Case Study/Evaluation: Denver First Time Homebuyer Analysis

[Nick P.]

Bought my "First Home" about 6 months ago, and figured I would recalculate the numbers with the actual inputs (critique on calculations is encouraged). I bought this home before learning of BiggerPockets, but knowing the value real estate can provide to me. These numbers are slightly skewed as I did a 3% down conventional gift loan (local lender contributed 2% of down payment). Cash to close is so low because of earnest money credited towards closing and $2k back from the inspection. HOA recently increased from $300 to $350 sadly. Maintenance at $50 month based on HOA covering major repairs & me DIY.

Numbers based on hypothetical rents for the area.  I currently have a roommate splitting the mortgage (he pays $850/month), still debating to sell or refi/rent (based on diy repairs) when I am eligible for another personal residence loan.  Obviously cashflow is a bit low, mainly from my measly down payment.  

About the property:  2 br / 1 ba, 970 sq ft, in 10 unit condo complex, built early 1900's.  Neighborhood: Capitol Hill.  I felt comps in this area/condition were in the $270k-290k range.  

Critiques and questions are welcomed.  I am happy to share more info, pictures, etc.

Also to anyone without a full understanding of the numbers, don't let that cash on cash return (13.13%) let you think this would be a profitable investment based solely on the income from rent.  (you most certainly would lose money)

Purchase price	$245,000.00
Purchase Closing costs	$1,321.32
Repairs	$2,500.00
Holding Costs	$0.00
All Personal Contributions (down payment)	$7,500.00
Total Investment	$248,821.32
Total Loan Amount	$237,500.00
Number of units	1
Average Rent per unit	$1,800.00
Total Loan Amount	$237,500.00
Interest Rate	4.125%
Term Length of Loan ( in Months)	360
Interest Rate per month	0.0034375
Total monthly mortgage payment	$1,151.04
Monthly Insurance (PMI + Homeowners)	$113.73
Monthly Property Taxes	$103.16
Other Monthly Expenses (HOA, Utilities, Maintenance, Etc)	$400.00
Total Monthly Expenses (not with mortgage)	$616.89
Total Monthly Expenses (with mortgage)	$1,767.93
Other Monthly Income	50
Total Gross Monthly Income (Rent)	$1,850.00
Total Annual Expenses (not mortgage)	$7,402.68
Total Gross (Most Possible) Annual Income	$22,200.00
Net Operating Income ($ left to pay mortgage)	$14,797.32
Cap Rate (for multifamily/commercial)	7.00%
VALUE BASED ON CAP RATE	$211,390.29
Cashflow per month	$82.07
Annual cashflow average	$984.80
All Personal Cash Contributions	$7,500.00
Annual cashflow	$984.80
Annual “cash on cash” Return on Investment	13.13%

[Bill S.]

@Nick P. I appreciate the effort and wanting to crunch numbers so please understand I am trying to be helpful. Your numbers are a bit difficult for me to follow but here are some thoughts.

1) It appears you added $50 for "other income" but there is no explanation of where that income will come from.

2) So I understand, you are just getting started and DIY is money in your pocket but the way you figure it here, you are donating it to the property and consider it of no value. Place a real value on your time and the work you will "donate" to your investment. If you want to see if you can float a marginal deal (this is one), then add it back in at the end. If you never plan for anything other than DIY you will end up being a handyman for your own real estate and it will stunt your ability to grow. I know this for a fact having been in your shoes.

3) There is no management fee. Same things as DIY the handyman. Pay yourself for management. In the end you can make a choice about whether or not you do it. If you don't pay yourself, you will always be a the pm and again it will stunt your ability to grow. Again first hand knowledge here.

Bottom line is you have a dog and are trying to "make it work" on paper. You are happy with owning the property and are looking to justify that emotion. We all do it. 

Nothing wrong with owning your first property and even renting it out to save on expenses. Look for better deals next time. Just because it's "working" for you doesn't mean you can't raise your sights a bit.

The reality is, no one should buy the property you bought for strictly rental purposes. You bought it to live in and because you had a low down payment. That is a great start but if you repeat the deal on many more properties with similar numbers, you will end up broke unless you have a nice day job to fed the alligators. 

Finally my best advise is to get rid of the PMI. Figure out how to do that and then you will have some more breathing room.