Hi BiggerPockets!
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I've decided to do a calc review in hopes to remedy some of the "analysis paralysis" I'm experiencing. There's so many input parameters to analyzing a deal, it can be paralyzing. Especially for newcomers, Capex, Repairs, and Vacancy rates are hard to calculate accurately.
The property I’m analyzing is a Duplex in South Austin Texas. I wasn’t fishing for the perfect cash flow property per-say, rather at this moment I’d prefer be able to determine the quality of a deal easier
I’m going to include where I’m getting value of parameters from so that I can be critiqued in that regard.
Purchase Price: $445,000 (Currently listed price)
- 2 Units, 3/2 Each
- 2066 sqft
Amount Down: 3.5% [FHA] (I know this analysis doesn't include me living there).
Rules of Thumb: [From the book on rental property investing]
- 2% Rule Test: .79% ($3500 rental income / $445000 purchase price)
- In areas like central Austin Texas it seems impossible to get a high % here.
- 50% Rule: $1750 ($3500 rental income / 2)
- Est. Cashflow @ $1952 P&I monthly: $3500 – (1750 + 1952) = $-202
- Right off the bat, using this generalization of expenses I see that I wouldn’t be cash flowing positive and would need to offer lower.
Income:
- $3500
- Current rent roll from Realtor.com && Rentometer says this is fair price.
Expenses:
- Tax: $634
- o $7613/12 - 2018 Tax assessment according to realtor.com. $8300 estimate from the local online county tax accessor website)
- PMI: $244.75
- o Estimated at 0.058% of purchase price – or $55 for every $100K
- https://tinyurl.com/u9bl48r
- Vacancy: $175
- o 5% of monthly rent.
- o Where: Estimate found in Brandon Turners book.
- Repairs: $350
- o 10% (5-15%) of monthly rent.
- o Where: Estimate found in Brandon Turners book.
- CapEx: $280
- Property Management: $350
- o 10% of monthly rent.
- o Where: Estimate found in Brandon Turners book.
- Home Insurance: $102
- o Quote from Liberty Mutual for $230K of coverage for assets. (estimated rebuild cost).
Returns:
- Cashflow: $3500 – ($2135 operating exspenses + $1952 P&I&PMI) = -$587/mo
- CoC: -30.5% LOL (-$7044 yearly cashflow / investment)
- 1st
Year Insurance Premium: $2880 (240*12)
- Title Fees: $1000 (my lender says this is the max I’ll likely have to pay in Texas)
- Appraisal: $500 (quote from lender)
- Lender Fees: $250 (credit report / etc)
- Escrow, 3-4 Mo Tax & 2 Mo Insurance: $2419 (634*3.5) + (2*240)
- ROI: See IRR calculation in report.
- o For this specific property, you would have to bank on appreciation. A modest 2% yields decent returns, ~17%, at 5 years and 5% YoY yields ~40%.
Takeaways:
- Running this analysis takes way too long to do on every property. I’m starting to like to use the 2% (or whatever %) rule for quickly screening properties.
- What do rule of thumb screening process do you all prefer to use?
- For areas like both coasts, the price to rent ratio is absurd. I plan on house-hacking MF in this area to get started and while the cash flow isn’t good, I think it is still better to do than renting and the equity built on the back-end has potential. Afterall Austin since the year 2001, has average 5% appreciation YoY.
- Do you guys factor in appreciation, or is it like “icing on the cake”?
- It’s hard to do much with a rule of thumb like the 2% rule without setting bars that you are aiming to reach. However, it’s hard to set bars you are aiming to reach if you don’t where the bar should be set.
- How are you guys calculating percentages to aim for?