What indicates a good deal to you?

Question

So i'm 24, currently looking to purchase my first rental property - a SFH 3br, 1-2bathrooms, sub 200K, but i've been hesitant to purchase because i don't yet trust myself, and a bit of fear, since obviously it's my first. I've read books, listened to podcasts, watched videos and so much more but i have one question about deal analysis.

What makes a good deal and how do you, or others you've seen, run their numbers? Each area is different and i know in the midwest, especially here in MI, we see more cashflow in our deals. The way i've been running my deal analysis is looking for properties on the MLS, and aim for a house that could cash flow me $150/month. I would honestly be okay with $120 a month because i think getting the first property is more important to that extra cash flow to me.

That number is after mortgage, insurance, taxes and 25-30% for vacancy and maintenace. My question is, how do you approach deal analysis? I see people who say they make $500 a door but thats because they're not accounting for the 25-30% savings. if that's how things are approached then i think i've found a whole bunch of deals.

I rarely find deals where the rent-(mortgage+tax+insurance+savings) is around what im looking for. I'm fine with this and I'm dedicated to keep looking, I just want to make sure I'm not passing up deals due to lack of knowledge.

So am i approachijg the analysis portion wrong? should i be less concerned about how much cash flow ill have after the savings and more focused on the profit after only mortgage + insurance + taxes?

Lesley Resnick · Answer

There are a ton of spread sheets out there that will kill any deal.  They count maintenance, capex, vacancy etc.  There are very few real numbers.

How much did you pay?

How much rent do you receive?

What are the costs for tax, insurance and finance?

After that it is all a guess (estimate).  Further the idea of "saving" (cap ex) money for a roof, seems silly unless you are actually going to put the money in a separate account.  That does not make sense since there is no yield on saving accounts.  The roof and ac have a 15 to 20 year life span.  If they are solid, the rest is going to be small issues.  Depreciation and accounting is a look back not forward.

I like gross rent multiplier.  It is simple and powerful.  Property taxes are a function of the cost, not much variability, insurance is basically priced on the value of the house.  This assumes they are all in the same area.

The soft analysis is do you like the neighborhood? How is the crime?  Is it improving or decaying?

Nader Hachem · Answer

@Jim K. Of course, I definitely do take all advice with  grain or salt but also know that many people here know much more than I do - through experience!

Dan Leyden · Answer

Hey Nadar,

You're 24, anything you buy over time will be a deal. Put it into perspective, if you have a 30 year mortgage by the time you are 54 you'll have a completely paid off property (as long as you dont refinance). Thats pretty awesome.

In terms of calculating the deal, there's a bunch of ways to work the numbers to make properties not a deal. Maintenance and vacancy of 25-30% seems extremely high. In the last 10 years I haven't had a single tenant move out.  How are you coming to these numbers? Most of the time I use 5% of gross rent for Capex and 5-8% vacancy. I look for at least a 10% cash on cash return after all expenses, management fee, vacancy etc.

My advice is find a solid property that doesn't need a ton of work up front and pull the trigger. Get your feet wet.

Drew Sygit · Answer

@Nader Hachem what cities are you looking in?

We recommend the Ring Cities for novice investors. Once you get more experience you can look at City of Detroit properties with higher cashflow -- but also higher risks.

You may want to follow our "Deep Dive" series we're doing about Metro Detroit cities and City of Detroit Neighborhoods: https://www.biggerpockets.com/...

Nader Hachem · Answer

Yeah, makes sense! I've been looking at sub 200k, more specifically 125-175K with a rent of $1300ish is what i'm finding. I'll keep digging on the MLS to see what else is out there. following up on that question though, does rent-tax-insurance-mortage = profit to you? or would you consider vacancy, etc.

Nader Hachem · Answer

Hi Lesley. Thanks for your response! it seems to me like you're saying what i need to hear - live outside the spreadsheet and focus on the big items (roof, ac, furnace, etc.) When i run my numbers forward i'll include a percentage for vacancy and repairs - but will try not to get too caught up in it. Looking at the bigger picture includes things like you said, neighborhood, etc.

Thanks for the knowledge!

Drew Sygit · Answer

There are deals on the MLS, but you've got to look hard to find them and know what you're doing.

You haven't given a price range you're looking in, so the $100-150/month return doesn't really mean anything. EXAMPLE: it would be a great monthly positive cashflow on a $50k purchase, but not on a $200k purchase.

We just assisted a client in buying a $80k duplex that needs about $5k in repairs, that rents for $1600 combined.

Nicholas L. · Answer

@Nader Hachem do you currently rent or own a primary?

Nick Rutkowski · Answer

@Nader Hachem

I look for value add opportunities, if I see a deal where I don’t have to spend a lot of money and I can increase my income then that’s a deal worth looking at. I try to find more technical deals vs fixing up a property. The faster I can stabilize the property, the faster I can move on to the next.

Nader Hachem · Answer

@Dan Leyden thanks! I think that 25-30% came from 8% vacancy, 10% repair and 10% property management. I've heard this a few times while reading brandons book and listening to podcasts  I wouldn't be using a property manager to begin with - I'd like to learn that part and one shouldn't be too hard to handle.

Thanks for the extra push to get going!

What indicates a good deal to you?

Most Popular Reply