My First Trial Run on a property. Testing the Numbers.

5 Replies

Property is $179,000 for a 5 Bedroom Multi-Family home. 

They said the total income is $2075 for rents ( Based on a site) 

$2075 * 50% Rule = $1037.5 

20% of 179,000 is 143,200 @ 4% interest Rate makes the Mortgage $683.33

( No PMI or Property Tax because thats part of the 50% correct?)

Cashflow = $1037.5 - Mortgage

$1037.5 - 683.33 = $354.17 Cashflow

( Brandon in his 50% Video he said he likes $100 - $200 per Rental so that doesn't seem that great which is $70 per Bedroom)

CoC ROI

CashFlow * Annual /Investment = CoC

$4250 / (  20 % Downpayment + Rehab) 

How do I find rehab needed without visiting a unit or Estimate ( Unit is out of state)

Lets say it needs $10,000 of Rehab

$4250 / $45800 = 9% CoC Return

Which is just below Stock Market.. 

BUT Brandon also said that you should ALWAYS ask for 20% below Listing Value 

Lets redo the Numbers.

Property is $143,200 

Rents $2075

New Mortgage $546.93

$1037 - $546 = $491.5 

Cashflow  = $491.5 

Closer to 100$ per Unit.

Annual Cash flow $5,898 / Investment ( Downpayment + Rehab 10,000 ) $38,640

CoC Return 15%

Very good Return..

Biggest Concerns : 

How do I find out what Rents really should be?

How do I figure out what Rehab should before I hire inspector to figure out if its even worth my time to consider a property. 

Are my Calculations correct? 

@Brandyn Duff 

Hi Brandyn. I think it's fair to say that the 50% rule is a function of your expenses of your investments over time, the size of the property and the condition of each individual property. The rule is there as a guideline. With older and larger complexes your expenses will most likely be 50-60% of your Gross Effective Income. If you're buying something smaller and newer these percentages might be much lower. On duplexes to ~20 units I have found the expenses to be about 35-40%. I'd still steer clear of anything that that has expenses as 34 or fewer percentage points on 2-20 units.

I imagine from your mortgage assumptions you've supplied that you're looking to go conventional. I'd say that your rate would probably be closer to 5.25-5.5%. At 5 units and not 4 or fewer many conventional banks might not be interested. They usually like 4 or fewer or really large deals. You might get lucky though. At 5.25% you're looking at payments of $790.76. Your PMI is part of your mortgage not your expenses. Property tax is part of your expenses.

It looks to me in a best case scenario you're looking at $49.35/door. This of course is completely ignoring economic vacancy and bad debt which should be tabulated at a minimum of 5% maybe more depending on your market. This is deducted from you gross scheduled income. So (2075*.95)=1971.25. This changes your number to $38.97/door.

Anything that has to do with rehab out of the state I'd check in with J Scott. I am amazing ignorant in that area and would just lead you astray with speculation.

Some people use rentometer to find out what rents are or call local realtors. I prefer the old fashioned way. I make a spreadsheet and call up the competitors in the market. Let them know what you're doing and offer to share information if they cooperate. Ask if they are having any move-in specials to quantify the supply/demand in the market. Who knows, maybe you'll get a lead on another property as a bonus.

When dealing with multi-family you really need to have an excellent handle on what current rents are like and what direction the market is heading. These factors are paramount when determining the valuation and viability of an instrument.

Your CCR would be about 4% based off of what I tabulated. Not something to get excited about. I think as you develop more experience it might be ok to base your decision on a pro forma (in this case buying 20% less than asking price) if you really know that market. Since you are out of state, don't know the market and it's your first deal I'd not consider that at all in my decision to more forward or not. Base it on what you can verify and the worst case scenario. Making assumptions that are rosy will get you separated from your cash quickly. Be more conservative. You'll pass up a lot more deals but you will mitigate damage should you find yourself in a storm when you finally do buy.

Thanks Dave, 

Great post.. I need to do a lot more research.. I thought I knew a little but this goes to show me, I am barely on the tip of the iceberg... 

Practice makes perfect 

Your top level math is pretty accurate but is very hypothetical.

Getting just over 1% of purchase price in rents will cash flow some (hypothetically with 50% rule) but will be a pretty lousy CoC.

Generally on a 2 - 4 unit building you'll have to put down 25% (20% would be for single family homes).

For interest, you can get conventional NOO in the 4.25 - 4.75% range today dependent on your credit.

For people that are looking for $100/rental or door... they're looking for $200 of cash flow out of a duplex (2 family, 2 doors, 2 * $100)... it's not a per bedroom calculation.

Things to always watch for are taxes (I like them in the 5 - 10% of GOI range, lower is obviously better)... insurance (floor insurance can be a killer)... and utilities (many landlords pay water though few are happy about it... you really don't want to be paying gas and/or electric as that will blow 50% out of the water).  You can also look into vacancy rates and Property Management costs in your area.  They will vary some.

I look for properties that can rent for 1.33% of the cost + rehab.  At a 50% expense ratio that creates an 8% cap rate.  If the property is close to that I will look further into actual expenses.

Second, I look at available funding.  I want a cap rate that is 3 percentage points above my cost of money.  If I can get 4% funding I will settle for a 7% cap property.  At 5% it is my normal 8%. So, in my case, I consider any funding below 5% to be good.

Hope this helps.

Bill

thanks for all this information.. How do find the expenses and rent of each property? Do you just call the seller  on say realtor.com or trulia.com etc? @Nathan Emmert  

@Bill Jacobsen  

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