choosing between deal options and capital us in Kansas city, MO.

Real Estate Deal Analysis & Advice
8yFollow

choosing between deal options and capital us in Kansas city, MO.

Ali Zantout
Architecture drafter · Kansas city, MO · Member since 2018 · 59 posts · 24 votes

Okay i have 2 deals I am looking at for my second investment property both deals are 30 year loan, the mortgage price includes insurance and taxes.. 

1)  first deal is 2 houses owned by one person that can be bought in a bundle, both priced at $30,000, they were $34000 and price went down, but the mortgage is calculated on the $34000, its in low income community near 2 colleges in KC, they have tenants in them lease ends in 6 months and have a property manager in place. One is rented for $575/month that brings in $6,900. After mortgage and expenses I calculated for worse case scenario (575-(mortgage=300)-(expected expenses= 80)=195x12= $2340/year. 2nd house rented for $650 brings $7800. Again calculated worst case scenario ( 650- (mortgage=300)-(expenses=80)=270x12=$3240/year. Both per year bring $5580/(expected I put 20 percent down for each plus 2000 for inspection/appraise and some closing cost) (2000+12000)=39.8% cash on cash! so in 3 years I would make my money back and more. 

-opinion= Get 2 houses with tenants there rent might be raised for the $575,both houses were remodeled in 2016, new furnace in both places. 2 houses kinda scared to have if its too much this early for me, holds more capital than I want, but cheaper and management already in place. If I exit in the future might just break even or get some profit.

2) second deal is single family 3 bedroom at $49000 %15 percent down, same area near the college rented at $700 that brings $8400, tenant lease is month to month. I got numbers done on this (700- (mortgage=385)-(expenses=80)=235x12=$2820/year. So 2820/(%15 down + some closing costs) (7350+1000)=33% cash on cash return, so 3 years I would get my money back.

opinion- less capital to put in, more money at the end if more stuff goes wrong, but 1 house and will have to wait longer to get the third property. if tenant moves out I can rent out rooms for college kids even if its 400 a room for the 3 bed. thats 1200 which makes it better deal. would be less stress to manage, but dont have any recent maintenance on this place yet. On exit might break even, but might get the house in low $40000.

Wanting some experienced  advice from investors. I am doing the buy and hold for passive. Both deals are great, just hesitant to pull the trigger on one of them. Thank you guys.

0Reply
23 views

4 Replies

Jump to latestLatest
  • Ali Zantout
    OP
    Architecture drafter · Kansas city, MO · Member since 2018 · 59 posts · 24 votes
    8y

    Actually the first deal is at a 15 year loan on the calculations, which is usually $100 more than a 30 year loan. 

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    Howdy @Ali Zantout

    Do you have any investment criteria established yet? Like minimum Cash Flow per unit or Minimum CCR percentage? If not I strongly recommend you do. Neither one of these deals would meet my requirements.

    $80 per month for expenses? I think you need to provide more detail. This seems extremely low. Does it include Vacancy, Property Management, Maintenance, and CapEx?

    1Reply
  • Ali Zantout
    OP
    Architecture drafter · Kansas city, MO · Member since 2018 · 59 posts · 24 votes
    8y

    Hi @John Leavelle, 

    I had to do more research and I understand what you mean exactly, I re-did my numbers and yes the result is different. SO take this for example and let me know if I did the numbers right on this one please. My criteria is atleast $100 a month cash flow after expenses and that monthly rent is more than %1 of purchase price. So rent of $700.00 for 49,000 with 16.8% down which is 7350 the mortgage number is calculated by my bank=385.31+(management fee= 10% of rent 70) + ( vacancy= 7% of rent 49) + (maintenance= 10% of rent 70)= 574.13. So (700-574.13)=125.89 cash flow after expenses so 1510.44 a year.  1510.44/7350= .20X100= 20.5% CASH ON CASH. so is that calculations correct?

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Ali Zantout

    Better, but you are not quite there yet.

    I assume you are using the 3 Br SFR for this exercise.

    Where are you getting the Down payment (16.8%) from?  They are usually 20% - 25%.  Sometimes you can work out others.  Did a Lender provide it?  What is the interest rate/Term length?

    You are still lacking Expenses.  Unless you have verifiable numbers you should always stay conservative in your analysis.  Do not fudge the numbers just to make the deal look good.  Let me show you what I mean.

    I analyze properties in multiple steps. 

    Step 1: Quick overview analysis. Does the property meet the 1% rule. Rent $700 / Purchase price $49,000 = 1.42%. Answer: Yes. Does it meet the 50% rule for Cash Flow ($100/m per unit). $700 Income x .5 = $350 Expenses. $350 NOI - $385.31 P&I = - $35.31. Answer: No.

    At this point I would move to the next deal.  I actually use 55% for Expenses in my analysis.  I’ll continue  for this post.

    Step 2: A closer look. I first determine what the Market Value should be for the property in rent ready (like new) condition. I will base my ARV on this estimate. I also determine the Rental Market rates for the area. Both will allow me to see where the Sellers numbers compare. High, Low, or Just right.

    I then try to find as much actual Expense data as I can.  If I can’t obtain it I use the percentage indicated.  This includes the following:

    Vacancy (minimum 8.34% to 10%)

    Tax (Check County records)

    Insurance (Get a quote)

    Property Management (10%)

    Utilities (contract utility companies)

    Repair/Maintenance (5% - 10%). Depends on Age and condition of the property, and quality of tenants.

    CapEx (10%) Until I have the property inspected to determine the current condition of all major components and appliances. Then I adjust to a more accurate reserves requirement. In other words I keep it at 10% until I have a property under contract.

    Lawn care/Snow removal (minimum of $50/m)

    Miscellaneous (5% minimum). This covers Legal, Accounting, Pest Management, etc.

    HOA (find out)

    As you can see these could easily add up to 50%.  In your numbers above you only account for 27% expenses.  The real number/percentage is somewhere between these.  You will here this a lot “Keep your analysis conservative “.

    The last thing you should do is try to get some kind of idea of the condition of the property.  Does it have any deferred maintenance or Rehab work needs.  Will you need to put immediate cash in to it to get it rent ready?

    Step 3:  Detailed Analysis.  Put under contract and start due diligence to verify everything.

    Until we get you right on the loan and expenses I will not go over your CCR of 20.5%. I suspect that is double what it really is.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free