At the risk of looking like I don't know anything...

[Alex Jean Baptiste]

Hey there BP! Hope all has been well! I believe I'd like to start practicing on analyzing deals just so I can really get used to that part of things. How do you guys suggest I go about that? Do I just pick a listing site (classic ones like redfin, zillow, realtor) lets just say zillow for this purpose. and we use Zillow and use a property like this https://www.zillow.com/homes/for_sale/house_type/5...

At the risk of looking like a complete idiot I am going to analyze this deal. haha So lets assume I'm not using the BP Calculator and using the BP Four square method instead. So

Box 1: income in example is 1800.

Box 2: Expenses:
- Taxes: 216/mo (2594/12)
- Insurance .5-1% of standard loan so lets say a 20% down loan would make the loan of this house 138k and .5-1% of that is 690-1,380 per year or $57.5-115 per month.
- Utilities: utilities are an interesting thing to me because everywhere I look it is assumed that the tenant is paying these but shouldn't one still have an estimate of what water, heat, electricity will average out to especially in the case of a house hack?
- Vacancy: (5% of rental) 90/mo
- Repairs: 50-100/mo
-CapEx: 100/mo
-Property Manager: $0 (at least to start)
- Mortgage: Used a mortgage calc and plugged in 138,000 at 4% interest as most things ive read right now in mass are between 3.7-4.2 so Monthly payments are $659/mo (700 for simplicity)

So expenses box would be 216+58+90+100+100+700= $1264

Box 3: Cash Flow= 1800-1264= 536

Box 4: Cash on Cash ROI:
Down payment: 34,000
Closing costs: 6,000 estimated
Rehab Costs: Arbitrary with no basis 7,000

47,000

So I admit here I've gotten to the end and realized I really messed up. I guess because this home just got foreclosed on its actually not for sale and the pictures of the property are blurred out. Damnit. I'm really sorry for wasting your time here wondering if there was any other place I went wrong?

But all things being equal and if my numbers were right: 536x12= 6432.
6432/47,000=.1368 or %13.68 I know this is completely wrong but if you guys could explain to me how I messed up on my first "real" deal analysis. Thank you very much. After hearing some feedback I will do another analysis here on a property that's actually for sale and hopefully get that right. ha

[Ben Wilkins]

@Alex Jean Baptiste - practicing analyzing properties is a fantastic way to learn about property value, income, expenses, markets, etc. Kudos on taking the step!

I usually suggest taking a property off of one of the websites such as Zillow, Trulia, Loopnet. My personal preference is either Realtor.com or Coldwellbanking because they usually have a little more information available for running expense calculations.

Since there are so many properties out there, and I have limited time, I usually do a "60 second evaluation" in order to determine if a property is being offered close to what I think it is worth, or if it is way over-priced and not worth pursuing. Most properties (there are a very few exceptions) are worth something as an investment - there is a price that I would be willing to pay in order to make a profit. The purpose of running an analysis is to figure out what that price is.

So on to your analysis:

Box 1: Where did you get this income for your example? I don't know your market, but I'm curious where you got the number. I usually use RentJungle or RentOMeter to determine local rent rates for similar properties.

Box 2: I usually use the last tax assessment available online for a property, then add a percentage extra. Always make sure to look at when the last time the property was appraised for taxes - you don't want to purchase a property that hasn't been appraised in a while, then have your taxes jump up in the next year. Assessments usually happen within 4 years, but it will differ for each county / city.

Insurance: I never used a percentage to determine this value. The amount of down payment never affects insurance, so this calculation doesn't make sense to me. I use insurance history from my previous properties. That said, $1000 annual for a SFR or Duplex both sound about right. $690 sounds low, but you'll have to call around and find rates for your area.

Utilities: In your example, this is a SFR and you wouldn't house-hack it. I would have the tenant pay all utilities. In a duplex, this might be different - tenants usually pay electric at the very least, while the owner pays W/S/G. This is really dependent on how the utilities are split though. The utilities also depend on whether the property has water-based heating, electric, gas, etc.

Vacancy: Find what the average is for your area. 5% seems like a low average - I usually use 8% as a safe average.

Repairs and CapEx: I'm happy to see that you included these! How did you come up with your numbers? I default to 10% of income for both (20% total), and go down based on the age of the property, the tenant class, etc. If this is an older building, stay at 10%. If it is an A class rent area, you can look at decreasing. There's no point in skimping out on CapEx - if something does break, you have the money available. I hate not setting aside enough CapEx, then throwing a year's worth of cash flow into a repair.

PM: Isn't your time worth something? What if you want a PM in the future? Include something here or you risk "faking" numbers to make the deal look better than it is.

Box 3: Math looks good. I like simple math when doing an initial estimate.

Box 4: Closing costs at 5% is a starting estimate. Usually you need 1 year of insurance, 1 year of taxes, and standard closing costs (if you want to put a number that makes sense)

Repairs: I always put a number in since I always need to do some work. For an initial estimate, 10% will usually work. When you are completing due diligence, I like to take a contractor through and get his estimate.

This isn't a mess up - I analyze properties. A lot. I don't look at whether they are currently for sale, foreclosed, pictures available. The point of starting these analyses is to learn one key fact: every property is worth something as an investment. The point is to practice determining what it is worth for you to invest.

The second point is to learn another key fact: don't fudge the numbers to make a deal look better than it really is. I can put in a lower maintenance, CapEx, PM, vacancy and make just about any deal look good. When purchasing a property, you only have a few options to make a deal better than the offering price: decrease your offer (and decrease your mortgage), or have a plan to force appreciation. If you can increase your income or decrease your expenses, you make the property more valuable to yourself as an investor. Do not decrease your percentage expenses in order to increase your cash flow, unless if you have a firm reasoning for decreasing them (my example of a new property decreases CapEx).

You can't really mess up practice - that's the whole point of practicing! Once you get further along, you'll want to start narrowing down the properties that you analyze - that's when stuff like the 50% rule will help you to get quicker and do a "napkin calculation". After that is when you dig deeper and do a full analysis.

I hope this helped! It's a lot of reading ;)

Keep practicing, and keep posting what you're doing and we will continue to give advice. Over all, good job on the first analysis. You nailed it with remembering most of your expenses, so kudos again on that.