Deal Analysis for a Newbie

25 Replies

would love anyone's opinion on whether the deal below looks "good" to you....thanks!

OVERVIEW
Listing 109,900
Purchase 106,000
Down Payment 26,500
Closing Costs 12,393
Cash Needed 38,893
Loan Amount 79,500
Annual Taxes 4,444

CASH FLOW
Mo Annual
Income 1,480 17,760
Unit 1 800 9,600
Unit 2 680 8,160
OpEx 441 5,290
Homeowners 70 840
Vacancy 74 888
Property Management 89 1,066
Maintenance 74 888
CapEx 74 888
Utilities 60 720
NOI 1,039 12,470
Loan 435 5,220
Taxes 370 4,444
Cash Flow 234 2,806

ANNUAL METRICS
Cash on Cash 7.2%
Cap Rate 11.8%
Payback Period (Yrs) 14

Thanks Aaron. Is there anything in particular that you don't like about it? The monthly cash flow? The cash on cash? I should've been more organized in my layout and I included vacancy in OpEx. Updated per month figures below:

Gross Rent = 1480

Effective Rental Income = 1406

OpEx = 355

NOI = 1051

Mortgage + Taxes = 803

Cash Flow = 248

CoC = 7.8%

Cap Rate (using purchase price) = 11.9%

I think @Aaron K. is right.

The numbers can not tell the full story. Is it A/B/C/D class type area ? Is it in city center or suburbs ? What is the crime rate ? Unemployment rate ? Is this market expected to appreciate ? What are the needed repairs for this Duplex ? How old is the roof / water system / elctricity ? (did someone on your behalf inspect the property?)

All those parameters will impact your numbers eventually.

BTW: I think 6% property mgt. is a bit low (might not get you the value you need from it)

As I said numbers do not tell the whole story we need more info on the property and location to make an informed decision.  If the property were located in Los Angeles it would be a great deal if in Cleveland it would probably be average or below average.

@Tim Haenn I'll have to agree with others here, we need more data. For example, I see you're using 5% for several of your expenses, but what is that based on? Is this your estimate or do you have hard data backing those numbers up? It also looks like you only have 6% for your PM fee, which is quite low. Most PMs charge 8-10%. On the other hand, you have utilities listed, which hopefully your tenants would be paying. 

Generally speaking, we don't like anything with an HOA because of the cost and the hassle, but I don't know your market and what non-HOA props might be available.

As others have said, the area makes a huge difference. A $110k prop in one market could be a solid B/B+ (Birmingham) and be a total nightmare in another market (good luck finding anything decent for that price in Seattle, for example). 

I'd also want to know about CapEx items and how old they are. When was the last rehab and what was the scope? Will you need to put additional time and money into this to make it a viable rental? How much?

I know it sounds like we're being picky, but analyzing a deal is as much about context as it is about numbers, so these are the types of questions you'll have to get used to asking as you progress in your REI journey.

Thanks all! Trying to answer these questions in the way they came in. I appreciate the time and feedback as we have the property under contract (about 1.5 weeks now) and we're trying to make the final call on whether or not to proceed. 

1. The area is outside of Philadelphia in Delaware County suburbs, which explains the higher taxes. I'd guess that it's a B to B- area but as I'm new to this, I can't base that upon experience. Per neighborhood scout, the area has appreciated 40% since 2000.

2. Per neighborhood scout, crime is at 35 where 100 is safest. Individuals below poverty = 16%and median household income = 45K. I've spoken with the local zoning officer and as a result of new elected officials, he told me that they are expecting the area to appreciate but I know that won't be guaranteed. 

3. Repairs per our home inspection are probably in the 7-10K range. Much of the capex has at least 5 years usable life left except floors (9 years old) and one heating unit, which is @ year 16 of an expected 20 year life. Roof is less than a year, 1 heating unit is about a year and both water heaters are less than 5 years old. The duplex includes tenants who have communicated that they'd like to sign year long leases but we have until October to better understand the quality of the tenants before committing. 

4. Property management @ 6% is per a prop manager that our realtor, who works with other investors, put us in touch with. However, we are setting up time to discuss with others so this could change. 

5. The utilities are water and sewer based which, if I understand correctly, are typically paid by the owner because they can become liens against the house if unpaid? Only water and sewer are paid by owner as the other utilities are metered separately and paid by tenants.

Let me know if there's anything else I can provide as your experience is a huge help!

Your taxes are 4,444$ a year on a 100k house ! That’s insane ..that alone would kill the deal for me . Property management is going to be much more than you are figuring I don’t care what that realtor told you those pm have fees stacked a mile high for every little thing they do so don’t get comfortable with that 6% figure . If you had true numbers that are realistic /conservative you’d have much less cash flow and a better idea . To me I’m not seeing this as a great deal when it’s all said and done ..especially with those taxes 

With utilities you can have it in your lease that tenants pay them and take it out of the deposit if they don't.  Worst case scenario is you end up paying it anyway and get a better tenant that will pay it.  I don't know much about Philadelphia but that doesn't seem too far out of line based on what little info I've seen.

Dennis, not trying to act smarter than I am just asking a question out of curiosity. Why would the taxes matter so much if the cash flow is ok? Perhaps you don't agree with the cash flow figures, if so that would make more sense. Are you thinking long term with taxes? I have thought about the fact that paying down the mortgage entirely would only allow us to add 435 in cash flow to the property but thats years away...

Houses don't have cap rates. They have gross rent multipliers. What you're stating at 11.8% is the return on investment not cap rate. A 12% return is trash on a house. Easier terms, it's the 1% rule everyone on BP pushes because it lines the pockets of the Turnkey provider but actually make terrible investments. You should flip a B neighborhood house not rent it. Renting in an owner occupied area immediately brings down the value because people that have the money to buy don't want to live on the street with tenants because they don't cut their grass or care for the property the way an owner does so they go to the neighborhood where it isn't this way, which in turn, makes the owner on the street selling reduce the price to get it sold. 

Principle of Substitution - Walmart & Target have the exact same item. One store has it on sale. Where do you buy the item? 

Same in Real Estate. That's why the buyer went to the other street & why the seller on your street had to put it on sale to get it sold.

Never rent in owner occupied areas. 

@Tim Haenn Huh ?taxes defiantly affects cash flow .. that’s well over 4 grand that is not going in your pocket that your property income must cover and do you think that number will go down over time ? IT WoNT . How about if you try to do the brrr strategy and you improve it a great deal through forced appreciation .. when it’s reassessed at 150+ grand then you’ll be paying 6 grand in taxes ,but your rents never really go up . Your in A thin margin where if your taxes go way up because it’s worth more ,it could wipe out any and all profit turning your investment into a dog that costs you money .
@Tim Haenn Tim, I have 3 SFR rentals in Delco (1 in Ridley, 2 in Eddystone). My cash flow ranges from 225 - 350 on them. I think your numbers are decent. A couple of questions, why are your closing cost (12K) so high? And, how long have you been searching for a property. If this is the best deal you can find then go for it. Also, re Zoning officer telling you prices will start going up, I wouldn't take that advice to the bank just yet.
@Joseph ODonovan thanks Joe! Closing costs is mid labeled to the general community as its inclusive of inspections and other non close related items. I just keep it that way in my numbers for simplicity. Lol at the zoning officer comment. I appreciate the sanity check from someone who knows the area well!

@Tim Haenn are you under contract on this property? The one you are referring to appears to be, and if so, congrats on taking action! Shoot me a message if you want to discuss anything specifically about the area the property is located in. They are a handful to work with as far as U&O and other inspection items. Not to scare you away, just something to be aware of.

Also the homeowners insurance number seems low. I would budget somewhere between $1000 and $1500 annually for a multi in Delco. I self manage but I can point you to two companies I have spoken to the owners of as a starting point. I'll do that in a private message since I have not personally vetted them out.

@Tim Haenn Hey Tim I just completed my first buy and hold in DELCO. I used the BRRR method. Going through cash out refi now. Will get pretty much all of my money back bringing my COC to almost infinite and I'll have $25K equity. I'm cash flowing $275 managing the property myself. I like the $275 since I'll have no money into the deal. Not sure I would like it if I had ~$40K in the deal.

@Justin Seng thanks for the input man! I totall get that becsuse we’ve had the same reservations. Because of taxes, we had trouble trying to make the BRRRR method work in DELCO but it would’ve been preferable. If you wouldn’t mind sharing more detail on it I would love to hear it as it would serve as a great example for my wife and I. We looked at one property in particular and to make it work we would’ve needed to come in 60-70K under asking and it was only like for 120K haha.

@Tim Haenn Sure.  I feel I did get pretty lucky on my deal. 3 bed 1 bath Row house in Glenolden (Darby Township) was originally up for $110K. Came down to $80K. I offered $60K and they took it as long as inspection was for info only. At first I had reservations as to why a seasoned investor didn’t pick this up. I put $15K into it. (Did a lot of work myself) Probably could have gotten away with $10-12K but I wanted to make it nicer to attract a better tenant and make sure the after repair value was high enough that I could get my money back. 

Purchase $60K

Rehab $15K

ARV $105K

Rent $1300

Expected PITI (Principal Interest Taxes Insurance) after cash out: $875

CapEx/Vacancy/Maintenance: $160

Cash Flow: $265

My CapEx/Vacancy/Maint may be a little low but with all the work I did I'm not expecting much maintenance and the CapEx items are all in good shape and should have years left.

 I’m just getting into this so I’m no expert but anymore questions let me know...

Originally posted by @Aaron K. :

As I said numbers do not tell the whole story we need more info on the property and location to make an informed decision.  If the property were located in Los Angeles it would be a great deal if in Cleveland it would probably be average or below average.

 Cleveland.........The LA of the Midwest.