All Forum Posts by: Matt Maluchnik

Correct, that's part of my question.  Where do people get that equation from?  And am I just using it in the wrong context?

I’m wondering if some of my offers are TOO low? And perhaps I can increase my chances of finding a good deal. Here are the two ways to analyze this deal..which way is correct?

Strategy: Buy and Hold for long term

Location: Elmore, Ohio

Type: Single Family Home

ARV: $103,000

Repairs: $40,000

-=1st Way to Analyze=-

Max Offer = .75*ARV – Repairs = $37,250

Thoughts: Everyone mentions this equation, but the issue I’m running into is that when I use the second way to analyze..the Max Offer from this outcome is too high to make sense.

-=2nd Way to Analyze=-

*Projecting Annual Property Operating Data Yearly *

Financing: 5.125%, 30 year, 20% down.

Closing Costs: $2,500

Gross Scheduled Income - $12,000

Vacancy Allowance – 5%

Advertising - $100 (w/ 2% growth rate)

Insurance - $700 (w/ 2% growth rate)

Lawn/Snow - $400 (w/ 2% growth rate)

Taxes - $2,323.42 (w/ 2% growth rate)

Property Management – 10% of Gross Operating Income

Repairs – 10% of Gross Operating Income

CapEx Reserves – 10% of Gross Operating Income

In this scenario…if I purchase it at $8,183, then my total cash investment is $44,137…then my COC Return starts at 9%, then 9.25%, then 9.5% yearly ect….so I couldn't pay much more then that (trying to get 9-10% COC). That's a long way off from the $37k from the other offer.

Thoughts anyone? Seems like when I’m running the numbers in detail like this I keep getting extremely low offers.

I was told by an agent who lists a ton of HomePath properties in our area - don't bother making an offer on a HomePath property unless your within 10% of what they are listed at.  "They will always say no".

This sounded a bit extreme, but yet this guy has been a real estate agent for many years and has had most of the HomePath listings in my area.

Thoughts??

Thanks for the response Jaysen,

What IRR and COC do most investors look for? Were my goals alright? Spending money on mailing campaigns at the moment, so far no deals, but I want to make sure these numbers are okay for goals.

Also, just to be clear....If I wanted to sell a Duplex or Triplex years down the road, are other investors buying them based on Cap Rates?  Or ARVs?  I want to make sure I price it accordingly for the projections.

Can someone please analyze this deal and let me know if it looks like I'm doing this correctly.  I've made a few offers doing math similar to this and still no deals, so I just want to check in and make sure I'm not being overly cautious.  Thank you!

-=DUPLEX=- (both sides currently rented)

Side 1: $450/mo

Side 2: $450/mo

Owner Pays: $938/yr for Water

**Financials For Broken down for YEARLY**

-=INCOME=-

Gross Income: $10,800/yr (2% growth rate)

Vacancy: 3%

-=OPERATING EXPENSES=-

Advertising: $100/yr (2% growth rate)

Insurance: $750/yr (2% grown rate)

Lawn/Snow: $300/yr (2% growth rate)

Legal: $100/yr (2% growth rate)

Property Management: 10% of Gross Operating Income (factor's in vacancy %)

Repairs and Maintenance: 10% of Gross Operating Income (factor's in vacancy %)

Funded Reserves for CapEx: 10% of Gross Operating Income (factor's in vacancy %)

Taxes: $1,312/yr (2% growth rate)

Water: $940/yr (2% growth rate)

-=Financing=-

20% down, $3,000 closing Costs, 30 yr. Mortgage at 5.125% (recent quote by bank), put about $3,000 into the property year one for mixups.

-=Future Selling Price=-

Calculated based on 8% Cap rate, starts at $60,600 and goes up every year based on above financials.

-=Taxes=-

Depreciable Amount is 75%, also using 27.5-Year Straight Line depreciation

-=Spreadsheet Results=-

BUY PRICE: $48,666

CASH INVESTMENT: $15,683 (includes down payment and initial fixups)

Cash On Cash Return (Cash Flow Before Taxes/Initial Investment) -- starts out at 8% and goes up from there every year until about year 10 at 13%.

Modified Internal Rate of Return, After Tax -- starts out at around 17.9%..then goes down to about 12.83% in year 10 if I resell it.

NOTE: This is for a Duplex, so resell value on these I'm basing off of Cap Rates for the area.  When doing Single Family Homes I've been using Appreciation Rates of 1%.  I'm having difficulty figuring appreciation rates because I'll see values of -.98% over past 10 years...but past 2-5 years will give me rates of 2-3%.  So just to be safe I'm using Yearly Appreciation of 1%.

GOALS: I'm trying to get Cash On Cash Returns of 8% minimum year one..and looking for a MIRR of at least 10% in year 10.  Are those good numbers?

If a lease option has two different contracts --- the Lease, and then the Option (which is paid for)...what happens when the tenant decides to break the lease, but yet the Option still has another 2 years on it?  Are you able to link the option in such a way as to say....If they break the lease, then their option is Null and all monies are forfeited ?

I'm speaking with a local mortgage lender...and it's basically a small business that packages loans..then sells them to a larger entity that buys them.

As someone who's started a couple companies...I thought to myself...well why don't I just get who they are selling to and package my own loans as I do my own deals...cut out the middle man and save a few thousand dollars on broker fees ect.

Anyone else currently do this?  Did I simplify this too much?  I'm assuming it's just finding the criteria this BUYER has, then filling out the proper information to sell to them.  I close myself using Cash from my new 'mortgage company', but immediately resell the loan to one of these companies.

When someone says they 'invest for cash flow', what do they mean by this? Does that mean they don't look at specific return factors like IRR and/or Cash-on-cash return? Or do they mean they never consider debt pay down and/or appreciation?

Had a Lender say.... "No one can get you a loan on an investment property unless you have already lived in a property that you own for at least the past 12 months." (My situation: great financials, but live in apartment due to extensive travel) Bottom line, lender is telling me I won't be able to Finance any investments.

Side note: I keep using 5% Vacancy, 5% Repairs, 10% Management, and a CapEx % that gets me around $150-$200/mo which is usually another 10-15%.