Help with practice deal analysis.

[Heather M. L.]

Hello BP friends,

I'm following the advice of Brandon Turner and starting to analyze deals; I want to analyze several "practice" deals before I begin any real deals.  I'm hoping to get advice from the pros on whether you think my "practice" deals are any good, need improvement or just bad.

Here's the first, what do you think:

$159,900 Asking Price 4Beds 2Baths

2,130 Sq. Ft.

$75 / Sq. Ft. Built: 1924   Lot Size: 5,227 Sq. Ft OLD WORLD CHARM.....PROPERTY FEATURES LEADED GLASS THROUGHOUT, NATURAL WOODWORK EVEN A 3-SEASON PORCH. LARGE 2 CAR GARAGE ALONG W PLENTY OF DRIVE FOR PARKING CARS OR TOYS. REAR YARD IS FENCED IN & IDEAL FOR BBQ'S, PETS OR EVEN GARDENING. BOTH UNITS HAVE 2BEDS 1BATH AND DINING RMS. UPPER UNIT HAS THE LARGE SUNROOM WITH WINDOWS ON 3 SIDES. LOTS OF POTENTIAL DEPENDING ON YOUR NEEDS.

See my analysis below, I dropped the asking price down to $ 155,500.

Monthly Income: $1,790.00

Monthly Expenses: $1,523.74

Monthly Cash Flow: $266.26

Pro Forma Cap Rate: 7.77% 

NOI $12,861.60

Total Cash Needed  $18,942.58

Cash on Cash ROI 16.87%

Purchase Cap Rate  8.27%

Purchase Price: $155,500.00 

Purchase Closing Costs: $2,000.00 

Estimated Repair Costs: $10,000.00...needs paint job, carpet & minor repairs

Total Cost of Project: $167,500.00 

After Repair Value $165,500.00

Down Payment: $5,442.50 

Loan Amount: $150,058.00 

Loan Points: $1,500.58 

Loan Fees: Amortized Over: 30 years 

Loan Interest Rate: 5.000% 

Monthly P&I: $805.54

Financial Projections 

Total Initial Equity: $15,442.00 

Gross Rent Multiplier: 7.24 

Income-Expense Ratio (2% Rule): 1.07% 

ARV based on Cap Rate: -

50% Rule Cash Flow Estimates 

Total Monthly Income: $1,790.00 

x50% for Expenses: $895.00 

Monthly Payment/Interest Payment: $805.54 

Total Monthly Cashflow using 50% Rule: $89.46 

          Any advice is greatly appreciated.

[Dan H.]

Some thoughts:

• Deal analysis is best done local.
• Deal analysis must include expected tenant class (Class B is a lot different than Class D).
• Investors should always strive to obtain below ARV. I realize in hot markets it may be difficult but I would be hesitant to call a purchase where cost is above ARV ever a deal.
• I would like to see the break down on monthly expenses better broken out.  My view is a lot of newbies under estimate on-going cap ex.  I did numbers on just a water heater at $8/month cap expense.  I see a lot of cost estimates that leave off cap ex estimates with various rationale.  One of my favorites is everything is rehabbed.  Of course we all know the life of the newly rehabbed items starts as soon as placed in service and if that cost is not evenly distributed then it will build up at the end eating up potentially years of "cash flow".  I can not see if it includes PM costs.
• Monthly cash flow of $266 is not great. What are the odds that it increases? decreases? Does not go up even at the rate of inflation? If this is self managed you are taking on a job that a PM would charge close to $200 for (PM on SFR I have read is ~12% when including all costs such as re-up, find new tenant, contractor add-on, inspections, and monthly fee). So if the $266 is cash flow not including PM then you have your money invested for less than $100 when accounting for the value of the work for PM responsibilities.

In my market at a rent to cost ratio of 0.75% or greater I can be cash positive but on a 4/2, >2100' I would have a rent or ~$3200 in class B areas.  Higher rent makes fixed costs items a smaller percentage of the rent.

In summary, I think there are a lot of things to consider when you evaluate a property (class of tenants, appreciation/depreciation odds, other investment options, etc.).  Many of the things to consider are not obvious with the numbers provided.

Good luck