Double checking whether my analysis is correct

[John Stewart]

Hello guys,

I've never pulled the trigger on a deal before, in part because I don't have all the capital lined up just quite yet but mostly because I am not confident in my ability to analyze a potential deal.  

When looking at a property initially I use the 1% rule to weed out the fluff (in my market, Chattanooga TN, there are plenty of properties trading about 1% or higher).  Then I subtract half of the gross monthly, per the 50% rule, to see what is left to cover the mortgage.  I've pretty much used 15 year term as base starting with 0% down (just to see) and gone up to determine what amount down makes it a good deal.  Every property I've looked at requires a massive downpayment, like 30% or more, in order to meet the $100 cash flow per unit requirement AND cover the monthly payment + 50% monthly expenses allowance.  

I understand deals are scarce, but am I missing something? It feels like maybe I've mixed it up somehow.

Every property I've looked at has been a residential multifamily property, 2-4 units.   

Would love input from people who have done deals and gone through this.

[Michael Garofalo]

Hi @John Stewart, you are on the right track, but you really need to go into more details for the expenses. Subtracting out a generic 50% in dangerous, because that number could actually be higher and then you'd be misled to believing you have a better deal than you really do. A detailed evaluation should include the following (all % are based on monthly rent):

-8% Vacancy cost

-8% Property Management cost (regardless of whether or not you chose to use)

-12% CAPEX reserves

-Utilities 

-Property Taxes

-Insurance 

-HOA fees (if applicable)

-Yard work/landscaping (if applicable)

When calculating the 1% rule, I include purchase price+closing costs+rehab costs, and that becomes my denominator for the ratio. For rents I take the lower end of the spectrum in the market. For financing I would recommend plugging in 20% down with a 20 year amortization schedule. If it doesn't cash flow $100 or more each month per door under these conditions, walk away from the deal. If you follow all these rules, you can be certain you are being as conservative as possible. Ultimately the success of any property depends on how you manage it, and the quality of tenants you are able to place inside it.