How to Estimate Costs When Analyzing a Deal

Question

Hi all, I've started analyzing properties for my first deal. I'm looking in the Cleveland and Pittsburgh areas and have yet to find one duplex that cash flows. How do you come up with estimates for various expenses, such as insurance, water, repairs, capex, closing costs, etc.? I've been using ~$100/month for insurance, $100/month for water, then 10% of gross annual rents for capex and repairs. Using these numbers, every single property I've analyzed has come out cash flow negative. I know it's not easy to find great deals in this market, but I've analyzed a ton of properties and haven't found one positive one..

Mackal Smith · Answer

It may be where you are looking. Are you focusing on A or B areas or are you looking at C properties? Are you doing your own searches only using MLS or are you working with an investor friendly realtor who can set up a custom feed for you? Rather than estimate insurance, talk to other investors and see who they use for insurance. Call the agent up and give them an idea of the types of properties you are looking at along with prices and general locations and get a realistic number. If you are working with a realtor, they can ask for actuals on properties then you'll know what the water/trash/sewer costs are. You can generally get property tax info from the county or city web sites. Don't forget to account for vacancies in your calculations. I would be extremely surprised if you can't find any positive cash flowing properties. It has to be the areas you are focused on...

Mike Rosso · Answer

@Griffin Myers calculating maintenance and capex can be difficult and everyone has a different opinion what is right. I purchased a duplex in December using 10% maintenance and 10% capex and was able to achieve solid cash flow. The property was in a solid C class area.

As far as water some of the properties are structured so the tenant is responsible for paying their own water. Just depends on the area and what other landlords are offering. Also in a duplex the water has to be sub-metered to each unit in order for you to bill back the tenant.

I agree with @Mackal Smith. Look in some C neighborhoods and you should be able to find cash flow positive properties. Good luck!

Mackal Smith · Answer

B areas may be your problem. You'll find cash flowing properties in C areas. You can find them in B areas also (depending on your market) but it is MUCH harder. 8.3% is probably good if you are self managing. If you are using a property manager 2 months is better. Capex costs are harder. If you are looking in B areas then you may be high if you are figuring 20% (that's what you meant by 10% for each, right?). I say that because if you are looking in B areas the properties and mechanicals are probably newer and/or in better shape. That's a PROBABLY not ABSOLUTELY... if you are looking in C areas that may be right. If your goal is simply to get some positively cash flowing properties that you can go look at, then generalize at 10% repairs and 5% for Capex costs but look closely at the mechanicals when you go see the property (or have your inspector do it for you)... Good luck.. Don't ignore C properties

Griffin Myers · Answer

@Mackal Smith Thanks for the response - I've been looking at B neighborhoods. I've been estimating Vacancy at 8.3% (one month out of the year) of rents. Thanks for the note on insurance. How do you estimate your repairs/capex? Do you just throw in 10% for each?

Mackal Smith · Answer

oops and I almost forgot one of my big mistakes starting out. I used to think that I would only invest in properties of a caliber or in an area where I would not mind living myself. That is just wrong thinking. The right thinking is this. Everyone needs some place to live. Just because your income is lower doesn't mean you should have to live in a hovel. Focus on making the properties you own clean, fully functional, secure and well maintained. If you do that, you are providing a better product than 90% of the other landlords out there.

No matter where you invest, buy it right and provide a great product and you will make money.

How to Estimate Costs When Analyzing a Deal

Most Popular Reply