[Calc Review] Help me analyze this deal

[Ben Hunt]

Hi BiggerPockets!

View report

I've decided to do a calc review in hopes to remedy some of the "analysis paralysis" I'm experiencing. There's so many input parameters to analyzing a deal, it can be paralyzing. Especially for newcomers, Capex, Repairs, and Vacancy rates are hard to calculate accurately.

The property I’m analyzing is a Duplex in South Austin Texas. I wasn’t fishing for the perfect cash flow property per-say, rather at this moment I’d prefer be able to determine the quality of a deal easier

I’m going to include where I’m getting value of parameters from so that I can be critiqued in that regard.

Purchase Price: $445,000 (Currently listed price)

• 2 Units, 3/2 Each
• 2066 sqft

Amount Down: 3.5% [FHA] (I know this analysis doesn't include me living there).

Rules of Thumb: [From the book on rental property investing]

1. 2% Rule Test: .79% ($3500 rental income / $445000 purchase price)
   1. In areas like central Austin Texas it seems impossible to get a high % here.
2. 50% Rule: $1750 ($3500 rental income / 2)
   1. Est. Cashflow @ $1952 P&I monthly: $3500 – (1750 + 1952) = $-202
3. Right off the bat, using this generalization of expenses I see that I wouldn’t be cash flowing positive and would need to offer lower.

Income:

• $3500
  • Current rent roll from Realtor.com && Rentometer says this is fair price.

Expenses:

• Tax: $634
  • o $7613/12 - 2018 Tax assessment according to realtor.com. $8300 estimate from the local online county tax accessor website)
• PMI: $244.75
  • o Estimated at 0.058% of purchase price – or $55 for every $100K
  • https://tinyurl.com/u9bl48r
• Vacancy: $175
  • o 5% of monthly rent.
  • o Where: Estimate found in Brandon Turners book.
• Repairs: $350
  • o 10% (5-15%) of monthly rent.
  • o Where: Estimate found in Brandon Turners book.
• CapEx: $280
  • o 8% of monthly rent.
  • o https://www.biggerpockets.com/blog/2015-10-13-real-estate-capex-estimate-capital-expenditures
• Property Management: $350
  • o 10% of monthly rent.
  • o Where: Estimate found in Brandon Turners book.
• Home Insurance: $102
  • o Quote from Liberty Mutual for $230K of coverage for assets. (estimated rebuild cost).

Returns:

• Cashflow: $3500 – ($2135 operating exspenses + $1952 P&I&PMI) = -$587/mo
• CoC: -30.5% LOL (-$7044 yearly cashflow / investment)
  • Investment: $23,075 = ($15,575 purchase price + $7,501 closing costs.)
  • Closing cost estimate: $15,575 (2-5%) https://www.zillow.com/mortgage-learning/closing-costs/
  • Closing cost calculated: $7,501 
• • 1st Year Insurance Premium: $2880 (240*12)
  • Title Fees: $1000 (my lender says this is the max I’ll likely have to pay in Texas)
  • Appraisal: $500 (quote from lender)
  • Lender Fees: $250 (credit report / etc)
  • Escrow, 3-4 Mo Tax & 2 Mo Insurance: $2419 (634*3.5) + (2*240)
• ROI: See IRR calculation in report.
  • o For this specific property, you would have to bank on appreciation. A modest 2% yields decent returns, ~17%, at 5 years and 5% YoY yields ~40%.

Takeaways:

1. Running this analysis takes way too long to do on every property. I’m starting to like to use the 2% (or whatever %) rule for quickly screening properties.
   1. What do rule of thumb screening process do you all prefer to use?
2. For areas like both coasts, the price to rent ratio is absurd. I plan on house-hacking MF in this area to get started and while the cash flow isn’t good, I think it is still better to do than renting and the equity built on the back-end has potential. Afterall Austin since the year 2001, has average 5% appreciation YoY.
   1. Do you guys factor in appreciation, or is it like “icing on the cake”?
3. It’s hard to do much with a rule of thumb like the 2% rule without setting bars that you are aiming to reach. However, it’s hard to set bars you are aiming to reach if you don’t where the bar should be set.
   1. How are you guys calculating percentages to aim for?

[Michael Tyler]

The 2% rule only works in C class neighborhoods in the Midwest. The 1% rule is more like it, but even that is difficult in Austin. If you can move south to San Antonio, you’ll see cashflow a lot more easily.

I prefer to separate vacancy/repairs/capex from the other costs when calculating cashflow. In your case: $3500 - $1952 debt service - $634 insurance - $350 management - $102 insurance = $462 of income flowing in each month.

That $462 should ALL go into savings for the inevitable repairs and vacancies. And because $462 is well below the best practices for contingency savings, you should expect to fund emergency expenditures out of your own pocket if they arise early on.

This is where a thorough inspection comes into play. Make sure you know every detail that could go wrong, so you can plan and save for it. Water heater near the end of its life? Roof only have five years left on it? Knowledge is power. 

Vacancy risk is lower because they’re 3/2 units. People stay longer in those. My duplex is 3/2s and one tenant was around for ten years.

Also, you don’t have to pay 10% for management. My manager is 8% and he’s a standup guy. PM me for a referral. With a lower % you’ll be paying more for initial tenant placements, but hopefully that’s tempered by the fact that your 3/2s will keep tenants longer.

So in my book your deal does cashflow. It just doesn’t cashflow enough to carry its own weight for contingency funds. You pick up the slack from your own savings when something goes wrong.