Midtown Deal Analysis

Real Estate Deal Analysis & Advice
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Midtown Deal Analysis

Damien Lee
New to Real Estate · Atlanta, GA · Member since 2020 · 25 posts · 23 votes

Hi all,

I've just recently started looking into real estate investing and wanted to go ahead and start posting the deals I analyze daily. I’m currently not looking to buy this home (you’ll see why if you read) but I am looking to improve my deal analysis skills!

If anybody wants to make an offer on the analyses I make now and in the future, please free to do so, but give me updates on how it went! By no means do you have to but I'd love to know what price you got it for, and how you were able to negotiate the price for whatever return it is that you got! Otherwise, it's just a free deal analysis for people to take a look at and point out any mistakes I may have made.

I’ll (try to) be posting every weekday! *Overview at the bottom*

Deal Analysis

This is my first deal analysis so I’m sure there’s a lot of things I didn’t take into account, if you notice anything I could do differently please let me know.

The deal I’m looking at right now is actually currently pending, but here is the address if anyone wants to look it up on Zillow. 244 13th St NE APT 217, Atlanta, GA 30309

Pricing

It’s a condo currently listed for $375,000 but condos in the same area sold for at most $350K so I’d put it’s actual home value at $340-350k. On the higher end because it looks like the renovations here are catered more towards a trendy modern style.

Listing Price: $375,000

Estimate HV: $350,000

Rent

The condo itself is a 2Bd/3bth (2 full baths and 1 half bath). It’s two stories with bedrooms on the second floor, large living room, kitchen, and half bathroom + laundry room on the first floor. Around 1300 SqFt, right next to Piedmont Park (which is great for the active folks!)

I’ve talked to a few of my friends and most of them said that they’d be perfectly happy paying about $1000-1100 a month but most of them are college students/recent grads. Based on the apartment I’m living in right now, the rent I’m paying, and the amenities I get for what I’m paying, if I were to look at that property as somewhere I myself would want to find rent in, I’d be willing to pay $1100 at most. This is a 2Bd/3Bth home with no master bedroom. I don’t expect rent prices to be increasing too much soon since I’ve heard of a lot of development occurring near GT housing and ITP in general. There’s been quite a lot of construction happening in Atlanta for the past few years.

Has the following Amenities:

Swimming pool

Parking + Gated community

Small gym

Rent Estimates: $2000-2200/month (both rooms)

Rent appreciation estimate: 2% a year? (I’m not sure about how to calculate this)

Location

In terms of location I’d say it’s an B+ to A class neighborhood as it’s right next to piedmont park and a very short walk to the Marta Station. This leads me to speculate that in the far future when Atlanta becomes the big city I think it’ll be, this Condo will probably be worth a lot more in the future, so this is actually an ideal unit for a long term buy and hold (if you have other cashflow to deal with the expenses).

Expenses

I’m just going to post a picture of the spreadsheet I used for this.

Operating Expenses + CapEx Assumptions

The three main expenses here are the HOA fees, Property management fees for when expansion occurs, and taxes. Taxes are actually a huge expense most likely due to how high the housing prices in Midtown Atlanta have become. This leads to the actual returns of this property

Returns

If we bought the house for the asking price and put a down payment of 20%, then our monthly cashflow would actually be negative and our CoCROI is -3.25%. In terms of a rental property this is a pretty bad deal. In order to get a CoCROI of 10% you would need to buy the property for $167,221 which is less than half the asking price of the seller.

Closing costs are pretty high since I’ve read that closing costs for legal documents getting signed are somewhere around 3% of the home value and then lately, it is no longer custom for the seller to pay for the buyer’s REA fee, which adds another 3% to the closing cost. This would mean you would need to pay $97,500 Cash just for this negative return.

To at least break even on the expenses you would need to pay $294,062.96 which is 80% of the asking price.

To make at least some cashflow ($200/month) you would need to pay $232,824.65 which is around 60% of the asking price, which I highly doubt the seller would agree to.

Due to the expenses and the HOA fee, this property looks to be a pretty bad investment without completely slashing the prices of the home, which the seller is unlikely to do.

Deal Overview

Listing Price: $375,000

Home Value: $350,000

Assumptions

30 year mortgage

2.75% interest rate

20% down (no PMI)

Purchase Price for

10% CoCROI: $167,221

Break Even: $294,062.96

$200 Monthly Cashflow: $232,824.65

Rent: $2200/month

Location: B+ to A

House: B+ to A

Operating Expenses: $1,239.61

As is, the numbers to make this deal work are pretty improbable and while this would be great to buy and hold it just doesn’t look like it’d be worth it. At least not to me. If anybody has any feedback on the deal analysis, or what I could do better/differently, please let me know!

Thanks,

Damien

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Anthony Fontana
Real Estate Agent · Atlanta, GA · Member since 2017 · 86 posts · 71 votes
5y

@Damien Lee a couple things here. Really detailed underwriting, glad to see you're making it a habit.

1. it is customary for the seller to pay all real estate agent commissions, this can vary a little bit deal to deal, but I would not expect to pay 3% commission as the buyer.

2. This condo has rent restrictions, so unfortunately you are not able to rent within this association. You'll want to get on an MLS search that excludes condos with rent restrictions, an agent should be able to set you up on that. My first 2 deals were condos/townhomes and even in associations that did allow renting, there was still red tape that did not allow me to do STRs and I also had annual rental fees to pay the association. These are things you'll want to watch out for and have your agent request during DD.

3. I would never assume $0 in repairs. Almost every deal has some level of repairs that need to be done, even something that is almost totally turn key will have 1-5k worth of work to do after closing. It is best practice to incorporate repairs into your underwriting.

4. It does not look like you recalculated your taxes as they will be reassessed after you close, normally fairly close to your purchase price.

5. Vacancy of 2.5% is not realistic, this should probably be somewhere around 10%

6. Even though biggerpockets tells you to calculate repairs as a % value, that is not best practice. If your repairs are calculated based on a % of revenue, that does not exactly make for accurate underwriting. If you improve your property and increase rent, your repairs will more than likely decrease rather than increase. Also, if your property is in bad shape and you rent for $500, your repairs and maintenance will probably be higher than an updated property that rents for $1500. In my experience, my condos have annual repairs and maintenance of around 600$ per year. Single family houses will be a little higher.

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  • Anthony Fontana
    Real Estate Agent · Atlanta, GA · Member since 2017 · 86 posts · 71 votes
    5y

    @Damien Lee a couple things here. Really detailed underwriting, glad to see you're making it a habit.

    1. it is customary for the seller to pay all real estate agent commissions, this can vary a little bit deal to deal, but I would not expect to pay 3% commission as the buyer.

    2. This condo has rent restrictions, so unfortunately you are not able to rent within this association. You'll want to get on an MLS search that excludes condos with rent restrictions, an agent should be able to set you up on that. My first 2 deals were condos/townhomes and even in associations that did allow renting, there was still red tape that did not allow me to do STRs and I also had annual rental fees to pay the association. These are things you'll want to watch out for and have your agent request during DD.

    3. I would never assume $0 in repairs. Almost every deal has some level of repairs that need to be done, even something that is almost totally turn key will have 1-5k worth of work to do after closing. It is best practice to incorporate repairs into your underwriting.

    4. It does not look like you recalculated your taxes as they will be reassessed after you close, normally fairly close to your purchase price.

    5. Vacancy of 2.5% is not realistic, this should probably be somewhere around 10%

    6. Even though biggerpockets tells you to calculate repairs as a % value, that is not best practice. If your repairs are calculated based on a % of revenue, that does not exactly make for accurate underwriting. If you improve your property and increase rent, your repairs will more than likely decrease rather than increase. Also, if your property is in bad shape and you rent for $500, your repairs and maintenance will probably be higher than an updated property that rents for $1500. In my experience, my condos have annual repairs and maintenance of around 600$ per year. Single family houses will be a little higher.

    1Reply
  • Damien Lee
    OP
    New to Real Estate · Atlanta, GA · Member since 2020 · 25 posts · 23 votes
    5y

    @Anthony Fontana Thank you for all the great feedback, I really appreciate it!

    1. Last I heard from the Agent I found (before I learned about BP) they told me that people have been moving away from having the seller cover all closing costs (or at least the REA closing costs). It’d be great to have them covered if possible, but for now due to conflicting information I think it would be best to overestimate expenses rather than underestimate them. If it comes down to it, I could always use covering my own Agent’s closing cost as an incentive to get my own offer accepted. It could also differ depending on location or just who that particular REA interacted with, but I’ll keep this in mind moving forward.

    2. When I first looked at the zillow listing for this Condo I saw that the waitlist for renting out the condos was currently empty which is why it was included in the properties I was looking at. I was also considering buying this property as I had not learned how to calculate expenses yet!

    3. Thanks for pointing this out! I’ll make sure to incorporate this into my next deal analysis.

    4. I did not consider this! How exactly do taxes work? I know you said it’s close to purchase price but what if my purchase price is lower than what it appraises for? Do I pay them based on the appraised home value or the purchase price? For instance, if the home was appraised for 340k but I purchased it for 200k, would I be paying taxes on the value of 340k or 200k?

    5. Understood, for this I calculated vacancy on the expectation that I would be able to find Tech students willing to rent but always better to overestimate than under estimate.

    6. Understood, this makes sense. So what would be a more accurate way of estimating monthly repair costs? I imagine it’d depend on the what I do with the house so for example

    Scenario A) No repairs are done to the house so repairs are a flat value based on the initial rent value (let's say 5% of the initial rent value) and remains the same if no rehab is done. Thus even after rent rises due to supply and demand repairs remain the same initial cost based on 5% of the initial rent value

    Scenario B) Rehab is done and repairs are a flat value based on the post rehab rent price (let's say 2% of the rent value), and the repair price follows scenario A, except it’s just (hopefully) lower. And repair costs remain the same until I rehab?

    I’m also a little unsure of what exactly would be considered under the repair cost as from the book I’ve been reading they just call it wear and tear of living like scuffed floors and banged up walls. Could you shed some light on this or suggest a resource that might be able to?

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  • Jingru Sui
    Real Estate Agent · Atlanta, GA · Member since 2014 · 683 posts · 317 votes
    5y

    Just curious what's the HOA savings?

    0Reply
  • Drew Steusloff
    Developer · Atlanta GA · Member since 2020 · 30 posts · 15 votes
    5y

    Hi Damien,

    Interesting write up and very thorough analysis. Midtown is definitely a tough market to find cash flowing rentals in. While there is a strong demand, the prices I have seen on anything listed have been far too high relative to rental rate. One thing to look out for in these high priced markets are value add opportunities that can increase cashflow. For instance, converting the second floor of a single family home to an additional unit. Creative strategies such as this can make a potential investment much more lucrative and give you an edge over other investors who may have overlooked it. Are there any other areas of Atlanta you are considering?

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