Is my RENTAL CALCULATOR BROKEN

4 Replies

Hello everyone, I'm a newbie trying to purchase my first BRRRR or rental property and house hack with my family and I. However, the homes here in north NJ are over priced. I know its a sellers market out there, but all the deals that I have been analyzing are way off the asking price.....You know the home run number. I know that I have offer whatever works for me and what I'm willing to pay for, but the sellers are not even responding to me. I think my real estate agent maybe getting annoyed. Not sure if I am using the rental property calculator wrong (which I do not think I am). I am using the expenses portion to liberal? I don't know right now. Any tips would be greatly appreciated.

Also, if by the grace of G-D that the a deal goes through as far as a rental goes, anyone have a rock solid lease agreement  that I could use.  As long as it GREAT, I'm willing to pay for it!! 

THANKS BP FORUM!!!

All real estate is local. You need to get to know your market and what cap rate and expenses are normal for the area (your realtor should be your primary resource for this info). 

Rather than "getting annoyed", he/she should be able to educate you and explain. 

Something like "Duplexes in this neighborhood are generally selling between a 4-6 cap. Your offer represents a 10-cap (half of what the property is worth) and is not even going to be considered by the seller. Let's discuss ways to make this more realistic." is way more useful and productive than "Okay, I'll submit another low ball offer if you want me to...whatever you say boss".

That being said, what cap rates are multifamily assets trading for in your market, and what cap rate do your offers generally represent? If you don't know, you might want to consider going back and reviewing these basic principles.

With regards to expenses, a well-managed property should run below 50% of gross rental income for expenses. So many investors use this "50% rule" when evaluating properties. 

So, if a property brings in $1500/mo in rent, and similar properties in the area are trading at a 5-cap, your analysis would look like this:

  • $1500/mo x 12 = $18,000/yr Gross Rental Income
  • Less 50% presumed expenses = $9k/yr Net Operating Income
  • At a 5-cap, this property should be expected to sell for $180k*

(*$9,000 NOI divided by $180,000 acquisition cost = 5% capitalization rate)

With regards to lease agreements, they are generally state-specific. I'd suggest finding an attorney who specializes in working with NJ landlords and having them prepare your lease. For example, I pay $45 for lease prep by an attorney here in FL. The same attorney will usually them become a resource if you get into an eviction, security deposit dispute, or other legal matter. 

Jeff,

I thank you for your time to explain.  I have been reading many books which touched on cap rates, but your right, it is up to me to do my own diligence on educating myself much more on the fundamentals of real estate.  I did utilize that formula or the 50% rule and most of the numbers I feel are an underestimate of the possible true cost my analysis.  Also, from most of my research BP and other sources of info, the 50% rule to most investor say that it can be a dangerous tool because it underestimates true cost of their analysis.  I was a contractor for many years and understand what goes into repairs from window to doors, remodeling kitchens, laying tile, or paving a driveways.  So the calculations which I am plugging into the "Rental Property Calculator"  are basically telling me that my areas value is inflated and I need keep looking for a deal.  

Jeff, I appreciate your input and you basically lead me to my own conclusion after I reran the numbers.  Just needed someone's perspective.

@Christopher Veljkovic - I absolutely understand your concerns and would never suggest that you overpay for a property or skip any due diligence. But don't get bent out of shape trying to dial in the exact "possible true cost" of repairs and other expenses. I guarantee you that your expense estimates, no matter how refined, will never be exactly right. 

The 50% rule is used as a long term average (i.e., over 10 years or so, your expenses should average about 50%). They will probably never be exactly 50%, just like they'll never be exactly what you estimated. And sometimes, they are lower than expected and you come out ahead (or at least get to defer the pain)! 

Obviously, you always want to include known expenses like management fees, taxes, insurance, and average utility and landscaping costs as precisely as possible, and make sure you're not forgetting anything that will throw your analysis off. But beyond that, long term averages are usually your safest bet. 

For example, if a new roof costs $10k and is good for 25 years, then budget a couple hundred bucks per month for that in your capex allowance and move on to the next problem. 

This sounds like a classic case of analysis paralysis, and remember: There is a cost associated with doing nothing.

Every month you wait to get started, you are earning a zero % cap rate. And I assure you the one thing you'll regret later on is that you didn't get started earlier!

Thanks again for taking the time.  I appreciate you and your guidance!  I will take your advice.  

Also,I will always remember from now on that "there is a cost to doing nothing."  Thanks for recognizing that I had the case of analysis paralysis!!

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