New deal analysis rookie investor

8 Replies

This is my first deal and I am looking to make sure that I do it right.

I am looking at a St Louis really old 4 plex which was recently updated in a C area. (New roof, tuck point and plumbing stacks). The heaters and furnace are old. I am yet to get it inspected so this assumes that inspection will go through.

I put it an offer for $120k ( with closing and some rehab another 14k would be needed). At 25% I will be all in at $44k. 

Here are my expense numbers (all monthly) Rentees pay utilities.

1) PITI - 483

2) Insurance - 120

3) Water and Sewer - 220

4) Repairs - 220

5) Mowing - 25

6) Vacancy and Capex - 220 (110 each)

7) Garbage - 56

8) Management - 220

9) Taxes - 81

The rent is expected to be 550 per door or 2200 all in. The CF comes to about 554. 

My main concern is CapEX. I feel that 5% or 110 is on the low side. How to in general estimate it? Have I missed any other cost item?

Also would love to hear thoughts from experienced folks here esp from St Louis, are these decent numbers?. I want to make sure I do it right. 

Account Closed in St Louis that can chime in with better estimates. 

Where exactly is the property because unless it is in a really horrible area $550.00 sounds really low for the market

His numbers aren't far off, I have a duplex in south city St. Louis, dutchtown neighborhood, and almost every one bedroom in the area is $500-600.  Yard are also small so $20-25 is on par, I've gotten quotes for those numbers.

Account Closed Your water and sewer number looks like an estimate.  Call the STL water department and ask them if the property is metered or flat rate.  And ask for numbers for previous water bills.

If you think the CapEx is low, double it and set a comfort threshold. Then, once you have that much, you can cut the savings rate back down and take the extra cashflow.

Basically its all one bucket of money anyway. If you under allocate for CapEx, it will dig into your cashflow anyway. If the number still make a solid investment with 2X CapEx, great.

@Avi Garg thanks for reaching out and we actually ran the #'s for Account Closed. Let me explain some of them. First off yes they are a estimates and best guess on what the will be based on what I own and manage. The BP calculators are great but do have some limitations:

  • Mowing: ( we typically charge $25 per mow and we mow 2 a month 6 months out of the year).  That is how it comes out to be $25 per month. 
  • Water and Sewer is not metered and is based on Square footage, bedrooms and bathrooms
  • Trash in st louis city is $14 a unit (they just raised it)
  • Insurance is based on what we're typically able to get.
  • Vacancy has been running about 5% which is a general statement. ( This is based on averages of everything we manage in south city) Winter and transitional neighborhoods can take longer especially during certain times of the year. 
  • CapEx: We use 5% as a placeholder until we do inspections, then we can evaluate all the items that go into this. This building does have a new roof, new windows, tuck pointing, sewer lateral replaced, and two renovated units with new appliances all within the last two years.

Hey Account Closed manages for us. With just about a year of data under my belt, I've found his estimates to be dead-on. Water, Sewer, and Trash are fixed by the city so it's an easy calc. Our policy with Shelter Insurance is around $90/month so $120 is a good estimate until you get a quote. Our repairs and maintenance have been $125/month, but our building had been very well-maintained by the prior owner so figuring a higher number is a good idea for you until you get to know this property. Our vacancy has been 4-5% and mowing has been an easy $50/month in the summer ($0 the other 6 months, so $25/month is right) with no issues. We average $550/month for our 1-bedrooms and just raised one of them so our average might be a little higher now.

You might consider calling the city/assessor and asking if they have a number for your 2018 property taxes. The city has been raising them a lot in some areas. We got a 10%+ bump 2 months after we closed, so that would have been good to factor in ahead of time.

As far as CapEx, we had 1 vacancy to fill when we closed so basically broke even for 3 months and since then we've cash flowed like clockwork (knock on wood), hitting our 10-11% cash-on-cash return estimate over the course of the full 9 months. We've added all that to our reserves until we get some a sense of what our CapEx is going to look like over time, so whether you figure 5-10-15% for reserves, you should have enough cash flow at these numbers to set aside as much as you're comfortable with.

Thanks everyone for chiming in. Yes, @Peter MacKercher knows his stuff pretty well and I have confidence in him!

One other detail question. Is it good practice to use time value of money while accumulating reserves, for instance $100 a month for 30 years accumulates to $36k whereas if I assume a monthly appreciation rate of say 0.66% ( backing off long term SPY rate at 8%) I get a figure of $150k which is heck of a lot different. Curious what people feel?

@Gaurav Bhalla

Who is going to be managing the property? Is 10% their only fee, or do they also charge any trip charges, or lease fees or renewal lease fees?  

How is the parking at the property?  If you have a garage (prob. not with a 4-plex in St Louis), but thought I would ask.  Garages help keep tenants longer term, so less vacancy.  Have you had the sewer inspected?  That can be a sneeky expense.  Also is the water line from the street new or newer?  If you plan to remodel and flip it later, the city will require you replace it if it is old, depending on the size of the street line and the line size you need for the house (prob. 1.5inch.)  Your looking at 3500-5500 to replace that.  FYI. 

Also would it be approved as a historical building?  If so, rehabbing it can get you tax credits!  cheers.

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