about 50%." Many people will criticize this rule but without it most new investors would underestimate costs. So lacking other true expense numbers you are wise to estimate at least 50%

Adam Bartomeo · Answer

I would be surprised if you could find any realtor to do this research for you. Most are not very helpful or knowledgeable in this aspect and don't want to put in the extra work. Most investors use fixed percentages of income to estimate these expenses.

Maintenance 8%-10%

Replacement reserves/Cap Ex 8%-10%

Property Management 8%-10%

Taxes - You can get the exact amount from the county clerks website.

Insurance - Get a few quotes and you will have a good idea for most properties

Utilities - You can ask the owner for the past bills.