All Forum Posts by: Brad E.

Thanks for all the feedback.  It is pretty much what I was thinking, but I wanted to put it out there anyway.  

Amanda G., cash flow is most important to us, but second to that is CoC. We want the cash flow to live on, but I want the return to be at least around what I would get in the market over time (~7%).

Brad

Hello all,

I am curious about your opinions and thoughts on our current strategy for determining an offer price on properties.  Right now, we are looking to earn around $150 per door on units, but I am not sure we are being realistic with our goals.  Here is one property we are looking at and am curious if you all think our strategy makes sense or if it is unrealistic.

Triplex in eastern North Carolina

Asking price $175,000

Income

Current rents: $675, $675, $625 = $1975/mo

Known expenses

  Management (10%)= $198/mo

  Taxes $151/mo

  Insurance $205/mo

Estimated expenses

  Mortgage (p&i) $745/mo

  Yard care $50/mo

  Repairs (10%) $198/mo

CapEx (5%) $99

  Vacancy (2.5%) $49

Total Expenses = $1695

Income - expenses = $280

Our mortgage assumptions right now are 25% down ($43,750 at asking price) at 5.5% over 30 years.  Closing costs are estimated at $5000.

This is $93 per unit cash flow per month. It also puts us at 6.9% cash-on-cash return with 7.0% CAP rate.

If we want to hit our goal of $150 per unit, we would need to reduce our offer price to $135,250.

This brings our cash flow to $450 or $150 per unit. It also reduces our downpayment to $33,813 putting our COC at 13.9% and 9.1% CAP rate.

On this property, we were told the owner is firm on the price, but we believe it never hurts to make an offer.  But we have looked at many other properties using the same formulas and every time, our offer price calculation is significantly below asking price.  Obviously the seller is trying to get as much as they can for their property, but I am concerned that all our offer prices are way too low and not realistic.

Are we including expenses in our calculations that should not be included?  Any inputs or opinions would be greatly appreciated.  Thank you so much.

Brad

Sorry it has been so long since my last post.  Things have been a bit crazy.

Well, the bottom line up front is that we have closed on the property!  It took quite a bit longer to get the work done than we were hoping, but this past Monday, December 12th we did it.  We ran up against the Thanksgiving holiday, weather, and city inspector availability, but in the end, we made it.

Regarding the work we had done prior to closing, it was a little more than expected, but not too bad.  There was quite a bit of rotten framing that had to be replaced.  There was about 50 sqft of rotted sheathing that had to be replaced and some of it was so bad that it had decomposed in the wall and was basically like someone dumped bags of topsoil in the wall.  About 6 wall studs, an entire door frame with the header, small parts of the second story subfloor, and parts of some floor trusses were replaced.  New sheathing was then put up, followed by the new deck, some new siding, and two new doors.  The deck looks great.

So pulling my estimates from my first post and adding in my actual numbers:

Purchase Price: $115,000 $110,000

Down payment 25%: $28,750 $27,500

Closing costs: $5,000 $2021.45

Mortgage: 4.5% 4.125% for 30 years = $437/mo $399/mo

Estimated renovations: $15,000

Estimated Monthly Revenue: $550/unit = $2,200/mo

Estimated Management (10%): $220/mo

Property Taxes: $165/mo $163/mo

Insurance: $160/mo $235/mo

Estimated Maintenance (10%): $220/mo

Estimated Lawn care: $150/mo

Estimated Vacancy rate 10%: $220/mo (estimated high)

Income - Expenses = $628/mo $593/mo

So that is $7,536 $7116 cash flow annually with an estimated $48,750 $44,521 cash outlay means 15.4% 15.98% cash ROI

So my estimated ROI so far even with the changes is about the same.  What is really killing me right now is my insurance.  I was surprised at how high it is.  This is fire/theft and wind/hail coverage.  I am going to shop around a bit for a better rate.  I also did not include my prepaids in my numbers above.  I had to pre-pay a year of the insurance policy plus fund the initial escrow.  Those costs together were $4022.67 paid at closing, but since they are captured above in the taxes and insurance costs, I did not include them in my calculations.

I really need to try to stick to my renovation budget.  That is where I will make or break my ROI.  I think I have probably underestimated the cost though.  I feel it will be more like $20,000, but for the sake of this blog, I'm going to leave it at the original estimate and compare the numbers in the end.

@Alan Russell, it is on Shipman. Keep checking back here, I'll keep posting updates through the whole buying, renovation, and initial rental process. 

@Kevin O'Brien, I guess my biggest tips would be 1) run the numbers to make sure you're in the ballpark for where you want an investment to be. You can then use your due diligence period to verify any financial assumptions you made and if they are off and that puts you outside your comfort zone, you can always back out of the deal. 2) After you have run the numbers, just make your offer. Make an offer based on the numbers, if your offer is too far from where the seller is, they'll say no. That's okay, don't force a situation that does not work for you. Know that there will be more opportunities out there. I found an investment analyzer spreadsheet in the BP file space under 'tools' in the top menu bar. Find something there that works for you in helping to run the numbers. Hope that helps. 

Hello all,

My wife and I are looking to start using a CPA for our business bookkeeping and taxes but we need someone who is knowledgeable in both real estate and salons & spas. We own two rentals now (one in Indianapolis and one in California) and we are under contract for a third (in North Carolina) which is a 4-plex and my wife owns a salon & spa in Indianapolis. We would be grateful for any suggestions/recommendations.  Thanks. 

Received the appraisal yesterday and it came back better than expected.  The appraised value was very close to our asking price, but we were more concerned about any "subject to" stipulations that would need to be fixed prior to closing.  The only required fix listed was repair of the rotted second floor balcony.  So with the appraisal in hand, the loan is now in underwriting.  It is possible that the underwriter may come back with more required repairs based on the inspection and other comments in the appraisal, so I will have to wait until next week to see what they say.  Once the loan is approved conditional only to the repair, we will be comfortable paying for the work ourselves knowing that everything else is good with the loan.

We also asked for a $5000 concession off the price for all the unexpected structural and plumbing repairs that need to be made.  Additionally, we asked to extend due diligence and closing by 2 weeks so we can get any work done to close.  The seller agreed to all our requests, so that was a relief.

Next step is to take care of the rotted balcony, get the appraiser back out to check the balcony work.  After that, we can close, then start all the other work that needs to be done prior to listing for rent.

Update 1

So it has been about 3 weeks since our offer on the 4-flex was accepted and we have been executing our due diligence.

So we paid a due diligence fee of $250 to the owner to have the power and water turned on for the inspections and appraisal.  After that, we scheduled the inspection.  While we waited for the inspection to happen, my wife got into the units and took lots of pictures and tried to discover as much as she could (I was in Yuma, AZ for the month and so she sent me the pictures).  She made a list of all the things that needed attention, and it was extensive.  With the water on, a number of plumbing leaks surfaced.

The inspection came back at 30 pages long.  Much more extensive than I was expecting, but most things on the list were small and easily repaired.  There were, however, a number of large items, including leaking plumbing, a rotted second floor deck, and water intrusion from the deck into a bedroom.

We decided to hold off on the appraisal until we could get some estimates on the work to see the extent of the work required and the cost.  So we scheduled two contractors to go out and look at the units for estimates.

Additionally, we ordered a termite inspection as we suspected termite damage on the deck.

We have the quotes for the work back and, while there is a lot to be fixed, it was not as bad as I was expecting based on the inspection report.  Therefore, I ordered the appraisal.  Unfortunately, due to the hurricane here last month, appraisers are in high demand and we are having trouble scheduling one at a reasonable price in the timeline we need.  Hopefully we will hear something soon, otherwise, we may have to request an extension on our due diligence period.

More updates to follow was we find out more.

Kevin,

I actually found them on the MLS using realtor.com. I was searching for multi-family units and they were listed. After looking at the first property, we asked to see the second even though it was pending, and that is when we found out that the buyer was almost out of time on his due diligence period, so we asked to be notified if he backed out. Once we got word that he did, we put in an offer.

Another option for finding units is to inquire with local property management companies whether they have any units that are coming up for sale. I contacted the property manager for the first unit I looked at to try to get some info and numbers for it and from that meeting, they showed me a number of duplexes and triplexes that they managed that were for sale. Some were listed on MLS and some were not yet listed. That may be a good way to find something that is not on the market yet.

A couple of firsts for me here on BP.  This is my first post, so I am excited to get involved in the community.  And I am posting about my first investment deal.  Truth be told, this is not our first rental property, but this will hopefully be the first property we have purchased for the purpose of being an investment (our other rentals were our residences that we ended up renting out).

So here is what has happened so far:

We have been searching for an investment in either our hometown of Indianapolis or near where are living now.  We found a four-plex for sale here in eastern NC listed at $149,000, but after going to look at it, it was in really bad shape.  The parking lot needed complete replacement, the units were very outdated and not in very good shape, and there was a water leak in an upstairs bathroom causing water damage and mold in the downstairs unit.  I started researching how much their repairs may cost when an identical unit came back on the market after a buyer backed out.

So we put in an offer of their asking price of $115,000 plus $1,000 toward closing costs.  It was accepted last week and now we are in our due diligence period of 30 days with a goal of closing in 45 day.  Here are some details about the property and costs:

Each unit is about 830 sqft, 2 bed, 1 bath.

The building has been vacant for 3 years and we are asking why, but I am not worried about them renting once they are updated.  The owners were in the process of updating the building but decided to put it on the market as is, so there are rolls of carpet and padding, some sinks, tile, and countertops in the units ready for installation.  This is actually my biggest worry about the deal.  My lender said that the units need to be habitable before the loan will close.  She also said that flooring and cabinets in need of updating are considered cosmetic so it will come down to how the appraiser presents what it found.  If it is appraised "as is," then we should be good, but if it is appraised "condition to," then those items noted will have to be corrected prior to closing.  The owner is not interested in putting any more money into it and I don't want to put money into a house that I don't own yet, so I am a little bit worried about this.

I am confident that each unit can rent for $550 based on comps but the owner claims he was renting them for $625 three years ago.  I am a bit skeptical about that number, so I am running my analysis based on $500/mo and if we can get $600, it'll be a bonus.

Estimated Purchase Price: $115,000

Down payment 25%: $28,750

Estimated closing costs: $5,000

Estimated mortgage: 4.5% for 30 years = $437/mo

Estimated renovations: $15,000

Monthly Revenue: $2,200

Management (10%): $220/mo

Property Taxes: $165/mo

Insurance: $160/mo

Maintenance (10%): $220/mo

Lawn care: $150/mo

Vacancy rate 10%: $220/mo (estimated high)

Income - Expenses = $628/mo

So that is $7,536 cash flow annually with an estimated $48,750 cash outlay means 15.4% cash ROI

Here are some pictures of the building as it is right now:

I know these aren't the best pictures, but I will post some better ones once the power is back on and we can get some good shots.

I am also looking for an attorney who can help with LLC formation and advice as well as an accountant for help with bookkeeping and tax prep (not just for our rentals, but for a salon & spa my wife owns), so if anyone have recommendations, please let me know. I would appreciate it.

Stay tuned for updates after our inspections this Friday.