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All Forum Posts by: Abdul Azeez

Abdul Azeez has started 82 posts and replied 465 times.

Post: Help me analyze this deal

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

@ Roy N of the options I have provided which one should I use? The APOD takes cash flow into account.

Post: What am I doing wrong?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

@Dakoda Spencer The book is called What Every Real Estate Investor needs to know about Cash flow and 36 other key financial measures. It is available online for about $16. Do not get the Kindle or Audio version. Get the physical paperback. In my case, I just borrowed it from my library and plan to purchase it based on how good it is. 

Post: Help me analyze this deal

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

Folks - i need your help in analyzing this deal. The subject property is a homepath single family property with 3 bedrooms, 2 bathrooms and a basement with 1092 sq.ft listed at $129,900. I have used three different analysis methodologies for determining the right price to pay for this property. My findings are below followed by a more detailed APOD analysis spreadsheet attached for those who need details. Kindly recommend what you think the right offer price should be for this property. Financing assumptions are a 30 year fixed rate mortgage with 4.25% APR and 20% down payment including rehab cost. The strategy is buy and hold although the hold may be for a few years and that's the reason the ARV analysis is used below as well.

My investment criteria is $150  per month per door. I had to extend the analysis over 10 years for Frank Gallinelli's methodology since first year has a higher cash flow as capital costs are zero (since rehab is factored into the loan) but is a 6% of annual rent year over year. So, I had to strike an offer price keeping in mind cash flow needs from second year to meet atleast $150 per door. This way the gains in year 1 are evened out starting year 2.

Analysis methodologies

1. Frank Gallinelli's APOD analysis

- Assuming, rehab costs of $30k, my offer price should be $90k

- Assuming rehab costs of $20k, my offer price should be $100k

- Assuming rehab costs of $10k, my offer price should be $110k

2. ARV method

I ran a search on Zillow for properties in the same area of the same size sold in the last 6 months. Based on this, I found an average square feet of $192/sq. ft. If I use this on the subject property, it comes to $209,664 as ARV. Using this, offer price = $118k (ARV * 0.7 - 20%)

4. Cap rate method

Assuming a median cap rate of 10% for the area, offer price = $79,830 (NOI of $7983 divided by 10%)

So, based on the above, I see a wide range between $80k to $118k none of which the lender may accept by the way. What would you pay?

I do know that the estimate from contractor for repair cost will have an important effect on this. That's the reason I used most pessimistic to most optimistic estimates in APOD analysis.

And I also want to know if it is insulting if I go with an offer based on my analysis if it is significantly lower than the list price or is it still worthwhile making an offer.

Post: What am I doing wrong?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

@ John Thedford Thanks.

Everyone - The subject property is a NO GO based on my analysis and your feedback. Thanks for your help.

Post: What am I doing wrong?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

@ Missy H -I have a very detailed APOD analysis spreadsheet I am leveraging from Frank Gallinelli's book.

Post: What am I doing wrong?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

Hello - I saw a homepath property yesterday where they have completely redone the interiors, painted and have a full finished basement. The subject property is a 2 bed, 1.5 bath townhome. I ran the numbers but they don't seem to add up. What am I doing wrong?

List price = $169900

Gross Operating Income = $15000 (Rent  of $1500 a month minus Vacancy allowance for 2 months)

Total Expenses = $9980 (Accounting ($300), Insurance ($600), Legal ($300), Repairs and maintenance ($1080 or 6% of rent), Taxes ($5781), HOA ($1920))

Net Operating Income = $5019

Annual debt service = $7392 (20% downpayment, 4.25% 30 yr mortgage)

Capital costs = $0 for first year (6% of rent per year after that)

Cash flow before taxes (Negative) = -$2373 or -$198 per month

Comparables are showing the following:

1. similar town house which is fairly well done sold for $96k in March 2016, 

2. a fully spruced up townhome in the same neighborhood sold for $178k in March 2016

3. similar townhouse sold for $155k in Feb 2016

4. similar townhouse sold for $200k in Jan 2016

5. similar townhouse sold for $145k in Sep 2015

In order to obtain a positive cash flow of around $100 per month, I need to pay $85k for this house which will reduce annual debt service down to $3768. Even averaging out the comparables comes to $155k not withstanding the fact that it is probably going to be an insult to both the listing agent and my buyer's agent who has spent several hours taking me on property tours to offer this low for the house. Where am I going wrong in my analysis? Am I factoring in expenses I should not be factoring? Does this property just not make sense given the numbers?

Post: List of books from podcasts

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

https://www.biggerpockets.com/renewsblog/wp-content/uploads/2016/03/The-Best-Real-Estate-Books-Ever.pdf

Post: Deal Analysis - Thoughts?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

1. Calculate your NOI (Net Operating Income). Get the cap rate for the area and use these two to figure out purchase value. Asset value = NOI / cap rate.


2. Look at comparables for the area and figure out what the approx. value should be for this property.

3. Calculate your NOI and then take out capital expenses and debt service fee to calculate your cash on cash return. Run cash on cash return for multiple purchase prices and figure out which one exceeds your return threshold.

The above are just a few ways to do this.

Post: Is this real and what does this mean?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

@Cheryl Packham Correct. And for my purposes I prefer using Annualized Return or IRR which tells me the story I am looking for i.e. holding period.

Post: Is this real and what does this mean?

Abdul AzeezPosted
  • Real Estate Investor
  • Monroe Township, NJ
  • Posts 468
  • Votes 85

Cheryl Packham - Thanks for your response. I think this is where I disagree with you a little bit. There is a good fool.com article that explains and can be found at http://www.fool.com/knowledge-center/the-differenc...

The key takeaways from the article are the following which leads to believe IRR is a good measure of annualized returns:

1. As the example in the article provides, an IRR of 16.2% was calculated for an investment with ROI 57% (similar to how you compared against ROI in my example). ROI represents the simple percentage gain over the entire period, not annualized as in the IRR calculation.

2. Internal rate of return will tell you the annualized percentage returns of an investment over any period of time which is what I believe I have done and shown in my example.

3. For monitoring your performance over the long term or against benchmarks like the S&P 500, the internal rate of return is more informative because it describes the performance in consistent, annual terms. However, for determining short term gains or understanding your cash-on-cash returns, the return on investment number gives you everything you need with a much simpler calculation.

So, I do retain my original idea that IRR is a better measure to evaluate holding period for the property in question whose example I have provided. This thread was initiated not to agree on the best return metric but as an academic exercise to enable me to understand why the annualized return (IRR) goes down over time for a subject property I was analyzing.

@ Stephen Greenway correctly explained that the decreasing irr comes from holding the property and averaging more modest and sustainable cash flow returns over the long haul bringing down the initial "flip" return.