All Forum Posts by: John Leavelle

@Matthew Ban

Nice job breaking everything down. Don't know if I would pay the purchase price you listed considering the ARV is $5,000 below your total project costs. You will need to have an electrician check the outlets to make sure it's up to code. That will add to your rehab costs. How accurate is your ARV comps? When was the property built? Are there other duplexes nearby? Is monthly income based on both sides being occupied? Is monthly cash flow for both units or per unit? If both, then the margins are too thin for me.

@Lan Nguyen

Listen to what @Michaela G. said.   I had a property snatched right out from under me when I made a post similar to yours.  Most people here are ready to help you, but, there are a few that will take advantage of you.  That said, you need to post the info/data to allow people to analyze and provide good feedback.  Let me ask a few questions to get you started.

You said it is 2 separate buildings (the overhead shot looks like 3 buildings!?).  And yes it is a house hack if you are living in one of the units (paying part of the mortgage out of pocket).  How many Bedrooms/Bathrooms in each unit?

What is square footage of each unit?

What is List price?

Are the units currently rented?  What is rent rates?

What are Operating Expenses?

@Mia Edgar

Does your Monthly Expenses ($2351.34) include mortgage P&I? From the amounts/percentages listed later I am only getting $1323 in expenses. These need to be keep separate for us to evaluate the deal. You are also missing some expense items (CapEx, Lawn care/Snow removal, Garbage, any utilities, legal, accounting, etc).

What kind of financing are you using?  Remember with 5-units you can not use residential home loans.   You will need a commercial or Portfolio loan.

Hope this helps.  :)

@Mark Huang

Mark, if you haven't already done so, I recommend you get J Scott's book "The Book on Estimating Rehab Costs".  He provides system by system, task by task break down of doing Rehab Estimates.  Very good book to use and reuse.  You will be able to develop your own walk through checklist to build an accurate SOW and build your budget.

Until then you can use the square foot method of estimating (not as accurate).  Basic full cosmetic rehab on lower end properties $20 - $25 per square foot.  Upgrades $30 - $35 per square foot.  Only use this method to get a ballpark figure in your initial analysis and before you can walk the property with your contractor.

Here's to smart investing.

It sounds like you have already received documents from the Seller when you talk about property history, low maintenance history, and higher occupancy rate.  Did you receive the rent rolls and P & L statements for past 2 years already?  If so that's great then you may have a good deal if your assumptions are correct.  Keep moving forward. 

@Matthew Carducci

Matthew can you show me the math on how you came up with $466 month cash flow.

@Matthew Carducci

First, you may not have that high of expense, if you are lucky.  However, as stated you did not include all expense areas.  Such as Vacancy, Credit losses (uncollected rent and skips), Pest control, legal, accounting, leasing.  You did include lawn care, but, how about snow removal?

Every property does not have every expense obviously.  But, you must go in expecting them until proven otherwise.  Good cash flow is extremely important to me.  That's why I am very conservative in analysis.

Here's how I generally break down the 55% expenses:

10% Property Management 

10% CapEx

5%. Maintenance./Repair 

5%. Vacancy 

5%. Credit loss

5%. Tax & Ins.

5% - 10%. Utilities, Lawn care, HOA fees, etc.

5%. Misc (Pest control, Legal, Accounting, Leasing)

Of course these are adjustable (I.e. newer properties need less CapEx)

Other things to consider are age of property, category of property and neighborhood (A, B, C, D).  A & B would probably have less tenant problems and turn over.  So less maintenance required.

Remember, this is my guidelines.  Others have less stringent ones.  You may analyze 100 properties, put offers in on 10, and end up purchasing only one.  I don't know about you but I don't want OK deals, I want good to great deals.

@Matthew Carducci

What is your goal?  Income through Cash Flow? Or is it Appreciation?  If you want to be in the rental income business you need to be extremely careful analyzing your expenses.

As @James Syed stated your expense ratio for MultiFamily properties will be between 40 - 60% on average on a well maintained property.  That's why I always use 55% in my analysis.  It's up to the Seller to prove otherwise.

Additionally, low/no down payments are normally used for distressed properties that are discounted below market value.  Low down payments will result in higher mortgage payments and thereby reduce your potential cash flow.

For example using your numbers:

Income = $3,075 mo.

Operating Expenses =$1,122.75 mo. (This is only 36.5% ratio ... and you are still missing some expenses as mentioned by @Robert Burk )

NOI = $1,952.25

Finance = $375,000 - $37,500 (10% down) = $337,500 @ 5% APR 30 yrs = $1,812 mo.

Cash Flow = $1,952.25 - $1,812 = $140.25 mo. ($35.06 per unit)

Slim margins for a rental.  At 55% expense ratio you would have a negative $428.25 cash flow.

Your options as I see it is:

1.  Lower Purchase price.

2.  Bigger Down payment.

3.  Seller finance with low interest only payments that will allow you to cash flow minimum of $600 month with balloon payment at end.

4.  Walk away and keep looking for better deals.

Hope this helps.  :)

@Louis Aller

@Zak Parks brings up a good point. Unless you are house hacking you will not be able to get FHA loan with 5% down payment. You will need 20 - 25% down.

$416 month for a water bill is a problem.  Check with the local utility to see if that is normal.  There may be plumbing issues.  Or you will definitely need to sub-meter.

Built in 1900!  Has all major systems been upgraded to code?  Electrical, Plumbing, Lead paint, HVAC/Heating, etc.  When was last renovation?  How much Rehab will be required for you?  How much will it cost to bring it up to the average property in the neighborhood?  Too much?

You are missing a lot of expense information needed to do a proper analysis. PM, CapEx, Maint./repair, Vacancy, Insurance, Lawn care/Snow removal, etc.

What are comps in the area?

Just from what you have provided I don't see this property cash flowing at the stated purchase price.

@Liam Morris

What kind of units are they? 3BR, 2BR, 1BR?  Do you know current rent rates?  Are they currently occupied or vacant?  Any immediate Rehab required?

I never go by Listing Operating Expense until they can provide proof.  I am always very conservative and use 55% for expenses in my initial analysis.  I generally break it down like this:

10%  Property Management 

10%  Cap Ex

5%   Vacancy

5%   Credit Losses (Uncollected rent and Skips)

5%.  Maintenance/Repair 

5%.  Tax and Insurance 

5%. Lawn care, Utilities, HOA fees

5 - 10%. Misc.  (Pest control, Legal, Accounting, leasing, etc)

Obviously, these percentages are flexible and interchangeable.  But, it gets me started until I get the actual data to make adjustments.

$77,000 ($12,833 per townhouse).  Seems to me they could hardly be rent ready.  But, I'm not there to know.  :)

If they do need Rehab before renting, then, you will need to consider holding costs.

Hope this helps.