Purchase analysis: What do you think of this deal?

[Krystof Pilisiewicz]

Hi,
I want to run some numbers by you, and see if my purchase would make sense.

I live in NYC so I`m trying to be creative with my approach. I will be managing this property on my own, and do fixes on my own.

Here you go:

This is a 2-family house (frame) with unfinished basement with 3 garages. Listing price $799K
- first floor (2 bedrooms)
- second floor (2 bedrooms, with enough space that I can add an extra bedroom, so I eventually I would have 3 bedrooms)

Expenses:

- Mortgage $3,643 a month (10% down-payment with 4.5% on a loan)
- Taxes $425 a month
- Insurance: $160 a month
- W&S: $160 a month
- Heat: $140 a month
- CapEx: $54 (2%)
- Vacancy: 54 (2%)
Total expenses: $4,636

Income:
1st Floor apt - $1800
2nd Floor apt - $2000 (because of the 3 bedrooms)
Basement – $900 (after I finish it)
Garage #1- 200
Garage #2- 200
Garage #3- 200
Total income: $5300

Does this make sense to you? Am I missing something? Should I add more to expenses, especially for CapEx and vacancy?

Love to hear your thoughts.
Thanks!

[John Leavelle]

Howdy @Krystof Pilisiewicz

Your analysis is way too optimistic going into the deal.  The safest thing to do is be very conservative initially.  Use 2 "Rules of thumb " to start with. 

 The 1% rule says the total monthly income needs to be 1% of the purchase price.  Even with your optimistic rent rates you do not meet this one ($799,000 * .01 = $7,990).  Your $5,300 is not even close.  The purchase price is way to high.

The 50% rule says to use 50% of your total monthly income for expenses.  Expenses do not include mortgage payment.  Therefore, your expenses would be $5,300 * .5 = $2,650. Not $933.  Use the conservative expense numbers until you can verify all existing expense amounts.  Then you make adjustments (up or down).

What is the current rent for each unit (including 3 garages)?  That is what you need to base your initial income analysis on (not future hypothetical income).  Yes, you can still evaluate the possibility of future income increases,  You still need to analyze on current conditions.

As far as your expenses go they are extremely low.  As @Matthew Gangi suggested your CapEx and Vacancy rates should be closer to 10%. CapEx will depend on the age and condition of the property. You will need to have an inspection done to identify any problem areas and condition of major systems (Electric, gas, plumbing, HVAC, etc.). You will be able to estimate the usable life of those systems and determine when they will need replacing/upgrading. That will give you the amount you need to accumulate in your CapEx reserves. Then divide it by the total number of months (i.e. 6 years or 72 months). Now you know how much to hold out for CapEx each month. Additionally, you mentioned adding a 3rd bedroom and finishing the basement. If you do not complete these additions when you first purchase the property (during a Rehab phase), then, it will need to be included in your CapEx calculations.

You also need to include an expense item for repair/maintenance which can be 5 - 10% of your monthly income.  You should also include Property Management in your expenses (10%). Even though you plan to self manage (your time is worth something, right?) you may decide later that you need a PM.  Most investors will be including it in their Cash Flow analysis of your property if you ever decide to sell.

There are other miscellaneous expenses to consider (Lawn care/snow removal, pest control, legal, accounting, marketing, etc). I use 5% to cover these.

The last thing is where are you getting a loan with a 10% down payment and at 4.5% APR?

Hope this helps.  :)