PLEASE Critique My Thought Process on a Potential Deal
Hello BP Nation,
I’m looking at purchasing my first RE investment property in the west suburbs of Chicago within the next 90 days. In an effort to mitigate the amount of catastrophic mistakes that I’ll make as a newbie, I’m running numbers on potential deals to refine my understanding. Please take a look at the following deal and provide your expert insights!
Property: Two flat 3BR/2BA main house with a 3BR/1.5BA coach house. Total rentable space: 3653 SQ FT. I estimate 40K in repair costs. This is based on internet reconnaissance conducted with a GC by my side telling me what to look for. However, the house was built in 1912 and I’m sure that a home inspection will uncover some kind of issues with plumbing, windows, roof, electrical, subfloor, or something major.
Asking Price: $470K.
Gross Scheduled Income: $3250. I haven’t validated the leases. For the purpose of this exercise I will assume the seller is being truthful.
OE: $1861. I itemized the expenses (Taxes, Ins., Vacancy, Repairs, Cash Reserves, etc.) to the best of my ability.
NOI: $1389.
Mortgage/Insurance: $2224. This is based on a 0% down VA Loan at 3.75% with the 10K funding fee being financed as well.
CFBT: (-)865
At this point, this is a dead deal but please hear me out. I looked at the market comps and found that with 40K in repairs/updates I can quickly raise the GSI to $4600. Here are my projected numbers.
Asking Price: $470K
Gross Scheduled Income: $4600.
Expenses: $2300. I’m utilizing the 50% rule as it is higher than my original estimate and thereby more conservative.
NOI: $2300
At this point, I'm looking at different ways to make this deal work. I'm not married to it, just trying to work on my thought process. If I want to maintain a CFBT of $200 per door then I must keep my mortgage and insurance as $1700 which means I should pay no more than $370K for this property. Also, I've calculated the IRR and CAP with the current numbers and, as expected, they suck. I calculated the IRR and CAP with the projected numbers and came up with a respectable (I think) CAP of 6.57% which will increase to 7.85% in 10 years. My DCR would be 1.31. My COCR would be 10.99%. My cumulative CFBT would be $79,740 after 10 yrs in addition to a net profit of $100K at resale assuming 1% appreciation per year. My IRR would be (-) 55.69% and increase to 19.06% in 10 years.
I am bracing for impact and look forward to any and all feedback. Thank you for your time.
Respectfully,
John