All Forum Posts by: Addy Chupa

You can find it at www.AssetAFC.etsy.com or at www.AssetAFC.com

Quote from @Zhong Zhang:

Can you help me evaluate an investment case? I mainly want to ask if these assumptions are reasonable and if there's anything I haven't considered:

(1) multifamily units in NJ close to New York City, ~$1,000,000, 20% down payment, 

(2) Using the following assumptions: 4% appreciation rate, 6.5% interest rate and 5.0% refinance after 5 years, $10,000 yearly maintenance fee

(3) ~$6,000 monthly rental and assume 3% increase yearly with 5% vacancy rate

(4) Based on the above, the calculated IRR if selling at the 10th year is ~19% (considering tax benefits) and ~17% (without tax benefits). The tax benefits refer to the tax deductions from mortgage interest and property tax.

The returns mainly rely on appreciation, and the cash flow only improves in the last few years, also depending on securing the 5% refinance rate.

I've learned a lot from this forum, but as I start to operate on my own, I'm still not completely confident. I'm not expecting a yes or no answer - I would be very grateful if you could comment on the analysis above. Thank you very much!

Hi @Zhong Zhang
I ran some numbers for you and attached the picture below. The $10,000 yearly maintenance fee is really hurting your cash flow, as it’s eating up all your profits. Based on your current assumptions, you would be paying $1,229 per month out of pocket, leading to negative cash flow.

If you’re house hacking and living in the property, it might still make sense because you're paying for housing anyway. But if this is purely an investment, the high maintenance fee is a major concern.

Now, let’s look at what happens in the next 5 years:

• Refinance After 5 Years: Assuming 4% appreciation, your property value will increase to $1,216,653. If you refinance with an 80% loan-to-value (LTV), your new mortgage will be $973,322. You'd be able to pull out $330,455, which is significantly more than your initial $236,930 investment.
• Your Initial Investment Back: This means that in 5 years, you’ll not only get your original investment back but also keep an additional $93k in your pocket.

However, there’s a downside:

• Negative Cash Flow Impact: Over the next 5 years, due to the negative cash flow of $1,229 per month, your total cumulative loss will be $(60,153). So, by the end of 5 years, your net gain will be around $33k ($93k cash pulled out minus the negative cash flow).

Looking ahead:

• Future Cash Flow: After 5 years, assuming a 3% annual rent increase, your rent will rise to $6,955. With a 5% interest rate on the new mortgage, you would still be negative by $500 per month. However, this could change because with a 5% vacancy rate, you’re likely to have tenant turnover. When that happens, you can adjust the rent to match current market rates. This could push your rent up to $7,500 or even $8,000, which would make your cash flow positive.
  

In summary, the refinance could give you a good return in the long run, but the negative cash flow in the first few years is a concern. While you’ll get your initial investment back, the first 5 years will be challenging due to the ongoing costs.

Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

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Hi William,

I ran some numbers using our tool, and I’ve included my thoughts below, along with two scenarios: one based on your exact assumptions and another with adjusted figures that I believe could make the deal work better.

Observations on Your Numbers

1. Utilities: Based on your calculations, it seems you’ve assumed the tenants will cover all utilities. This might be typical in your market, but it’s worth confirming to avoid unexpected costs.
2. Home Appreciation: You’ve estimated a 2% annual appreciation rate, which I feel is quite conservative. Personally, I wouldn’t invest in a market where appreciation averages only 2%. I aim for at least 4% to 5% as a benchmark. I recommend researching the average appreciation over the past 10 years in your target area to get a clearer picture.

As you know, in real estate, ROI comes from multiple sources:

• Home Appreciation: 
• Reno Appreciation: Value added through renovations or improvements (usually just in the first year).
• Initial Equity: The discount you achieve when buying below market value.
• Principal Paydown: 
• Cash Flow: 
• Tax Benefits: Savings from depreciation and interest deductions.

For a deal to make sense, at least three of these components—home appreciation, cash flow, and principal paydown—need to be strong. Appreciation, in particular, is crucial, while cash flow acts as the fuel to keep the property sustainable.

Your Scenario with 2% Home Appreciation

Here’s how the deal looks using your assumptions:

Year 1 Analysis

• Cash Flow: -$1,123
• Initial Equity: $51,000 (assuming a $249k purchase on a $300k market value as per your report).
• Home Appreciation: $6,000 (2% of $300k).
• Principal Paydown: $2,441
• Total Gain: $58,317
• ROI: 360.32% (on $16,185 upfront investment: 3.5% down payment of $8,715 + 3% closing costs of $7,470).

Year 2 Analysis

• Cash Flow: -$752
• Home Appreciation: $6,120
• Principal Paydown: $2,617
• Total Gain: $7,985
• ROI: 49.34%.

Year 3 Analysis

• Cash Flow: -$375
• Home Appreciation: $6,242
• Principal Paydown: $2,806
• Total Gain: $8,674
• ROI: 53.59%.

Year 4 Analysis

• Cash Flow: $9
• Home Appreciation: $6,367
• Principal Paydown: $3,009
• Total Gain: $9,386
• ROI: 57.99%.

Based on these numbers, you’d have negative cash flow for the first three years and only break even in Year 4, assuming a 2.5% annual rent increase.

Adjusted Scenario see second picture: Landlord Covers Gas and Water

In the second scenario, I assumed the landlord would pay for gas and water at $300/month while maintaining the same 2% home appreciation rate. For this deal to work under those conditions, the purchase price would need to be closer to $179k.

With your original assumptions 249k, the deal is marginally acceptable but not great, given the negative cash flow in the early years. If you need to cover utilities, the numbers tighten significantly, making a lower purchase price essential.

Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

Quote from @Jennifer Fernéz:

Um, WOW. This is amazing. Dang, all offers were due yesterday and I didn't make one. What kind of tool did you use to analyze all that? I mean, I could try to just memorize the math..

The tool is called Cashflow Analyzer Pro with Deal Instant Analyzer from Asset AFC. You can find the link in my bio. If you need help analyzing any deals, feel free to reach out—I’m happy to guide you through it!

Quote from @Jenna Schulze:

Hi! I am starting to become involved in real estate investing and I am looking between two cities in Ohio to purchase my first property (hopefully a duplex). Through my research, it says that Cleveland and Toledo are both good options for real estate investing. Which one is better? Is there a city that's better than both of these in Ohio? I do need a property that is not very expensive, which is why I have been looking into Clevland due to their low selling prices and high appreciation rates. 

Both Cleveland and Toledo can be great options for starting real estate investing, especially if you're looking for affordable properties. Cleveland often stands out for its strong appreciation potential, while Toledo is known for steady cash flow opportunities. It depends on your goals—if you're focused on growth, Cleveland might be the better choice, but if you want consistent rental income, Toledo could work well. Other cities like Akron or Dayton in Ohio might also be worth exploring for affordable properties and good returns.

Quote from @Jennifer Fernéz:

I need help analyzing this property.

Address:

2542 Glenn Terrace, Mount Penn, PA 19606

Asking Price: $209,000

Taxes: $5087 (they are really high in my county)

Renovations: $10K-$15K

Mortgage: Conventional

Credit Rating: 712 median

1. I have an interior design background and can make this property really cute, but is it worth it? I have to front a ton of capital.

2. I was thinking about getting the property, renovating it, and then cashing out 80% of the ARV to get some of the money back. Good idea or no?

3. What do you estimate the ARV? There is a 'comp' listed for $200,000, but it was sold as-is and needed great repair. I think if I make this house really cute, I could potentially get $240K ARV. But I don't know. What do you think?

4. What do you think you could rent this for? I have no idea. I think I could get at least $1700. Maybe $1800? $1900? $2000?

I don't want to spend all my capital, but I think I could potentially refinance and get some back. But then my cash flow won't be high, and when trying to get another property my DTI won't be great because 75% of the rent won't meet the mortgage. However, I like that there isn't a lot of work to do and I could still make the property really cute with not much risk.

Inventory is so low. Any help appreciated!

 @Jennifer Fernéz I run sum numbers for you with our tool, see comments and pics below before refinancing and post refinancing .

Financial Breakdown:

• Purchase Price: $200,000

• Mortgage (LTV 80%): $160,000
• Interest Rate: 6% (30-Year Amortization)
• Mortgage Monthly Payment: $959

Upfront Costs:

• Down Payment (20%): $40,000
• Closing Costs (3.5%): $7,000
• Renovation Costs: $15,000
• 1 Month of Carrying Costs During Renovation: $1,548
  Total Upfront Required: $63,548

Year One Rent:

• Monthly Rent Income: $2,000
• 1 Month Rent Losses during renovations (-$2,000): -$167/month distributed over 12 months
• Total Rent Income: $22,000 per year => $ 1,833 per month

Monthly Expenses:

• Mortgage Payment: $959
• Property Tax (Assuming $3,000/year): $250 per month
• Property Insurance (Assumption): $100 per month
• Utilities (Hydro, Gas, Water): $275 per month
• Assuming 5% Vacancy: $92
• Assuming 0 % Repairs & Maintenance first year because unit has been recently renovated
• Total Monthly Expenses: $1,676

Monthly Net Cash Flow: $157

Post-Renovation Refinancing Strategy after 12 months:

So far, we’ve purchased the property, completed renovations, and rented it out.

Next, you can approach the bank for a refinance to consolidate a portion of your initial investment into a mortgage. Typically, the banks prefer to refinance one year after the initial purchase.

To get to the ARV of $250,000 , I am assuming as follow:

Because you spent $15,000 in renovation, I am assuming you increased the Initial value of the property at 30,000 bringing it at $230,000

Add a 8.69% home appreciation for one year $20,000
Estimated Home Value After 1 Year:$250,000

Refinancing Breakdown:

• New Home Value (Post-Appreciation): $250,000
• New Mortgage Amount (80% LTV): $200,000
• Existing Mortgage Balance after 12 months: -$158,035
• Assuming 3 Months Interest Penalty for Breaking Existing Mortgage: - $2371
• Total Cash Pulled Out: $39,594, allowing you to recover to pay a portion of your initial investment of $63,548, leaving $ $24,015 in the deal.

Many new investors mistakenly believe the BRRRR strategy ends after the cash-out. It's crucial to evaluate how the deal performs with the new mortgage:

Updated Financials After Refinancing:

• Market Value: $250,000
• Mortgage Amount (80% LTV): $200,000
• Equity: $50,000
• Interest Rate: 5% (30-Year Amortization) Assuming after 12months the rate will drop from 6% to 5%

Monthly Expenses:

• Mortgage Payment: $1,074
• Property Tax: $260 (4% Adjustment from last year)
• Utilities: $309 (+3% Adjustment)
• Insurance: $104 (+4% Adjustment)
• Vacancy: $105
• Repairs & Maintenance: $105 (now after 12 months we can assume we have repairs at 5% factor on annual rent)
• Total Monthly Expenses: $1,957

Rent Income after 12 months assuming annual rent increase at 5% : $2,100

Cash Flow: $143 per month 😊

Year 2 Return on investment

• $2,951 Principal Paydown year 2
• $20,000 Property Appreciation (assuming 8% per year)
• $1,720 Yearly Cash Flow (this will increase as rents rise)
• $50,000 Initial Equity

Total Gain $74,671 with just $ $22,789 remaining in the deal. 

Year 3 and Long-Term ROI:

• $3,102 Principal Paydown year 3 (this will keep increasing each year as you pay off your mortgage
• $21,600 Property Appreciation (assuming 8% per year)
• $2,568 Yearly Cash Flow (this will increase as rents rise)

Total Gain Year3: $ $27,270 giving you 113.55% ROI on your $ $24,015 left in the deal.

This is a good investment in my opinion.

Feel free to reach out if you have any further questions or need additional clarification!

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When house hacking a duplex, start by estimating the total monthly rent you can earn from the unit you’ll rent out. Compare this to your total monthly costs, including mortgage, insurance, taxes, vacancy and maintenance. A good deal is one where the rent covers most or all of your expenses. Tools like Cashflow Analyzer Pro with Deal Instant Analyzer from Asset AFC can help you break this down and understand your potential cash flow and return on investment. Lastly, don’t rush—focus on properties in good locations and with solid potential for both income and appreciation. Good luck!