Am I running numbers correctly?

Question

New investor here. I'm trying to do quick analysis for properties using mostly rules of thumb (50% rule, 1.5% purchase price for rent, ect.) I feel like I'm horriblely estimating them. I'm not sure if I'm using the rules of thumb wrong or not. Any tips when trying to do a quick analysis to determine if a property is worth checking out? I'm trying to do multi family but another thing I'm unsure of is a lot of properties seem as if they're normal SFH but are listed as multi family? I'm thinking of du-, tri-, and quadplexes. This is the listing I'm doing a rough analysis on: http://m.homes.com/property/12613-w-85th-pl-lenexa...

Thanks for any help BP!

David Dachtera · Answer

@Chris Trupiano,Residential multi-family - 2 to 4 units - will be priced based on comparables, but you still need to run the numbers as if it were commercial MF.For me, every such property is worth getting the details on. If I discard a property because of my assumptions I may be passing up "The Deal of the Decade".Remember: the seller's asking price is a pipe-dream - it's what they wish they could get. The reality is always what the market will support.The lender's decision will be keyed by the comp.'s and the buyer's qualifications.YOUR decision needs to be based on the numbers of the property as a business decision: based on income vs. expenses + debt service.David J Dachtera"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

JD Martin · Answer

Thoughts in no particular order:Scrap the list price on your sheet, it means nothing.Is 1.5% of purchase price a reasonable figure in your area? I roughly use a 1% of my all-in as my bottom figure, i.e. if I buy a house for 40 and put 20 in it I have to be able to rent it for a minimum of 600. Will your expenses be 50% of rent? How do you know this? I hope it's not because you saw a number on BP. You should have a good handle on your insurance, taxes, reasonable vacancy expectations, and routine maintenance for the house/area you are looking at. For example, a brand new house in a hot neighborhood is probably going to have minimal maintenance, capital and vacancy expenses, whereas an 80 year old home in a sketchy area will (likely, depending on what's been done) have higher levels of maintenance & capital expenses and almost certainly greater levels of vacancy. Buying a house just on what you have on that piece of paper is going to be dangerous. You've written "Seems very high" for the rent number. Is it? There shouldn't be any "seems" in your answer - either you know that figure is outrageous for what you're looking at, or you don't know one way or the other, in which case you should probably go find out first.

Sam Newell · Answer

Chris Trupiano I don't like rules of thumb a whole lot because everyone's market is different. I use 35% expenses and the average cap rate is 5.5% here. I would ask a local realtor for Sold comps and then work out what the average cap rate is in your area, then you can analyze a property that's for sale based on what has been selling in your area. I'm thinking of doing a video on this, let me know if you're interested in learning more. Amy Kendall works with me and is a great resource as well

Joseph Gibson · Answer

@Chris TrupianoAnother good resource is to check what people are posting on craigslist, or drive the neighborhood find for rent signs. If your in the are area you could always knock on doors and say "I'm interested in renting around here do you mind if i ask what a place like this rents for?"

David Dachtera · Answer

@Chris Trupiano,I would do both. Ask local agents / brokers and also see what Zillow suggests (but take Zillow with rather a large grain of salt!). There's also rentometer.comDavid J Dachtera"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Chris Trupiano · Answer

@David Dachtera where would you typically find market rent?Do you use a website or call local realtors?

Jim Adrian · Answer

I think your rent is in the $1800 range. I have seen using 1.1% to 0.08% of property value to establish rent. Anything over $200k was at 0.08% and anything at or under $100k was 1.1% I am not sure how this holds up around the country. It worked for me. In looking at the numbers on Zillow and comparing it to Omaha, I think the Zillow's numbers look on target. I typically feel Zillow is low by 10% - 20% for my area.

David Dachtera · Answer

Single family homes are valued entirely on comparable sales.Multi-family residential (2 to 4 units) is valued by the lender on comparable sales and by the investor based on its ability to produce income.Commercial property (5+ units, retail, industrial, etc.) is valued based on its ability to produce income.Area rents will be the best guide on what you can reasonably expect to get for comparable units (size, Br/Ba, etc.).David J Dachtera"Success is not a destination. Failure is not an event. Success is a process, failure is a choice."- DJ Benedict

Chris Trupiano · Answer

@David Dachtera How does running numbers for commercials differ from SFH? Also would you find rent strictly from rents if surrounds properties?

Chris Trupiano · Answer

also what would you use to figure a purchase price if you through out a listing. Do you go off surrounding house values or figure from market rent?