All Forum Posts by: Bill Jacobsen

You will have maintenance/capital reserves of $2,500s-4,000, management of about $4,000 + vacancy of about $1,500.  If you can break even with the added expenses you will be making over 10% on your money.

Good Luck.

Bill

Hi Brian:

I used the interest rate of the loan as the cost of money.  That interest rate is 5.5%.  I like my cap rate to be 3 percentage points above that rate.  There is no use investing if you only make the same amount as your cost of money.

It is more accurate to calculate the weighted average cost of capital which would include the return that you would want on the down payment amount also.  I just use the above short cut.

Hope that answers your question.

Bill

Based on a $65,000 buy price, financing at 5.75%, rent at $1,100 you can estimate net operating expenses at 50%  and net operating income at $6,600.  I want my net operating income divided by my buy price (cap. rate) to equal my cost of money + at least 3 percentage points.  Since your cost of money is 5.75% I would use a cap rate of 8.75%.  Dividing the operating income of $6,600 by .0875 gives me a value of $75,429.

At this point I would still be interested.  You need to estimate the individual components of the expenses as Minka suggested.  Also, estimate maintenance costs.  These costs maybe lower or higher than the 50% of rent estimate.  Substitute the new expense number in the equation,

This is or is not a good investment depending on the cap rate that you require.  My opinion is just my opinion.

Good Luck.

Bill

I don't know why you bought this property if you didn't know whether it was a good deal or not.  Next time make sure it is a good buy before you buy.

A good buy would be one that meets your required return on investment and is selling below comps.  Only you know that.

In that the individual components of operating expense are not available we can only guess. First, I am only interested in properties that sell at no more than 75 times estimated monthly rent.  That meets my criteria but may not meet your.  Your property exceeds my criteria.

If we estimate operating expenses at 50% of rent then we have $9,450 net operating income  At a 10% cap rate that would equate to a value of $94,500.  At a 12% rate the value would be $78,750.

Based on the information you gave this looks like a very good deal.  Congratulations.

Good Luck in the future.

Bill

I would not pay $50K for a property that only comps for $53 unless it would make a good buy and hold.  Determine the market rent and its value as a rental.

If you still want to buy it try to get at least 3 years and possible 5 or as long as you can.  You should also try to get at market interest or lower.  I would calculate the value as a rental using a cap rate of the interest rate offered + 3 percentage points or better.

Just my opinion.  Good Luck.

Bill

When  I add vacancies and maintenance to the mix I get a cap rate of about 4.9%( without  adding management).  Your cost of money is 5.5%.  Your cap rate should be 3 percentage points above your cost of money.  In my opinion this would not be a good investment.

Good Luck.

Bill

I start out by estimating $1,000 per year for repairs and $1,000 for capital reserves for a 1,500 foot house.  I use a 5% vacancy factor unless I have some historic data that is different.  I budget 10% plus one months rent to fill a vacancy.

Good Luck.

Bill

I invest in stocks and real estate for diversification. I think that REITS act more like small stocks than real estate. Obviously, most of the return from a REIT is in the form of dividends. My problem with REITS is that it is too difficult for me to determine the value of real estate owned by them.

A cash on cash ratio of 8% is OK on non-leveraged property.  With cost of capital at 5% you can have up to 20% leveraged cash on cash. The cost of borrowing for stocks is more.

If you don't mind the involvement  in real estate I would buy real estate rather than REITS.

Just my opinion.  I know I didn't answer your question directly but hope it helps anyway.

Bill

Market value is what people are selling or buying similar properties at.  This assumes that the property is properly marketed.  This is the value based on comps.  An appraisal is the value that a licensed appraiser gives the property assuming a sell within 6 months.  My experience is that appraisals can be somewhat high.  This works well for properties that are move in ready.  Under the above circumstances you usually can sell property within 5% up or down of its value.

Properties that need rehab are different. Not only do you have to assess the ARV but the cost of rehab. Not as many people are willing to buy properties needing rehab. The property will not sell for ARV - Rehab cost. People want a discount to that number to account for time and effort and risk. Each rehabber has his own profit margin.

I don't worry about buying below market.  I want to make my profit margin.

I hope this helps.  Its only my opinion.

Bill

The 70% formula has the profit built in.  From my experience the profit amount will be about 20% of the money put into the project.  Obviously, you can target any profit amount that the market will bear.

Good Luck.

Bill