Analyzing homes on the market, numbers never work.
Rental Property Investor · Boulder, CO · Member since 2019 · 144 posts · 72 votes
I get that BP is selling the sizzle a bit. I have been studying and studying. But no matter what, I simply cannot make the numbers work.
I am in a still-affordable-yet-booming metropolitan market in the southeast. The humidity is crippling. Within 50 miles, there are no homes for 100k (there are vacant lots for 99k). Homes at 150k are tear downs, or would require I would imagine, at least 30k in rehab.
There are no homes that simply require a lick of paint for under 200k. Probably 250k.
Banks I am talking to require 25% down. Let's say I get a house for 140k. 25% down is 35k. 30k rehab, that's 65k in.
A 105k loan @3.6% for 30 yr is 477/mo. I am roughly doubling that to account for all other expenditures. Estimating rents around 1200, this leaves about 250 left over. 2400/yr / 65k in = 4.5% ROI. Pathetic.
When I look in smaller markets, there are some potential homes at the right price, but the rents are around 750/mo, so that disqualifies those deals again.
What am I not getting here? This is what it's like with no mentor, just fishing around in the dark.
Signed,
Totally Confused.
@Christopher Davis Send me PM. I'm in Indianapolis and not a competitor. I'll go over numbers all day long.
@Christopher Davis
So, a couple things. I live in the Midwest so obviously different markets which is both good and bad; good for buying, bad for selling or renting. That said, I’m new to this too and have had to hunt - I mean really hunt for the right properties. I’ve analyzed hundreds of them to come up with a handful that I’ve decided to make offers on. It’s a numbers game.
$2400 a year is decent where I’m from so I wouldn’t be upset about that. I’d be thinking more long term and higher volume.
Secondly, you might look into what’s called a 203(k) loan that rolls the repair costs into the mortgage and as long as the mortgage is paid by the tenants every month and it’s cash flowing, even $200 a month, who cares how much interest you’re paying the bank? You’re not paying it; the tenant is. It also mitigates your amount of risk from a lawsuit if you don’t fully own the property so think of it as insurance.
Hopefully some of this helps or gives you a place to start. Best of luck. ;) that’s why they call it house hunting.
@Christopher Davis
I will give you 15 min. I’m an accredited investor with over 85 doors.
I will dona Zoom meeting with you and show you my last deal.
My brother n law just moved to Nashville so I’m simi interested in that market.
So I bought it for $560K and appraised at $680K 2 weeks later... Now if you want to use Zillow, Zillow has it at $757K..... my view is it is likely $700K valuation TODAY.....no future appreciation needed.....
So my $60K downpayment is now $180K to $257K, depends on which value you want to use.....
Tenant is a single guy late 20s works for Google making $190K a year, ACH the rent on day 1 of each month, so no PM needed....Vacancy is likely 2 weeks per every 5 years in SF....
So you can run the math from there.... if I prefer, I can offer tenant $20K to leave, and put the property on the market to sell for $700K TODAY.....
But I am off track a bit here... My initial intent is to show OP that are good deals on MLS.....
Some great ideas mentioned here. I will add that if you haven't done any networking with your local meetups you could be missing out on some opportunities. Just attending a few meetings got me the business cards of a few wholesalers that have been sending deals my way. Every city will be different, but it doesn't hurt to attend a few and just talk to people. A few investors I know have been giving realtors a finders fee for sending any properties their way. Some people will poo poo the networking, but seriously it does work. You get out what you put in. You can't expect deals to magically appear and jump to you. But if you put in the work you can make it happen.
An investor friend of mine bought 2 houses on my block under value and both off market deals. How? Because he happened to get a heads up from a neighbor on the block that he knew about a house possibly going for sale. That neighbor gave him his phone number. Both owners needed the money to move out of state and a fast close. He paid cash and everyone left happy.
You should be able to find something within 3 hours of any Major city. I had to go an hour outside of mine to get things a little more affordable yet the rents are still pretty competitive. Don't give up yet keep at it.
@Christopher Davis my market is WAY worse. Something that rents for 1200 is at least 150k.
@Christopher Davis my market is WAY worse. Something that rents for 1200 is at least 150k.
While that's not impressive it will probably still make you money, depending how you do it. Assuming property tax is $2000, you pay $80 a month PM plus first month's rent of $1200 for finding the tenant, $30K down, 5% interest, $500 insurance, no HOA and no repairs or reno, that's 6.7% return or $2K cashflow per year. Not gonna make you an instant millionaire but the tenants will give you a free house.
This is from my excel spreadsheet which may not factor everything that you have to. Some in my portfolio don't perform that well, but are still putting change in my pocket. It's not always about making a killing with this, multiples is where it's at.
What's that saying, "Take care of the pennies and the dollars will take care of themselves."
I get that BP is selling the sizzle a bit. I have been studying and studying. But no matter what, I simply cannot make the numbers work.
I am in a still-affordable-yet-booming metropolitan market in the southeast. The humidity is crippling. Within 50 miles, there are no homes for 100k (there are vacant lots for 99k). Homes at 150k are tear downs, or would require I would imagine, at least 30k in rehab.
There are no homes that simply require a lick of paint for under 200k. Probably 250k.
Banks I am talking to require 25% down. Let's say I get a house for 140k. 25% down is 35k. 30k rehab, that's 65k in.
A 105k loan @3.6% for 30 yr is 477/mo. I am roughly doubling that to account for all other expenditures. Estimating rents around 1200, this leaves about 250 left over. 2400/yr / 65k in = 4.5% ROI. Pathetic.
When I look in smaller markets, there are some potential homes at the right price, but the rents are around 750/mo, so that disqualifies those deals again.
What am I not getting here? This is what it's like with no mentor, just fishing around in the dark.
Signed,
Totally Confused.
Chris this is a really good thread and has brought some great information out. Thanks for posting your scenario.
I’m trying to understand how this can be considered a good investment, and not a speculation on continued price appreciation.
That “120K instant equity” is a bird on the fence, yet to materialize. And is only 60K, because you paid 60K to get it.
Usually, condominiums have HOA, but maybe yours doesn't. You don't have anything factored for PM and vacancy (usually 8% property management and 8% for vacancy), nor anything for capital expenses and maintenance repairs, nor make ready. Depending on what number you would use here, you'd end up with a $500-$800 monthly negative cash flow.
So, your 60K investment brings you a negative (!) $2,400 - $9,600 annual return. That is pretty much guaranteed. Any longer vacancy, tax increases, rental cap will only make numbers worse. So, what is the play here? A bet on SF market continuous rise?
you are both correct. Her cash flow numbers are way off. Even with the low vacancy rates of San Francisco there is also maintenance/cap expense, vacancy (even low it has to be included), misc, and even though she currently self PM the PM cost should be factored in. She is definitely loosing a lot more than $190/month.
However, the $120k has significantly already been realized. She realized a large percentage of it upon her refi. For example at 80% LTV she has already realized $96k (80% of $120k). That is money she already has in her pocket. In Ca there are virtually zero tax increases. San Francisco/San Jose vacancy rates are some of the lowest in the nation and when factoring in homes on the market is nominally 3% (but i would use higher). I suspect her HOA is included in her PITI such that the PITI includes full escrow (taxes, insurance, HOA).
$96k of profit already achieved can absorb a lot of negative cash flow but historically San Francisco rents go up at an incredible rate and there is incredible market appreciation. That negative cash flow is likely to decrease every year and soon should have better cash flow than the Midwest purchase that was purchased for its cash flow. You may think this is speculation but its track record in this area is as sure as cash flow projections. If you believe cash flow projections do not dive then I invite you to look at the rent/vacancy of Detroit or Las Vegas during the Great Recession.
Her purchase has already produced returns and is very likely to produce cash flow soon.
I would purchase that RE in a moment due to the initial return achieved from the refi. There is no looking past that she got $96k in her pocket already on a $60k investment. It would take a lot of years of cash flow on a Midwest unit to achieve $96k.
@Christopher Davis my market is WAY worse. Something that rents for 1200 is at least 150k.
While that's not impressive it will probably still make you money, depending how you do it. Assuming property tax is $2000, you pay $80 a month PM plus first month's rent of $1200 for finding the tenant, $30K down, 5% interest, $500 insurance, no HOA and no repairs or reno, that's 6.7% return or $2K cashflow per year. Not gonna make you an instant millionaire but the tenants will give you a free house.
This is from my excel spreadsheet which may not factor everything that you have to. Some in my portfolio don't perform that well, but are still putting change in my pocket. It's not always about making a killing with this, multiples is where it's at.
What's that saying, "Take care of the pennies and the dollars will take care of themselves."
The maintenance/cap expense will eventually consume all that projected cash flow. how do you project $0 maintenance/cap ex? At that rent point, the 50% rule is likely fairly accurate. So we get expenses other than mortgage at $600/month. Using your mortgage numbers I get $851/month mortgage for a negative $250/month. Hopefully you do not have too many properties that project similar or worse than this one.
Good luck
@Christopher Davis my market is WAY worse. Something that rents for 1200 is at least 150k.
My market has a slightly worse ratio and getting units below $200k/unit is very challenging and it has statewide rent control ($200k/door may get $1500 rent). Yet I made an offer last month that was initially accepted but did not work out for the seller. I am considering an offer this week
Be patient. Run accurate numbers. A poor purchase is worse than no purchase.
Good luck
@Dan H. First of all, the 96K realized profit is a dream. Unrealized yet.
For which she paid 60K. So, that "profit" drops to 36K. To realize it, you have to sell - commissions and closing will wipe out most of it.
2. A correction in the market (and I think most of us would agree that we are closer to, if not past of the peak, than in the ascension phase of the appreciation curve) and it's all gone, for an investment cash flowing negative.
3. That "profit" leaks 9K per year. If that "incredible rate" and "incredible market appreciation" doesn't pan out (and counting on it is pure speculation, not investment), any longer vacancy, tax increases, rental cap, repairs will transform this opportunity into a money pit.
Speaking of repairs, I would call finding a property for 20% under the market, without need for any repairs (minor or capital) a unicorn, not the RE investment norm or beginner territory. While occasionally existent, giving this kind of examples/advice to new folks like @Christopher Davis has the same allure of the snake oil gurus dream selling seminars.
@Costin I.
You are so clueless about SF market, but each to their own and not worth debating over....
Just to show you how I can buy a property at 20% below market without need for repair.....
https://www.zillow.com/homedetails/1925-Leavenworth-St-APT-1-San-Francisco-CA-94133/15066062_zpid/
Thank you all for the responses and all offers to help. This thread has really blown up, to my amazement -I can't keep up with my replies. I will try and follow up with some of you when I can. What a supportive community!
I’m trying to understand how this can be considered a good investment, and not a speculation on continued price appreciation.
That “120K instant equity” is a bird on the fence, yet to materialize. And is only 60K, because you paid 60K to get it.
Usually, condominiums have HOA, but maybe yours doesn't. You don't have anything factored for PM and vacancy (usually 8% property management and 8% for vacancy), nor anything for capital expenses and maintenance repairs, nor make ready. Depending on what number you would use here, you'd end up with a $500-$800 monthly negative cash flow.
So, your 60K investment brings you a negative (!) $2,400 - $9,600 annual return. That is pretty much guaranteed. Any longer vacancy, tax increases, rental cap will only make numbers worse. So, what is the play here? A bet on SF market continuous rise?
you are both correct. Her cash flow numbers are way off. Even with the low vacancy rates of San Francisco there is also maintenance/cap expense, vacancy (even low it has to be included), misc, and even though she currently self PM the PM cost should be factored in. She is definitely loosing a lot more than $190/month.
However, the $120k has significantly already been realized. She realized a large percentage of it upon her refi. For example at 80% LTV she has already realized $96k (80% of $120k). That is money she already has in her pocket. In Ca there are virtually zero tax increases. San Francisco/San Jose vacancy rates are some of the lowest in the nation and when factoring in homes on the market is nominally 3% (but i would use higher). I suspect her HOA is included in her PITI such that the PITI includes full escrow (taxes, insurance, HOA).
$96k of profit already achieved can absorb a lot of negative cash flow but historically San Francisco rents go up at an incredible rate and there is incredible market appreciation. That negative cash flow is likely to decrease every year and soon should have better cash flow than the Midwest purchase that was purchased for its cash flow. You may think this is speculation but its track record in this area is as sure as cash flow projections. If you believe cash flow projections do not dive then I invite you to look at the rent/vacancy of Detroit or Las Vegas during the Great Recession.
Her purchase has already produced returns and is very likely to produce cash flow soon.
I would purchase that RE in a moment due to the initial return achieved from the refi. There is no looking past that she got $96k in her pocket already on a $60k investment. It would take a lot of years of cash flow on a Midwest unit to achieve $96k.
Great post Dan. I agree also that I would take that deal in a heart beat.
If you can't float a little negative cash flow every month then sure, don't do it. But to everyone else that deal is a slam dunk.
@Christopher Davis I’m in Texas, and it’s similar here. The only way the numbers work for me is to put more down... up to 50% in some cases. It’s not what the “experts” tell you to do, but if it’s a long term investment and I can still get the property at least 50% off using OPM... I’m good with that.
So you don't care as much about cash on cash return? You favor a lower loan and better cash flow?
I could also pull some strings and put more down, thus lowering the loan, but a lot of the BP theory emphasizes cash on cash return.
I am calculating 20% down, which has been quoted to me by a couple lenders. I also factor in at least 10k in rehab, minimum.
@Christopher Davis Just remember, if it was easy everyone would be doing it and the returns would be meh. You’ve got to want it, bad. The people who want it the most and who are obsessed with real estate, are the ones who crush it. Nothing will get it in their way.
Good luck Christopher! You can do it.
Great comments Jess, thank you. I want it bad!
@Christopher Davis Correct. I obviously try to get the best cash on cash return I can, but like I said... I’m in this long-term. As long as I keep positive cash flow I’m good. I’m in a fortune enough situation where my family doesn’t need the rental income right now. So, I put every penny of that cash flow back on the loans. Also, like I mentioned, I don’t ever put down more than 50% (unless I find a good all-cash deal). That 50% is just my personal preference because I like knowing I got an investment property for at least 50% off.
Hey Chris, I think you are on the right track and I know you do not want to drive for dollars or anything like that but most people that find good deals are those who do things people don't want to do.
Also I looked at the numbers and your ROI is low for the first year because you did not create any sweat equity to pull out. If you are looking to cash flow 250 a month is not bad but if you are looking to have as little money in the deal, BRRRR might be your best route Hope this helps.
You are missing equity pay down (principal) and property appreciation say 3% per year (your example is roughly 2x leverage makes it 6%). In a steady appreciating market your total return should be >10% per year in your example. Not really that meaningful if your total cost is "roughly doubled".
Roughly doubling the PI to factor my total monthly cost saves a lot of time, and it's an estimate. TI, cap exp, vacancy, a maintenance piggy bank, seems like a reasonable thing to me. If I am analyzing 10, 20, 30, listings, it saves time versus calculating every single line item, and how each line item may differ based on whatever variable. If I'm missing something please advise, thanks.
@christopher @Andrew A.
Clarksville, TN was mentioned as an option. It was just named “the best place to live in America right now” by money.com
You may not agree with them but it might create some extra interest in the area
Sorry I thought I had included a quote. FNG here. What is the rationale behind not buying sfh above 100k per door?
Rents won’t start to add up. Way tougher to find tenants when rent prices are higher. And higher rents are first to get hit with an economy tank.
70k to 100k per door.
Big multi family would be good.
Or single family is ok if it works out. Buy for 80k rent for 1000. But when you scale have to buy larger buildings
@Dan H. First of all, the 96K realized profit is a dream. Unrealized yet.
For which she paid 60K. So, that "profit" drops to 36K. To realize it, you have to sell - commissions and closing will wipe out most of it.
2. A correction in the market (and I think most of us would agree that we are closer to, if not past of the peak, than in the ascension phase of the appreciation curve) and it's all gone, for an investment cash flowing negative.
3. That "profit" leaks 9K per year. If that "incredible rate" and "incredible market appreciation" doesn't pan out (and counting on it is pure speculation, not investment), any longer vacancy, tax increases, rental cap, repairs will transform this opportunity into a money pit.
Speaking of repairs, I would call finding a property for 20% under the market, without need for any repairs (minor or capital) a unicorn, not the RE investment norm or beginner territory. While occasionally existent, giving this kind of examples/advice to new folks like @Christopher Davis has the same allure of the snake oil gurus dream selling seminars.
With the current tax laws I hope to never realize the gain because when realized is when you pay the taxes. Either 1061 the RE or die and get value re-baselined. If the money is in my pocket to spend or reinvest tax free that is what I desire over realized gain. She has $96k in her pocket and $84k of equity based on the typically conservative refi appraisal on a $60k investment. I have little doubt the resale value is higher than her refi appraisal.
My net worth is largely comprised of unrealized value as I suspect is true of a very large percent of the top 1% and 2% net worth individual’s net worth
You think projected cash flow is more sure than San Francisco appreciation but historically this is definitely not true in many markets. Look up appreciation of San Francisco on case shiller. You know what you will see? 2 declines of more than one year in the last 60 years with every decline recovered in a short period of time. Look at rent rates/vacancy rates for Detroit or Las Vegas during Great Depression for what can happen to cash flow projections. You do your research on the market and purchasing for appreciation is no more speculation than expecting the cash flow to continue going forward. Both can fail to happen but if you do your research, you can minimize the odds of it happening.
The San Francisco appreciation has never failed to happen over a 10 year span since home prices have been tracked. The $9k a year negative cash flow is a pessimistic projection. I would use around 50% of that. It is likely to decrease each year. Using your numbers of negative cash flow, she can handle 10 2/3 years with her current cash out. That is significantly longer than San Francisco's longest depreciation period since home values have been tracked. Tax increases cannot happen without a 2/3 vote approval which is not going to happen in my life on SFR (it may happen on commercial). What you refer to as incredible appreciation is the normal for San Francisco. What sort of cap expense cannot be covered by the $96k she has in her pocket from the refi?
Finding 20% below market is a challenge but done all the time/every day. Many flips are purchased at least this much below market. So referring to it as a unicorn is a bit extreme, but typically they do not just fall into your lap but take effort to find
I think @Diane G. Is correct that RE is local. Your understanding of the San Francisco market is minimal (the market that Case Shiller lists as having produced the best Buy n hold rental return in the US for this century).
@Christopher Davis
Hey Christopher,
I'd be happy to grab coffee or lunch and help you talk through this!
I know it's frustrating starting out, especially here. They're trying to make Nashville like NYC or LA 😅😫😫
Best,
Mark Douglas
Unless you are super rich or somehow got lucky with a deal, everything else is way overpriced. Outta 100 you might find 1 that will cash flow but with a lot of extra cost of rehabilitation. It’s just best to save that money and wait till market correct itself in year or so and buy something bigger and better. I’m sure they are already a lot of people saving and getting ready to take advantage of when the market fixes itself. I see no reason for rushing to buy something with little or no cash flow. When the market correct itself, seller will be fixing everything new and you can buy it as almost new :). So unless you can find that perfect deal with cash flow, just save up so when the market comes around. You’ll be all set :)