Hi all! I'm here in Dayton, OH looking for my first deal for a buy and hold for cash flow. Because I'm new at this, I don't yet have a lot of contacts, so I've been browsing the MLS looking for properties that could fit my criteria. Here's what I'm looking at:
1. Estimate gross scheduled rent minus a 10% avg vacancy and assume 50% operating costs for fewer unit properties (2-4), 55% for 5-9 units and 60% for 10+
2. Taking that NOI and backing into a 9% cap rate (which seems reasonable but a little on the higher end for this market) and seeing how that number compares to asking price.
* I also look at the 2% rule to kind of verify and amazingly anything that hits 2% looks on the surface like a killer deal
3. Finally I look at 100% financing at 6% over 30 years and see if the property could still cash flow $100/door per month (not that I would necessarily do 100% financing, but I'm checking to see if it can support it.
4. This is where I then take that list and send it to my agents to pull actual numbers from the listing agent.
Sorry the email is so long, but I'd love some feedback on this to see if you think I'm on the right track so far. Thanks in advance!
- 50% operating costs includes vacancy. the 50% remains the similar for any combination or number of multi units.
- 2% rule is fun and still works well in Dayton, but is a function of neighborhood. If you apply it to Beavercreek, you'll never buy a property. If you look in a warzone, you'll pay far too much.
- The MLS is stripped of good deals due to current demand. Search the FSBO properties on Zillow and other websites for a better opportunity. (Do NOT use the Zillow Zestimate for anything though)
@Darrin Carey I will definitely be there next week and looking forward to it. Just trying to gather as much info as I can for now.
- Good to know about the 50% rule - I've heard Ben Leybovich say to increase that % as the number of units increases (also about vacancy being included!)
- I don't actually value anything by the 2% rule, but I find it interesting to look at and get ideas from each area like you are saying
- Would you say that if I find something that looks good on MLS I should be wary because it wouldn't be there long if it were an actual deal?
@Anthony Whitt In the current market, it IS hard to find a good deal in the MLS. Certainly not at the list price. Three years ago, it was full of good deals.
For vacancy, 10% is a good starting point, but each property and property type is different. It may range from 6-7% to 15% or more. The larger the property, the more inclined I am to use it's historical vacancy, however I do look at the neighborhood vacancy rate also.
My mix of 1-4 unit properties around dayton probably averages a little under 10%. I had a two year period where it was 0%. By taking good care of the properties, I keep my turnover low, but the in-depth screening process means fewer tenants qualify and it takes longer to fill.
Most of my vacancies come from new acquisitions. Looking at all my current properties, most tenants are the original tenant. Some have been there for 7-8 or more years. (except one double that has more turnover).
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