The numbers aren’t working, what am I doing wrong?

Question

So I’m a bit frustrated trying to find my first deal. I’m looking for a mid-term rental or fix and flip in my area but I just can’t seem to get the numbers to work out. I feel like I’ve found a couple of good deals where the numbers SHOULD have worked out but my calculators are telling me different. Am I doing something wrong or have I just not found a good enough deal? Here is an example of a deal I looked at the other day that I feel like it SHOULD have worked out:

Purchase Price: $150,000

Down Payment: $37,500 (standard DSCR 30-year fixed rate)

Loan Amount: $112,500

Closing Costs: $4,500 (estimated 3% purchase price)

Rehab Costs: $50,000

ARV: $230,000

Total Cash Investment: $92,000

Property Taxes: $1,759/yr

Insurance: $2,000/yr (estimated)

Monthly Payment: $748.47

Gross Rent: $1600/mo

Vacancy Loss: $96/mo (6%)

Property Management: $166.67/mo (8%)

Repairs & Maintenance: $128/mo (6%)

Cap Ex: $48/mo (3%)

NOI: $935.07/mo (Rental Income less Vacancy and Monthly Expenses, Taxes & Insurance)

Debt Service: $748.47/mo

Cash Flow: $186.60/mo

COC Return: 2.43%

I have been shooting for a COC Return of at least 8% and just can’t seem to get the numbers to work.  Any words of wisdom or advice would be appreciated!

Mitch

Caleb Brown · Answer

It's tough in all markets. The killer with this one is putting 50K on the rehab and the rent being $1,600. If rent was 1% of the purchase price numbers would be better. Doing a true BRRR might be better but more moving parts.

Drew Sygit · Answer

@Mitchell McGuinnis conflicting info in your post.

1) You state you want to MTR, but the $1600 in rent appears to be LTR amount?

2) Property taxes: are these current amounts? How much will they change after you buy?

3) What Class of proeprty is this? You're using 6% for Vacancy & MNT which should only be done with Class A properties (in our experience).

4) No one really uses Cap-Ex for SFR.

5) Where did you come up with the $150k purchase price?- Newbies always get this wrong! You don't offer what the seller is asking, you offer what amount makes your numbers work! Many will say no, someone will eventually say yes. Yes, THIS WILL TAKE TIME & EFFORT!

Mitchell McGuinnis · Answer

So it’s not as much of an issue with the numbers as it is the deal? I guess that makes me feel a little bit better. I’ll just keep my nose to the grind stone and keep hunting for a deal. Thanks for your reply!

Mitch Davidson · Answer

Hi @Mitchell McGuinnis. There's already a ton of great feedback here, so I'll try not to duplicate.

1.	Regarding the MTR approach:   a.	Be sure there’s enough demand in the specific market.   b.	Add upfront furnishings to your expenses. And to be safe, multiply whatever you come up with by 1.25.   c.	Add a monthly expense for replacing furnishings. These items won’t last forever. They’re not assets or improvements. And unlike STR, you won’t have frequent opportunities to clean and maintain the furnishings.   d.	Add a monthly expense for whatever utilities you’ll provide. Many or most of us in MTR cover all the utilities and provide Wi-Fi as well.   e.	Be prepared for turns more frequently with MTR verses LTR, meaning gaps more often. On the other hand, with MTR you have less damage to deal with, because you’re providing all the stuff, because the tenant isn’t moving their stuff in and out, etc. And, my gaps seem to be shorter with MTR compared to LTR, meaning an average of just a week or two most of the time.   f.	Be sure there’ll be enough additional income to go MTR instead of LTR, and to pay back the initial investment in furnishings quickly.    g.	Consider that most MTR applicants only need 1-2 bedrooms and thus tend to not want to pay much more for 3 or 4 bedrooms. And some of them won’t even consider looking at homes that large.   h.	Consider that more often than not MTR applicants have a dog. By allowing dogs you’ll stand out from most of your competition, many of which are struggling STR owners, but you’ll need to take some precautions (ie, language in your lease, pet deposits, declining certain types of dogs, providing pet covers for furniture and requiring them to remain in place, perhaps fencing in a small area of the yard, etc.)2.	While closing costs themselves might be $4,500, you should also account for the following:    a.	Prepaying a year of insurance ($2,000 in your estimates)   b.	Prefunding your escrow account for sake of the next tax bill (likely a few months or $440 if you close soon and the county is the type that says it’s due by early January)   c.	Prefunding your escrow account for sake of your next insurance renewal (ie, likely 3 months or $500)3.	DSCR programs often disallow the borrower to waive escrows, meaning to pay tax and insurance bills on their own. Thus you should probably account for 1/12 of each annual amount in your monthly expenses.4.	If your rehab relates only to improving the home, you should be fine for DSCR. If the home isn’t fully habitable or functional, or there are other glaring concerns, DSCR won’t work. You’ll instead need to buy it with cash or private money, rehab, and then use DSCR as a cash-out.5.	Judging by the purchase price, it sounds like you might be buying in a rather rural area, at least by the appraiser’s judgement. They have to label the home urban, suburban, or rural. And while some of us offer DSCR for rural properties, many DSCR lenders don’t. Thus I would check into that before you get too far.6.	If you’ll pay interest on any of the cash investment, that needs to be accounted for as well.7.	Another critical question for me, if I were you, would be this. How much appreciation will there likely be for the particular market and property in the next few years? If it’ll likely be minimal, I wouldn’t bother with it unless the cashflow was going to be very healthy.

Elealeh Fulmaran · Answer

Mitch, you’re not crazy—your calc is doing its job. The deal’s just tight for 8% COC with that much cash in. Big cash in + modest cash out = crushed returns, and your ARV spread looks thin.

Quick ways to pressure test:

• Verify ARV with 3 comps—if it doesn’t stretch, move on.
• Price both LTR and legit MTR (net after cleaning, utilities, vacancy). If MTR doesn’t clearly beat $1,600 LTR, underwrite LTR only.
• Trim rehab to true “needs vs wants.” If budget won’t cut, deal won’t work.
• Renegotiate or change capital stack (private/interest-only, then refi) to reduce cash left in.

Verify ARV with 3 comps—if it doesn’t stretch, move on.

Price both LTR and legit MTR (net after cleaning, utilities, vacancy). If MTR doesn’t clearly beat $1,600 LTR, underwrite LTR only.

Trim rehab to true “needs vs wants.” If budget won’t cut, deal won’t work.

Renegotiate or change capital stack (private/interest-only, then refi) to reduce cash left in.

Decide your priority: pull most cash back or steady cash flow. At this ARV/price, you probably can’t have both.

Patrick Roberts · Answer

A couple things stand out:

- Does your monthly debt service figure include the principal component as well, because if so, that needs to be accounted for. - Closing costs are likely to be higher- DSCR loans cannot be used for distressed properties; it looks like you have the order reversed; you will need to rehab the property first, then get a DSCR loan after

Finally, the returns in rental real estate are not solely from the monthly cashflow. It's a combination of any free cash flow each month, plus the principal paydown on the debt, plus the appreciation that occurs over time. Real estate is a tax-advantaged leverage play. Looking at an annual measure of return for a single year on a rental property isnt really giving you the full picture. I recommend using IRR over a 5, 7, or 10yr timeframe to better understand and measure your return. You will need to account for transaction costs at the presumed exit as well as any tax effects to get an accurate picture that can be compared to other investment returns.

The numbers aren’t working, what am I doing wrong?

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