Cash Flow Analysis; Am I being too conservative?

Question

Hi all,

This is my first post on the BP forum!...

I am looking to tie up my first buy and hold deal, but when I do my analysis, I keep getting negative cash flow. I am providing my most recent analysis below. I would appreciate getting any experienced buy-and-hold investors' thoughts on my analysis.

$105K - All in cost (this includes closing, cost of money, holding costs, purchase, and rehab)

$130K - Very conservative ARV.

Thanks!

Joe Villeneuve · Answer

1 - First months rent doesn't impact CF...just the CoCR.2 - Don't use % when you analyze.  They lie to you and will cause you to make poor decisions.  Here are 2 examples using your house here:  a - CAPEX.  You are taking out 3.95% (why not just 4?).  What does that equal?  It means you are taking out $500...for the year.  How in the real world is that going to cover replacement of a roof, furnace, HWH, etc...?  A new roof will cost you at least $4k, so you better hope you don't need one for at least 8 years...and nothing else pops up during that time period that needs this "fund" for payment.b - Vacancy.  How do you have 8% vacancy?  That means 29.2 days.  First, (forgetting the absurdity of the decimal), a vacancy of 1 month means you will have to find out, clear out, list, interview, decide, collect rent, and prep for your next tenant...in 1 month.  Good luck with that.  Calculate this based on at least 2 months of what impacts your cash flow when the house is vacant...which are the expenses/mo.  Based on your estimates, that comes to 1/6th of about $16k...or $2667...not $1150.c - Why are you paying for the lawn and the snow?

You have to be proactive when covering all of these costs, not reactive...or worse, using % to give you the illusion you are covering these things.  This isn't just you that does this.  This huge mistake is common practice among way too many REI.

My two most important suggestions to you are these:

1 - Until the day comes when you pay for things using %'s, don't analyze using them.

2 - Use real numbers and not estimates when you analyze.

Joe Villeneuve · Answer

I don't see an analysis anywhere.  What I do see is a lot of guessing (Insurance, repairs/maint., CAPEX), assumptions...which is the same thing as guessing(vacancy, loan terms).  The reason why you ask the question above, is because your data is useless to you.

Get accurate/actual numbers.  All of the numbers should be, and can be, accurate.  When you do this, the numbers give you an answer that won't confuse you...and you can't argue with.  The numbers don't lie...as long as the numbers are based on facts...not guessing.

...and if you;re going to have to pay 17.82% for property management, find a different PM.  You should be paying more than 10%.  I don't care if they do everything and anything including camping out on the front lawn to watch over the place.

Todd Rasmussen · Answer

@Luke Meeker

So your rate and terms are similar to what you might see with a commercial loan so just make sure you're shopping in the right market place. Good luck!

Steven Andrews · Answer

@Luke Meeker Most LTR prop managers will ask for 20% for the first month and 10% thereafter. That upfront cost seems high. Re-negotiate with them or find someone else. There are plenty of others.

Luke Meeker · Answer

Joe,

Thanks for replying again.

I just got a quote for $678/yr for landlord insurance from geico.

$155K for replacement

$300K for personal liability

In your five line analysis, isn't this exactly what all experienced investors say newbies shouldn't do? That is, don't leave off vacancy, capex, and maintenance?

Also, the $105k would ideally get financed because the conservative ARV is $130K.

Luke Meeker · Answer

@Todd Rasmussen

Thanks for respondinng.

I will keep the PM idea in mind moving forward. I agree with you on the loan being key to this deal. I spoke with the lender a couple months ago, along with several others, and I can't remember if this specific lender was on the commercial side or not. I am waiting to hear back from the lender I will be refinancing with and I can give you more details then.

Todd Rasmussen · Answer

@Luke Meeker

Read through the property management agreement and red line it and send it back to the property manager for acceptance. Everything is negotiable in life, especially contracts. They've told you what they want, you can respond with what you are willing to pay.

Repairs and capex combined are probably the right number, I think you should be putting more away for capex and will experience less repairs than you have projected.

I use 8.3% for vacancy.

The secret for success in this deal is your loan terms. Get some feedback from your lender about why you can't do 30 year fixed and take steps to get to the point where you can get favorable loan terms. Are you talking to a personal mortgage lender or commercial?

Joe Villeneuve · Answer

Your over analyzing this...meaning your analyzing using formulas and data that are just cluttering up the numbers you need to use.

Rent/month         $1150T/I                          275DS                           660  (why is the int rate so high, and why 20 years not 30)?PM                          115CF/Mo                   $110

How are you getting 100% financing = $105k?

Luke Meeker · Answer

Joe,

Thank you for taking the time to respond. Here is some more information:

1) Property Management - There might be some confusion with the 17.82%. That percent is derived from the percentage that the PM expense is of the GOI (PM Percentage = PM cost/GOI). Most PM's here are at 8% (I used 8% in my calculation not 17.82%) of the monthly rent and take the first months rent once they find a tenant, which is why it ends up being 17.82%.

2) Insurance - This was definitely a guess and I can call some providers to get a better number on this expense.

3) Repairs & Maintenance - This is an educated guess based on owning a primary as well as reviewing other investors blogs, and etc. How do you estimate or "know" this number yourself?

4) CapEx - This is another educated guess based on reading other peoples blogs and etc. How do you calculate this number?

5) Vacancy - This is another educated guess. I used 8% and haven't ever seen anyone else use less than 5%. How do you usually calculate this?

6) Loan terms - These numbers were based off of lenders able and willing to lend to me.

Luke Meeker · Answer

Also, this is a single family home.

Cash Flow Analysis; Am I being too conservative?

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