All Forum Posts by: Ryan Tremblay

Thanks everyone for the detailed and thoughtful replies; much appreciated! I have quite a handful of comments and questions in response:

1. It's interesting to hear peoples' thoughts on using cap rate when analyzing residential properties. The inconsistence of opinions on this is consistent with what I've found elsewhere :). In general, everyone agrees you should use cap rate for commercial, perhaps half say to use it on a 4-plex, a quarter say to use it on a duplex, and a small handful say to use it on a SFH. Really interesting to hear how different people think about this!

2. Really interesting points on how owner-occupied affects the analysis between a significantly reduced loan rate and a negative cash flow justification. I hadn't really considered this because I'm not really considering owner-occupied scenarios for my own investing.

3. I didn't know about rent-o-meter.com - seems like a useful resource when starting research into a market or sub-market! Thanks for sharing!

4. The 1% rule and 50% rule seem like interesting and useful rules of thumb for doing an initial analysis without a calculator. Seems interesting also to note that you can directly relate this to cap rate (perhaps to allow for a more apples-to-apples comparison of a residential investment and a commercial investment). Specifically:

value = rent / 0.01 (estimated via the 1% rule)
NOI = 12 * rent * 0.5 (estimated via the 50% rule)
cap rate = NOI / value = (12 * rent * 0.5) / (rent / 0.01) = 12 * 0.5 / (1 / 0.01) = 6 * 0.01 = 0.06

In other words, combining the 1% rule and the 50% rule is the mathematically the same as assuming a 6% cap rate for residential. Does that sound right?

5. I appreciate the thoughts on potential hidden value. I suppose with enough experience and actually looking at the property, this is something a potential investor could identify.

6. Regarding cash flow being number one priority, that makes sense, but even with good cash flow, overpaying seems risky as it would "lock you in" to the property (it'd be hard to turn around and sell it if you needed to). It also seems like it'd make it a lot harder to get a loan, unless the property actually appraises at the seemingly inflated price. Would you agree?

Thanks again everyone for the replies to this question. Really really helpful as I try to educate myself!

Ryan

Hi BiggerPockets community - I'm in my education phase of real estate investing, and have been working hard to learn the details of financial analysis. I’ve done a fair bit of web research, and am also part to most of the way through a couple books (both recommended by BiggerPockets). I’m trying to validate my understanding of how to analyze the financials of a potential real estate deal, and am hoping someone can answer a few questions. To test my understanding, I went to the Redfin website, found a 4-plex, and worked out all the key numbers I’ve been reading about. I did all the math by hand to make sure I understood it, then I tried plugging all the same data into the rental calculator on BiggerPockets (fortunately I got the same results in both cases). Here are what I believe to be some of the key numbers:

• The property was listed for $625k
• NOI is $28,188
• Assuming a 30 year mortgage at 6.5% with 20% down and typical closing costs, cash flow would be negative $867 per month. Additionally, the debt coverage ratio would be 0.73.
• Assuming an 8% cap rate (I don’t actually have any idea what it is for the area), the property would be valued at $352k

Since I got the same numbers from doing the math myself and running the data through the BiggerPockets rental calculator, I’m assuming the math is correct. If this is the case, then I’m left confused about several things:

• This looks like an utterly terrible deal. There is negative cash flow and even with the principal being paid down, it would never break even (if the cap rate for the market is more like 4.5%, then it would be more highly valued but would barely break even after 5+ years). Am I missing something?
• Would any lender even be willing to loan money at a debt coverage ratio of 0.73?
• Why did this deal go pending after being listed for only a couple weeks? If you could increase the rent by 50%, you might end up with a valuation of around $615k (again making assumptions about cap rate), positive cash flow of around $866 per month, and a debt coverage ratio of around 1.28, which sounds much better. Is it likely that a buyer thought they could increase rent by 50% without putting much more money into the property?

I’d love to hear some thoughts on whether I’m analyzing this correctly, and also why this property looks like it is going to sell very quickly at price that does not seem to be indicative of a remotely good deal!

For reference, here is the listing for the property: https://www.redfin.com/WA/Everett/7801-Timber-Hill...

Thanks!

Ryan

P.S. Can anyone tell me if it is possible to edit the title of a post so I can fix my ridiculous misspelling of the word "analysis?" :/

Thanks everyone for the warm welcome, and also thanks for the forum and book recommendation!

Hello BiggerPockets community! I'm Ryan, from Duvall WA, and just discovered this site a couple of weeks ago after coming across Brandon Turner's The Book on Rental Property Investing. My wife and I are mutually interested in real estate investing with the goal of significantly increasing our financial freedom over time. We have not acquired any real estate yet, but we are both working on our real estate investing education. We aim to close our first real estate deal by the end of the year, while maintaining our current jobs (I am a software engineer, she is a naturopathic physician). Right now, we have our eye on rental property investing, particularly multi-family (probably tri-plex or four-plex), but we're still trying to learn all the possible avenues of real estate investment.

I'm currently neck deep in learning the details of financial analysis of potential rental investment properties, and would love some suggestions on the best place to ask questions on this topic (the Buying & Selling Real Estate Discussion forum?).

Super glad to have discovered this community and resource and hope to have enough success to contribute back as well!