Did this kill the deal?

Question

Hi All,

I've attached an image that shows two methods of running numbers on this potential cash flow property. The left image is highly detailed, the right image is percentage based. Am I being too crazy with the more detailed numbers? Did this kill the deal?

Account Closed · Answer

I have a few beginner questions about this thread such as... What exactly is a "TK property?" And a few more advanced questions about how the investment is structured and what can "kill a deal." More specifically, I too have a property I am invested in and seeking investors to pool funds together for a long-term buy-and-hold strategy. Since I purchased the unit before it broke ground and the unit will only start earning rental income after completion in 2019, the majority of my calculations are underestimates of income married up with overestimates of expenses. The specific numbers are not yet clear, but comparable properties already built in that area help to work the estimates. Since we're talking about things that may "kill the deal" what are some aspects of this deal that scare away potential investors?

Nathan Brooks · Answer

@William S. one of the things we do is when we are selling a TK house, all the cap x items are taken care of; if there isn't 10 useful years of life left we replace them. Roof/hvac/etc ...

So I think its a fair question, but could be bordering on analysis paralysis. If you want to get a deal long term, look for overall value in the operator and the way they renovate. Make sure its a quality house, and understand that there are ebbs and flows with expenses. Execute, let it ride, learn something, and repeat.

William S. · Answer

The numbers (left image) next to capex items such as roof, hvac, etc are the current age of these items. For example, roof is 10 years old. The TK provider said its 5-10 years old so I took the worst case for estimating. I've been using the chart for capex items in the below:

https://www.biggerpockets.com/renewsblog/2015/10/1...

It seems if you use the IRR method, it pretty much kills all of the single family homes with rents below $1,000/m. A couple of questions.

1. IRR seems to be the way to go for Multi-families perhaps?

2. Should you use capex % during your acquisition phase? Once you've used the cash flow to purchase a few other properties, payoff all of the mortgages to prepare for capex?

3. Have reserves set aside, and possibly invest those reserves in low-risk stocks, bonds to beat inflation costs?

I'm ready to buy, but coming across this has made me second guess everything...

Brian Skinner · Answer

It's not a bad idea to have detailed estimates for cap ex. But those are just to give an idea - there can be something that needs replacing in year 1 that you expected to last a lot longer.

It is a little tough to figure out from the spreadsheet - can you list the cap ex assumptions that went into this? Meaning price and how long to replace.

It is also important to note if you are evaluating over just the first time you have to replace something, or the new one as well. For example you have the roof at 10 years. A new one should hopefully last longer?

William S. · Answer

@Ben Leybovich

@Ali Boone

@Alexander A.

William S. · Answer

This is basically a IRR vs percentage based cash flow analysis. I'd be interested to get @Ben Leybovich @Alexander A. @Ali Boone perspectives on this as well.

William S. · Answer

The insurance is a typo. Both should be $60/m. The left image is getting into specifics. Vacancy factors in using property management with fees and Cap-Ex items being broken down into their lifespan. The right image is simply using a percentage method of calculating cash flow without going into further detail. The percentage method is what many investors use for TK properties, but after going into detail of Cap-Ex expenses the deal doesn't look very profitable. I want to be a hold investor. Do TK's not make sense because of Cap-Ex if your plan is told hold the property? Maybe investors acquire several TK's, then pay them off quickly with the initial cash flow before any major Cap-Ex items come up?

Bryan O. · Answer

@William S. If one was a more detailed breakdown it would make sense, but your numbers are different from one to the other: your insurance is higher, vacancy is higher, and capex is super high. You aren't actually comparing apples to apples there, and I'm not sure where some of your numbers come from.