Deal analysis and next step advice?

Question

Hi BP! I found a potential first property that interests me and I put together the following analysis. Any help you can provide me would be greatly appreciated!

I found this property on Craigslist and it’s also listed on Realtor.com and Zillow. However, the numbers on this property look good from my initial evaluation. It’s been on the market since June, and the price has been reduced 3 times. The posting says the seller is motivated and will entertain all offers. This property is located an hour away from my home in the town where my wife went to college, so we are familiar with the area. (I'm comfortable renting to students when current tenants leave, if necessary).

The property is a duplex with a 3bd/1bath and 2bdr/1bath. Unit 1 rents for $1,516.66 (700 biweekly) and Unit 2 rents for $866.66 (400 biweekly). Both units are currently occupied with one new tenant one long term tenant. There is also a garage with the potential of being rented for additional income (not included in this analysis since I have not seen the condition of it yet).

The tenants pay sewer/water and the trash collection is included in the taxes.

My questions are:

Does my analysis look right to you? Am I missing expenses? I’m trying to be very conservative in my estimates.

What should my next steps be? I plan to call my realtor this afternoon to set up a time for me to view the property.

At what point should I talk to a lender to get specific details on closing costs and rate, and insurance/management companies for a quote?

Asking Price: $152,500

Purchase Price: $152,500

Down Payment: $30,000

Closing Costs: $5,000 (estimate)

Loan Amount: $127,500

Rate: 5.5% (estimate)

Monthly Income: $2,383

Payment: $721.09

Insurance: $125 (estimate)

Property Taxes: $530

Management: $240 (estimated 10% of income)

Vacancy: $200 (1/12 of income)

Lawn care: $100

General maintenance: $200

Expenses total: $2,116

Cash Flow: $2,383 - $2116 = $267/month

Cash on Cash ROI: 10.68%

Thanks in advance for your help on this, I'm really looking forward to getting my first deal done, whether it's this property or another.

Joel Owens · Answer

Check actual versus stated rent.

What I mean is if they state 1,500 but gave first months free to move in then the real actual rent is 1,500 X 11 = 16,500 / 12 = 1,375 a month. Look for low or no security deposit as well.

The 3rd bed is above market with a new tenant and I would really focus on that.

The 2 bed is below market according to you and seems to me why the tenant has stayed there.

You need to really inspect the condition of that property. Example you buy and up the rent on the tenant closer to market and they balk and leave. You lose one months of rent in a best case scenario and the tenant being there awhile you have to drop 2,500 into the unit to get it rent ready again.

Now you have a swing of 3,300 to make up. Even if the new tenant pays 100 month more it would take almost 3 years to get back to where you were from the increase.

This is why all of my clients on larger buildings are not pushing top market rents in the market. That is usually reserved for brand new product and finishes. They up the rent every year but not to much. The goal is to keep the good tenants for years and years and reduce your turn and eviction costs.

Justin Fraser · Answer

Mehran K. You are right. I guess I was assuming that if the current seller can rent the property for $1,516 a month, why couldn't I rent it for $1,400 a month. I will re-evaluate the deal with a $1,200 rental amount as you suggested.

Another question- I included a $200/month general maintenance expense -is this higher than a typical estimate should be? I want to be conservative but don't want to exclude a property because I over estimated expenses.

All your feedback is greatly appreciated - I'm learning a ton just through this post!

Thanks again!

Doss Mann · Answer

I don't buy inspections. The only things that matter I am replacing anyway so there's no point. I do have experience in all trades but master of none. Some aren't comfortable with the unkown so it's beneficial until they get a little experience and confidence.

More important is the appraiser and I do pay for desktop appraisals from the lenders appraiser pool for $100. Once the deal meets criteria and I want to make an offer. Lets me know exactly what they will lend with no surprises. I also have MLS access but its the appraisers  opinion and choice of comps not an exact science. Wholesaler's and agent values are always high and free sites like zillow, trulia etc are only good for seeing pics of the comps and what's for sale.

Mehran K. · Answer

@Justin Fraser For expenses, I usually just go with the 50% rule when first evaluating numbers. I'll ask for repairs/maintenance records for the past 2 years if things are worth pursuing. For a detailed video on the 50% rule, check out this link: The 50% Rule: How to Quickly Analyze a Multifamily Investment Property

Also, verify whether the utilities are separately metered or not. Ask to see copies of both the leases. You can verify what utilities the owner is paying this way etc. If the owner pays water, you're looking at spending a bit more than 50% (as the 50% rule of thumb assumes utilities are being paid by tenant)

$1200+$875 = $2075 * 50% = $1037 - $721 = $316/mo Cash flow

$316 / 2 Units = $158/mo each unit which is good in my book. I shoot for a minimum of $150/unit using the 50% rule.

Tom Goans · Answer

@Justin Fraser,

I never pay for an inspection. I conduct them myself.

I did leave out one of my steps. The very first step is I have a lengthy Seller Disclosure form that I require. This is my road map of what to look for and confirm.

Justin Fraser · Answer

@Tom Goans

I appreciate you sharing insight into your process, and I understand what you're saying in regards to the sellers mindset once a price is stated. I'm curious if other people also pay for inspections before they make any offer- it seems to me that paying for a home inspection before every offer could add up to be quite expensive.

Thanks

Mehran K. · Answer

@Justin Fraser If rentometer is pulling around $1280ish as median/average, where do you get $1400 from? If I was looking at this property, I would use max $1200 in my analysis, given that data. I would also compare with ads on CL to verify that's about where they're at.

Tom Goans · Answer

@Justin Fraser,

Your method is the complete opposite of my methods.

First, comparables are not very valuable to me. Primarily, I only use comparables as an indication of what the competition is doing so that I can create a more effective marketing plan.

I begin my process by conducting very thorough research that includes the target market, neighborhood, employers, and demographics. I try to develop an understanding of what the future may hold. This is unique to every neighborhood. If this looks acceptable, I move to the next step.

My next step is a very thorough room-by-room inspection of the property and just as thorough of the exterior. I want to know down to the penny what costs and challenges I am facing.

All of this leads to a factual offer that I can make that represents my acceptable risks and workload vs. reward level. Every person has their own unique acceptable risk and workload vs. reward level. Every investment opportunity requires an adjustment to the reward level.

A consideration of the make an offer first approach, once you state a price, no matter the contingencies, this is the price the seller expects to receive. Anything less may present challenges to your success. If nothing else, the additional time spent by you trying to sell your new price.

I ALWAYS make my first offer my best and only offer. If it works, great, if not, I move on. This method may not work for many people. It strongly relies on the rules of negotiation.

Justin Fraser · Answer

@Joel Owens thank you for the reply!

The new tenant is in the 3 bedroom unit. I checked RentOmeter for both units for the following results:

3 Bedroom rented at $1,516 shows up as just above average. I may need to expect this rent to go down in the future- perhaps to $1,400. A decrease of $116

• Median rent: $1280
• Average rent: $1296
• 20th / 80th percentile: $1095 / $1600

2 Bedroom (rented since 2007) is rented at $866 is showing up as below average for the area. This may be able to increase to $950 which is $84 above the current rental.

• Median rent: $925
• Average rent: $965
• 20th / 80th percentile: $850 / $1100

If rents leveled out between the two units, it looks like I may make about $32 less  profit each month, which still results in a positive cash flow property.

Great points about the foreclosures in the area and the age of the building. I would make sure to include an inspection clause in any offer I make.

Joel Owens · Answer

At 50% costs I am getting about a 9 cap.

Which tenant is new the 2 bed unit or the 3 bed??

I ask because the 2 bed rent of over 800 a month sounds like a normal range but the 3 bed renting for almost twice the price of the 2 bed is not normal from my experience.

Usually with my clients on larger apartment buildings the 3 beds will get a few extra hundred a month but not almost double. If the 3 bed is the new tenant I would verify in the area that those rent levels are correct for a 3 bed. You verify the rents anyway but especially I would focus hard on that 3 bed number.

That rent number is way off and your cap starts going way down along with the return. Pay attention tot he age of the building as you could have many repair issues to fix. Also look at foreclosure notices and short sales for the area. If there are those occurring for these small apartments other investors will buy units cheaper for cash and then start out with lower rents to steal your good tenants and lease up their place. I have seen areas do this where the rents dropped by a few hundred as the new buyers did not have the high debt service of existing owners on their buildings.

Hope it helps.

Deal analysis and next step advice?

Most Popular Reply