I'm trying to learn to identify deals and analyze them, but I'm having some issues:
- What CapEx assumptions do you prefer to use and how do you determine that figure (based on age, size, etc. of property)?
- How do you identify investment properties from images online? I understand that visiting and touring the property with a contractor or inspector would be the best way to ge a full picture of what you're dealing with, but how do you determine that it's even worth your time to get under contract and to that point?
Thank you all in advance!
Question 1. It is an educated guess at best, and there are not hard and fast numbers, I just add onto repairs and maintenance for analysis. There are a few things that are a bit more predictable such as Comp roofs.
Question 2. You will see a property listed below the ARV then you look at the pictures and evaluate. There are some properties where nothing needs fixing, and in this case you would just move on to the next one. However if you see one or more major issues it will probably be worth it to investigate further.
@Aaron K. forgive me for asking a dumb question: How do you determine the ARV for the property (assuming it's a 2-4 unit)?
Banks will tend to use comps for 1-4 units, but this is not always a viable option, if you can figure out what the cap rate in your area is and base the ARV off of that you should be in good shape as well. (Make sure that you can actually increase rents to the estimated level before reselling if possible)
No, I wouldn't waste my time with cap rate. It has little to no relevance in analyzing 1-4 unit properties. It is especially irrelevant in determining value (i.e. ARV). Use CoC and/or IRR.
@Nate Wentworth great questions.
CapEx is fluid, but I get that you need a number to start off with -- most people just plug in 5-10% of gross scheduled income. Ideally though, once you find a good potential property and are able to walk it and determine the repairs and age of fixtures and appliances available you'd want to map out all of the replacements using the lifecycle method. I go into this quite deeply in this BiggerPockets blog post:
Determining the ARV for up to 4 units is the same as determining ARV for a single family. Here's another post on how to run comps and calculate ARV:
@Kuba F. thank you so much! I'll read those blog posts.