All Forum Posts by: William Taylor

Quote from @William Taylor:

Quote from @Addy Chupa:

Hi William,

I ran some numbers using our tool, and I’ve included my thoughts below, along with two scenarios: one based on your exact assumptions and another with adjusted figures that I believe could make the deal work better.

Observations on Your Numbers

1. Utilities: Based on your calculations, it seems you’ve assumed the tenants will cover all utilities. This might be typical in your market, but it’s worth confirming to avoid unexpected costs.
2. Home Appreciation: You’ve estimated a 2% annual appreciation rate, which I feel is quite conservative. Personally, I wouldn’t invest in a market where appreciation averages only 2%. I aim for at least 4% to 5% as a benchmark. I recommend researching the average appreciation over the past 10 years in your target area to get a clearer picture.

As you know, in real estate, ROI comes from multiple sources:

• Home Appreciation: 
• Reno Appreciation: Value added through renovations or improvements (usually just in the first year).
• Initial Equity: The discount you achieve when buying below market value.
• Principal Paydown: 
• Cash Flow: 
• Tax Benefits: Savings from depreciation and interest deductions.

For a deal to make sense, at least three of these components—home appreciation, cash flow, and principal paydown—need to be strong. Appreciation, in particular, is crucial, while cash flow acts as the fuel to keep the property sustainable.

Your Scenario with 2% Home Appreciation

Here’s how the deal looks using your assumptions:

Year 1 Analysis

• Cash Flow: -$1,123
• Initial Equity: $51,000 (assuming a $249k purchase on a $300k market value as per your report).
• Home Appreciation: $6,000 (2% of $300k).
• Principal Paydown: $2,441
• Total Gain: $58,317
• ROI: 360.32% (on $16,185 upfront investment: 3.5% down payment of $8,715 + 3% closing costs of $7,470).

Year 2 Analysis

• Cash Flow: -$752
• Home Appreciation: $6,120
• Principal Paydown: $2,617
• Total Gain: $7,985
• ROI: 49.34%.

Year 3 Analysis

• Cash Flow: -$375
• Home Appreciation: $6,242
• Principal Paydown: $2,806
• Total Gain: $8,674
• ROI: 53.59%.

Year 4 Analysis

• Cash Flow: $9
• Home Appreciation: $6,367
• Principal Paydown: $3,009
• Total Gain: $9,386
• ROI: 57.99%.

Based on these numbers, you’d have negative cash flow for the first three years and only break even in Year 4, assuming a 2.5% annual rent increase.

Adjusted Scenario see second picture: Landlord Covers Gas and Water

In the second scenario, I assumed the landlord would pay for gas and water at $300/month while maintaining the same 2% home appreciation rate. For this deal to work under those conditions, the purchase price would need to be closer to $179k.

With your original assumptions 249k, the deal is marginally acceptable but not great, given the negative cash flow in the early years. If you need to cover utilities, the numbers tighten significantly, making a lower purchase price essential.

Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

Hi Addy, thank you for collaborating on this one with me! Your report shows that it would need a bit of a lower purchase price, and I like the numbers you used in comparison (for ex. higher Capex vs rent/maintenance). This is great info. Thank you for taking the time to do a deep dive. 2% home appreciation was also a fairly low estimate, it looks like in that area it is actually around 5-6%. Good catch there.

 I like to use the appreciation since the year 2000.  Here are my thoughts:

- last dozen years have been outstanding.   Using anything less than 12 years is only using the near best appreciation years ever.

- using year 2000 includes one significant property value decline. 
- neighborhoodscout includes the year 2000 in their free info

I would use 3% (it has 2.9% since 2000) long term appreciation.  My underwriting since 2022 has used 0% appreciation near term (5 years).  I want my underwriting to be conservative.

https://www.neighborhoodscout.com/mi/ypsilanti/real-estate

Good luck

Do you mind if I send you DM/Connection request? I ran your numbers in my own deal analyzer that I use for my clients that I want to share with you.

is this it? If so, do you know the area well?

 Hey @William Taylor! I was going to look over your numbers for you, but can you answer a few questions:

* In what zip code is this property located?

* Is this a single-family property or a duplex?

* How many bedrooms per units?

* What is the sqft of the property?

* Does the property need any rehab? If yes, how much and how long will it take?

Hi William,

I ran some numbers using our tool, and I’ve included my thoughts below, along with two scenarios: one based on your exact assumptions and another with adjusted figures that I believe could make the deal work better.

Observations on Your Numbers

1. Utilities: Based on your calculations, it seems you’ve assumed the tenants will cover all utilities. This might be typical in your market, but it’s worth confirming to avoid unexpected costs.
2. Home Appreciation: You’ve estimated a 2% annual appreciation rate, which I feel is quite conservative. Personally, I wouldn’t invest in a market where appreciation averages only 2%. I aim for at least 4% to 5% as a benchmark. I recommend researching the average appreciation over the past 10 years in your target area to get a clearer picture.

As you know, in real estate, ROI comes from multiple sources:

• Home Appreciation: 
• Reno Appreciation: Value added through renovations or improvements (usually just in the first year).
• Initial Equity: The discount you achieve when buying below market value.
• Principal Paydown: 
• Cash Flow: 
• Tax Benefits: Savings from depreciation and interest deductions.

For a deal to make sense, at least three of these components—home appreciation, cash flow, and principal paydown—need to be strong. Appreciation, in particular, is crucial, while cash flow acts as the fuel to keep the property sustainable.

Your Scenario with 2% Home Appreciation

Here’s how the deal looks using your assumptions:

Year 1 Analysis

• Cash Flow: -$1,123
• Initial Equity: $51,000 (assuming a $249k purchase on a $300k market value as per your report).
• Home Appreciation: $6,000 (2% of $300k).
• Principal Paydown: $2,441
• Total Gain: $58,317
• ROI: 360.32% (on $16,185 upfront investment: 3.5% down payment of $8,715 + 3% closing costs of $7,470).

Year 2 Analysis

• Cash Flow: -$752
• Home Appreciation: $6,120
• Principal Paydown: $2,617
• Total Gain: $7,985
• ROI: 49.34%.

Year 3 Analysis

• Cash Flow: -$375
• Home Appreciation: $6,242
• Principal Paydown: $2,806
• Total Gain: $8,674
• ROI: 53.59%.

Year 4 Analysis

• Cash Flow: $9
• Home Appreciation: $6,367
• Principal Paydown: $3,009
• Total Gain: $9,386
• ROI: 57.99%.

Based on these numbers, you’d have negative cash flow for the first three years and only break even in Year 4, assuming a 2.5% annual rent increase.

Adjusted Scenario see second picture: Landlord Covers Gas and Water

In the second scenario, I assumed the landlord would pay for gas and water at $300/month while maintaining the same 2% home appreciation rate. For this deal to work under those conditions, the purchase price would need to be closer to $179k.

With your original assumptions 249k, the deal is marginally acceptable but not great, given the negative cash flow in the early years. If you need to cover utilities, the numbers tighten significantly, making a lower purchase price essential.

Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

Got it. I just don't think you can expect a property to cash flow when you're putting 3.5% down. It's unrealistic. 

And if you base an offer price on that, you'll likely have an extremely difficult time getting any traction. 

Most investors are putting 30% down on a duplex. I'd run your numbers based on that to understand what a realistic offer would be to most people and then see if you can be competitive. 

If not, you're likely wasting your time.

@William Taylor where did you get the tax info from?

How well do you understand how the taxes may change with the uncapping of the Taxable Value?

Where did you take into account the landlord paid utilities?

Your specific variable expense assumptions are wrong, BUT you stumbled into them being correct overall.

Also, you are approaching this correctly - entering in the numbers to generate a purchase price that meets your metrics:)

Your numbers look OK-ish to me.

Some things that jump out... how are you planning to buy this with so little down? A $240k loan amount on a $249k purchase price seems crazy and I'd never expect to produce any net positive cash flow doing this.

How are you calculating your property taxes? I see people doing this wrong in Michigan constantly. And it can fluctuate a lot. If you don't know how to do this properly it can be detrimental. 

No management costs? Are you self-managing?