All Forum Posts by: Daniel Flesher

I completely agree with Errol. Find a local group and start attending. You'll meet people who are making things happen. You'll learn about local markets, expected ROI, and little tips for finding deals. You'll also meet a lot of people, and it only takes one solid contact to get some opportunities that you wouldn't have had otherwise.

Thanks. That's starting to make sense why Bob is saying cap rate doesn't matter. I knew I didn't need a commercial loan, I just wanted to make sure I was doing the math correctly. 

I also get that the 50% rule isn't a hard and fast one, but it sounds like a good rule of thumb for person just starting out. I'd rather go with a tried-and-true rule of of thumb than say, "There's no way costs could be more than 15%" like an idiot and screw myself over.

This was supposed to be more hypothetical, "am I doing the numbers right," but you guys are just so helpful that I guess I dive into the details.

The property is in the Roxborough, Manayunk, Wissahickon area in Philadelphia. The buyer is asking $325k, which is on the high end for the area, and especially for the condition. It's not it bad shape, but there has been a fair bit of neglected maintenance. None of it is overly expensive on its own, but taken as a whole it all adds up. 

We'll be house hacking for now, but I'd like to know that it would cash flow if I weren't living in it. That means that (if I'm really serious about this) I need to get it for the right price and then do a few small upgrades to increase the rents. 

I also know the buyer is looking to get out of all his properties. He purchased the property in 2005 for $360k. He knows he is going to take a big loss on it and that he hasn't maintained it as well as he should have. He's also motivated to get out of it because he just bought a new home for his family and needs the money.

One major reservation I have on it is that it has a pool . . . that the owner put a cover over when he purchased it, and then never took off. I'm not sure if there's anything about it that is working. Again, this is a major liability, unknown factor, and expense. If I can get it working for relatively cheap, then that's fine while I'm living there. I had a pool growing up and am comfortable with the ins and outs of their maintenance and repair. But when I move out I'll have to have a lease with very strong liability waivers AND continue maintenance myself (or hire someone) because there's no way I'd expect a tenant to even know how to do it, let alone care enough to actually get it done.

But the pool hasn't been looked at in 10 years, and if it wasn't winterized properly then the whole thing will just be a big expensive mess. The pipes will most likely be cracked. I would just have it removed, and that's very expensive.

So if I get the property I don't feel like paying a lot for it. Comps are closer to $260k, and with a pool that could be upwards of $25k to get removed I'll have to think really hard about what price I'd be willing to pay.

Again, this started as a generic question of "am I doing these numbers correctly" and now we're getting really specific with the property and pool. If I weren't going to be house hacking and if I didn't know anything about pools I wouldn't even consider it, but the schools and location are good enough for us to stay in it long term, so I'll consider dealing with the pool.

 Oh, did I confuse you? I came in here asking if I was doing some math correctly. I didn't say that I was going to run around making offers on properties for half their market value. I did make an observation that finding properties with a 10% cap rate is hard, since most of the places I've been looking have had cap rates around 5%, but that's not the same thing as saying I'm going to make a low offer.

Thank you for your advise on asking for better records of annual expenses. That's great advise for both sellers and buyers since it removes many of the unknowns from a deal. Sellers can justify their asking price and buyers can better predict their income. 

 Do you mind expanding? What's included in the 50% rule (guess) that isn't an operating expense?

Wouldn't being conservative on operating expenses (estimating high) work out in my favor since it will result in a lower max price to pay?

Also, of course triplexes have cap rates. (Net Operating Income) / (Purchase Price) is your cap rate, regardless of if it's a single family home or 100 unit apartment building.

So I am doing it right. The $17,550 is the yearly NOI, so for a 10% cap rate the price would have to be $175,500. I'm guessing everyone has to work pretty hard to find deals with a 10%+ cap rate? The asking price for most places I've been looking at only give me a 5% cap rate.

My wife and I moved to Philly one year ago and have rented for this past year. We're looking for a multi-family property to buy so we can "house hack." I've been listening to past episodes of podcasts and lurking the forums. I've been running the numbers on different properties but I'm not sure I'm doing it right. Could you guys help me out?

Property 1: Triplex

Gross rents are $2925/mo. Rule of thumb is 1/2 for costs, which leaves $1462. At $100 per door that means my mortgage should be $1162. At 100% financing (that's how I'm supposed to look at this right?) the purchase price should be $260,000 max (This is assuming 3.5% FHA loan).

The other way to look at it would be cap rate. $2925/mo. -1/2 for costs, leaves $1462. Multiply that by 12 for $17,550 yearly net income. That puts the purchase price at $175,500 for a 10% cap rate. 

This is where I get confused. The two methods put the purchase price in way different ranges. Is there some other method for calculating costs when doing cap rate, or does the $100/door method just result in higher purchase prices because the formula is just for $100/door and not a percentage of the purchase price or monthly rents?

I'll wait for feedback before I post another example. Thanks everyone.