All Forum Posts by: John Leavelle

Hello David,

I have a few questions and info for thought.

Where are you getting your expense  data from?  $2,376 (66.9% of income) seem a little high to manage a rental property.  Not saying it is wrong - just a lot.

What type of Mortgage are you using? 30 years at 3.46% APR sounds like a conventional home loan. That is only good for a 1 to 4 unit property. 7 units would require a loan from a commercial or portfolio lender. The rates and terms would be different.

You say rents are at the top of the "good value" range.  What is the Median rate for each type of room (2 Bedroom, Efficiency)?  You estimate  it to be a C property in a B neighborhood.  I assume  you want  to improve (rehab) it to a B property.  How will you be able to raise  rents if you are already  at the top of the range?

What is square footage of property?  What are you basing $25K rehab cost on? 

I have the same REI goal as you (replace W-2 income using Buy and Hold strategy). However, I have some basic requirements that each property must meet; They must Cash-flow a minimum of $100 per unit per month when purchased . I must be able to improve it to a minimum of $200 after all rehab and property stabilization (18 - 24 months). Based on the data you provided you will be Cash-flowing $78.80 per unit. Not sure how you would improve that without rai

@David Ferrette

Hello David,

You are still missing some information to be able to give a good evaluation. You did not include Property Management, CapEx, Landscaping, or Mortgage Payment/Finance costs.

You should always include PM cost in your evaluation (even if your are going to manage). CapEx is needed to build cash reserves to for future major expenses. I am estimating your mortgage payment is around $835?!

You state your partner will be living in one unit.  If so you can not have $2800 as monthly rent income.  $2100 would be the rent income.  Therefore, using your numbers here's what I get:

$2,100 - $1,401 expenses = $699 NOI (not including PM or CapEx)

Cash Flow = $699 - $835 = -$136

Negative cash flow does not look like a good deal to me.

Hello Tricia,

Those 3 zip codes are not in the area Seth was mentioning.

78221 is South side of San Antonio (Outside Loop 410)

78207 is near downtown to the West

78228 is NW of downtown inside of Loop 410

Hope that helps.  :)

Hi @Braden Hobbs,

Sorry I haven't got back to you sooner.  I work a lot of long hours.

"Can you elaborate on this? Are you just assuming 55% expenses? I understand using the 50% rule as a "safe" way of analyzing deals. But what I'm trying to find out is if in my analysis of expenses if I missed anything or way underestimated what repairs or capex are going to be in the long run?"

First, let me recommend you read @Michael Blank blog post

https://www.biggerpockets.com/renewsblog/2014/10/20/your-complete-guide-to-analyzing-a-property-in-just-10-minutes/ . He recommends the 55% for expenses (on initial analysis). I like using it because of my investing method. Distressed small Multifamily properties using Creative Financing (Little or No Money down) and the BRRR method. So I have to be extremely conservative to find GREAT Deals.

As far as assuming 50% or 55% expenses let me answer this way:

I now see you are also a Realtor. I hope you are doing well. Do you represent Sellers of Multifamily rental properties? If so, do you always list ALL expenses for your client (Seller) when you place it on the MLS? You might start running short of clients if you do! I'm not sure if Seller's share all expense information to their Realtor's. Therefore, I as a Buyer must assume I will be missing accurate income/expense data until it can be verified (proof). I must see the actual Income Statement and 1040 Tax Return, Schedule E (But, that's for Due Diligence).

Additionally, on all Balance Sheets and Income Operating Statements, that I have reviewed as part of a Marketing Packets, have a variety of discrepancies from what is in the listing.  They want to put the best impression of the property.

Here is how it seems to breakdown:

10%  Property Management

5%  Vacancy

5% Maintenance/Repair

10% CapEx (depends on the age of the property and current condition of major systems)

5% Tax and Insurance

*  You have stopped at this point.   But, you do not see the following:

5%  Credit Losses (Uncollected Rents and Skips)

5%  Misc Expense (Pest Control, Legal and Accounting, cost of finding New Tenants)

5-10% Utilities, Landscaping, HOA fees, etc (Not part of your Property Analysis)

And here we are at 50 - 55% expenses!

Obviously all properties will not have every expense or will have them at a lessor amount.  But, I want to go in expecting them until proven otherwise.

Hope this helps clear up how and why I us 55% Expense.   Request the Marketing Package on the property, if you haven't already, and dig in to see what you find.

Good luck and Invest Wisely :)

Hello @Braden Hobbs

What is your primary goal here?  11% COCROI, Good Cash Flow, or Both.

Did you get the numbers from a listing? Did you get any additional info from the Broker/Seller? Or did you develop the data yourself (i.e. Rent $900)? Why do you think it is low? Is it a Duplex or SFH modified to be a Duplex? How is it zoned?

You did not provide any finance information. I assume you were putting $42,000 as down payment (that's about 21.1%). That gives a loan of $157,000. Your NOI ($1,076) - Cash Flow ($266) = $810 for mortgage payment. which gives us a 4.65% APR (30 yrs.)

You also did not include other expense items: utilities, sewer, garbage, snow removal, lawn care. HOA fees. That is why I agree with @Kevin Booker using 50% for expenses to ensure your are making a conservative initial analysis.  In fact I use 55% as recommended by some BP experts.  Until you have actual, verifiable income/expense data from the Seller it is in your best interest to use these conservative approaches.

Is the $42,000 down payment your Total Invested Capital?  What about closing cost, any repairs required upfront (or is it move-in ready), or other miscellaneous expenses you will pay to obtain the property.   They must be included in your Total Invested Capital to determine COCROI.

To get to 11% COC you need to increase Cash Flow or Reduce your total invested capital (or both). That means a much lower purchase price. Somewhere closer to $157,000.

Have you tried the BP Rental Calculator?  It has everything you need.  Quick and easy. 

@Joshua Adams

@Joshua Adams

That really depends on what type of investing you are planning; SFR, Multifamily Buy & Hold, Fix n Flips. Some you can do with conventional loans, re-finance loans, others you might need a portfolio or commercial loan. We would need to know more of what you are interested in.

Otherwise find out what they have to offer in each category. 

30 Day Challenge – Properties #20 – 27

Here is another group of properties (8 4-Plex) on the same block.  The Seller is requesting the same List Price ($218,750) for each one.  In this group they all have the same bed configuration (2 – 1B/1B, 2 – 2B/1B), the same square footage (3,069), all separate utilities, and fully occupied.  The difference is the Tax, Expense, and Rent rates.  Again I will show analysis for 2 properties (Best and worst cash flow) to give the range on these properties.

Cash Flow per unit comparison:

#20 – Seller $378.13, My $113.13

#21 – Seller $340.75, My $93.33

#22 – Seller $394, My $121.56

#23 - Seller $404.69, My $127.19
#24 - Seller $379.19, My $113.69

#25 – Seller $378, My $113.01

#26 – Seller $387.69, My $117.81

#27 – Seller $387.69, My $117.81

Property #21:

Seller Performa:

GAI = $29, 688 (2 Bed Rents $750/$750, 1 Bed Rents $649/$325 ?)

AOE = $4,453 (Incl. Tax, Ins., Maint, Mgmt.)

Tax = $3,674.58

Vacancy = 0%

NOI = $25,235 ($2,103 mo.)

Finance = $218,750 - $63,750 (20% down) = $155,000 Mortgage @ 4.125% APR (30yr) = $740 P & I

Cash Flow = $2,103 - $740 = $1,363 ($340.75 unit)

My Analysis:

GAI = $29,688

My Expense = $29,688 x 55% = $16,328.40

NOI = $13,359.60 ($1,113 mo.)

Cash Flow = $1,113 - $740 = $373.00 month ($93.25 unit)

Property #23:

Seller Performa;

GAI = $33,300 (2 Bed Rents $725/$725, 1 Bed Rents $650/$675)

AOE = $4,995 (Incl. Tax, Ins., Maint., Mgmt.)

Tax = $3,649.43

Vacancy = 0%

NOI = $28,305 ($2,358.75 mo.)

P & I = $740

Cash Flow = $2,358.75 - $740 = $1,618.75 ($404.69 unit)

My Analysis:

GAI = $33,300

My Expense = $33,300 x 55% = $18,315

NOI = $14,985 ($1,248.75 mo.)

Cash Flow = $1,248.75 - $740 = $508.75 ($127 unit)

Additional Info:

Rents rates are close to Market.  2 Bed, 34 rentals .55 miles, $749.  1 Bed, 35 rentals .57 miles, $576.  (Rent o Meter)

Conclusion:

1. All cash flows are within my preferred minimum ($100 per unit) using my expense rate (55%). Seller did not provide all needed expense information (CAP Ex, Vacancy, and other). Those that he did provide seem very low (i.e. for #23; $1,345.57 for Ins., Maint., and Mgmt.). Again it justifies using 55% expenses in analysis.

2.  I will be requesting additional information on these properties.  I must also get comps for this area.

3.  I cannot pay 20% down payment for this Price.  I would have to negotiate a lower price in order to use creative financing.

4.  We will see going forward.

30 Day Challenge – Properties # 15 – 19

These properties are all 2-Plex on same block.  They have some differences; List Price, Square Footage, Rent rate, and Number of Bedrooms.  They all have similar cash flows.  All have separate electric and common water meters.  I will show analysis on the lowest and highest priced to provide examples.

#15 - $140,000, 1,584 sf, 2 – 1B/1B, $710, Built 1964, Reno 1985, Occupied

#16 - $140,000, 1,584 sf, 2 – 1B/1B, $710, Built 1963, Reno 1985, Occupied

#17 - $160,000, 2,088 sf, 2 – 2B/1B, $810, Built 1951, Reno 1982, Occupied

#18 - $160,000, 2,088 sf, 2 – 2B/1B, $810, Built 1951, Reno 1982, Occupied

#19 - $180,000, 1,992 sf, 2 – 2B/2B, $910, Built 1969, Reno 1984, Occupied

Property #15:

Seller Performa:

GAI = $17,040

AOE = $2,979.14 (incl. tax, Ins., Maint.)

Tax = $2,067.14

NOI = $14,060.86 ($1,172 mo.)

Finance = $140,000 - $28,000 (20% down) = $112,000 mortgage @ 4.20% APR (30yr) = $548 P & I

Cash Flow = $1,172 - $548 = $624 ($312 unit)

My Analysis;

GAI = $17,040

My Expense = $17,040 x 55% = $9,372

NOI = $7,668 ($639 mo.)

Cash Flow = $639 - $548 = $91 ($45.5 unit)

Property #19:

Seller Performa:

GAI = $21,840

AOE = $4,201.88 (Incl. Tax, Ins., Maint.)

Tax = $2,941.88

NOI = $17,638.12 ($1470 mo.)

Finance = $180,000 - $36,000 (20% down) = $144,000 mortgage @ 4.5% (30yr) = $730 P & I

Cash Flow = $1470 - $730 = $740 month ($370 unit)

My Analysis:

GAI = $21,840

My Expense = $21,840 x 55% = $12,012

NOI = $9,828 ($819 mo.)

Cash Flow = $819 - $730 = $89 month ($44.5 unit)

Additional Info:

1.  Rents are well above average market rates. 1 Bed, 35 rentals .57 miles, Avg. $550.  2 Bed, 34 rentals .55 miles, Avg. $708.  (Rent o meter)  This means there will be no room to increase rates.

2. Again, Seller does not provide much for expenses. Management, CAPEX, Vacancy, Utilities, and others are not included. This justifies using 55% in my analysis.

3.  This might be considered a good opportunity for some investors, but, I am looking for “Great” properties.  So I will pass on these.

30 Day Challenge – Property # 9 & # 10

Property #9:  $290,085 List Price

4-Plex, 3,024 sf, Built 1930, Reno 1970, separate gas & electric and common water meters.  “Updated and Excellent Condition”.  Unit 1 – 3B/1B,$775, Unit 2 -2B/1B, $725, Unit 3 – 2B/1B, $600, Unit 4 – 1B/1B, $600, All occupied.

Seller Performa:

GAI = $32,400

AOE = $4,750 (incl. tax and ins.)

Annual Tax = $2,151.55

Vacancy = 0%

NOI = $27,650 ($2,304 mo.)

Bank Finance = $290,085 - $58, 017 (20% down) = $232,068 [email protected]% APR (30yr) = $1,091 P & I.

Cash Flow = $2,304 - $1,091 = $1,213 month ($303.25 unit)

My Analysis:

Expense = $32,400 x 55% = $17, 820

NOI = $14,580 ($1,215 mo.)

Cash Flow = $1,215 - $1,091 = $121 ($31 unit)

Additional Info:

Rents are a little lower than Market – 3 Bed, 35 rentals in .60 miles, Avg. $895, 2 Bed, 35 rentals in .45 miles, Avg. $785, 1 Bed, 34 rentals in .41 miles, avg. $600. (Rent o Meter)

Conclusion:

1.  My gut feeling is to pass on this one due to my cash flow ($31 unit).  Also I intend to use creative financing to purchase properties, so, I need a “Great” deal.  Not just a Good one.  The price would need to be closer to $200,000.

2.  However, I will request additional info to validate seller’s income and expense numbers as practice.  Is there still room for upgrades to this property?  Other than a little on the rent I don’t think so!

Property #10:  List Price $369,800

Small 2-story Apartment, 10 units (I think it is actually 8 units/10 Beds), Vacant. 9,198 sf. Built 1967, Reno 1985. Estimated CAP rate is 31%. Not operating due to lack of management and needs repairs. Sold as is, no repairs will be done. Next door property (10 units of townhomes and 8 studios), mostly occupied, is also available to right buyer. You may purchase as package deal with owner financing and easy terms. Common Water and Electric meters.

Unit 1 & 2, 2B/1B, $900

Unit 3 – 8, 1B/1B, $775

Seller Performa:

(Provided on Redfin and Realtor)

GAI = $108,000

AOE = $32,000 (incl. Ins., Maint., Mgmt., Utilities, and Misc.)

Tax = $7,644

Vacancy = 100%

NOI = $76,000

(LoopNet)

GAI = $146,400

AOE = $74,000

NOI = $71,500

Additional Info:

1.  Rents stated are high for the area.  2 Bed – 34 rentals in .47 miles, Avg. $708, 1 Bed – 35 rentals in .45 miles, Avg. $550.  (Rent o Meter)

2.  Both GAI numbers provided do not reflect stated rents.

My Analysis:

GAI = $77,400 (based on $900/$775 rent rates) 2 - 2 Bed/6 - 1 Bed

My expense (55%) = $77,400 x 55% = $42,570

NOI = $34,830 ($2,902.5 mo.)

Refi = $258,860 (Using 70% LTV if List is Market Value) @ 5%APR (30yr) = $1,390

Cash Flow = $2,902 - $1,390 = $1,512 mo. ($189 unit)

Alternative Analysis using Market Rent Rates:

GAI = (2 x $708) + (6 x $550) x 12 = $56,592

My Expense (55%) = $31,125.6

NOI = $25,466.4 ($2,122 mo.)

Cash Flow = $2,122 - $1,390 = $732 ($92 unit)

Conclusions:

1.  This property(s) project would be too big for my first purchase.  But, I am still interested, it might be good for a partnership (if numbers work).

2.  Stated data (income, expense, rents) does not add up correctly.  It may include the other property.  Need more information before making good decision.

3.  Pass for now.  I will keep an eye on it for future project.

30 Day Challenge Update

Hello again BP faithful.  Completing the analysis of all the properties and posting the results on a regular basis has been difficult due to lack of time off and other demands for my personal free time (my Wife).  However, I have actually finished analyzing 30 Small Multifamily properties.  Hooray!!  I was able to analyze mostly properties in my target area, north of downtown San Antonio, with a few others scattered around other parts of the city.

I am adding some additional post following this one for you to review.  I did not include my analysis on every property.  It would take up more time than I feel necessary.  So I grouped a few together that provides a good representation of what I found.  Some were groups of identical properties with either different price points, and/or income/expense data.  I summarized those highlighting key differences.  Other properties did not have enough information provided to complete a decent analysis (i.e. missing number of beds per unit).

Here is a summary of some information I gathered for future reference:

Unit Type, Number Analyzed, List Price

2-Plex, 9, priced from $123,000 to $365,000.

3-Plex, 1, price $249,900.

4-Plex, 14, priced from $88,500 to $460,000.

6-10 Unit, 6, priced from $239,000 to $369,000.

Rents Related to Market

7 were below market rates an average of $200.

3 were at market rates.

14 were above market rate (some were way over).

2 were not applicable due to being Vacant.

4 did not provide Rent information.

What’s next?  I will be requesting additional information from the listing broker on those properties, that are still on the market, I deemed needed more in depth analysis.  I will drive by those properties to get a firsthand look at them.  After that I’ll decide if I need to tour the properties and submit a bid or Keep looking.

As always your questions and comments are appreciated.

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