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.
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 :)
@Dan Heuschele
You are willing to pay for overpriced house with little or no cash flow knowing if the market correct itself you will lose 20k.
All I’m saying is, don’t just buy something just because. If there is no cash flow when market is already at the peak. You are gonna be in - If market fixes itself.
If you do find a good deal with good cash flow then go for it. Just don’t buy stuff with little or no cash flow because everyone is buying it. I have seen 2 of my friends paid 600k for house with - cash flow but they bought it because everyone is talking about RE. Buying something with - cash flow will become liability and that’s not how anyone should do business.
@Dan Heuschele
You are willing to pay for overpriced house with little or no cash flow knowing if the market correct itself you will lose 20k.
All I’m saying is, don’t just buy something just because. If there is no cash flow when market is already at the peak. You are gonna be in - If market fixes itself.
If you do find a good deal with good cash flow then go for it. Just don’t buy stuff with little or no cash flow because everyone is buying it. I have seen 2 of my friends paid 600k for house with - cash flow but they bought it because everyone is talking about RE. Buying something with - cash flow will become liability and that’s not how anyone should do business.
@Christopher Davis you need local help from long time local investors who know how to make money locally.
Google Reia Nashville
Go t meetup.org search real estate join and go to all groups till you find the personality and help and experience you're needing.
Bo is weak re being local, Reia's are the historical Orgs for the old timers,, like me. :)
Chris, several of the other replies already mentioned this, but I feel it's key. Rather than relying on MSL properties, work towards off-market properties. Whether you find them yourself (marketing, dealing with sellers, getting properties under contract), or, partner with other wholesalers to get off-market rehab projects at wholesale prices, your numbers would start looking better.
In your area you will most likely need to find off market deals. I would suggest going to some investor meet ups in your area. Check out the local apartment associations and look to connect with folks who have done what you want to do. The other option would be to invest outside of your area, but it is always easier to manage properties close to home. Feel free to dm me if you have any questions.
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.
Not saying a 4.5% ROI is good, but let's say that's just as good as it gets.
That's 4.5% compared to what? 1 or 2% in the bank? And that 4.5% is what's left after you pay down your property. And you have a property that's increasing in value at 2%, but you are only in it for 20-30%. So that 2% increase is compounded against your down payment by a factor of 3-5x. Then you also have tax advantages. Next thing you know, it's really 10+%
There is a reason so many have made so much in RE
@Christopher Davis Have you researched for any local REI meetup Group's in your area? That's where you get to connect with fellow investors, wholesalers and good contractors. Mentor may be found there. I highly recommend you to start going to those meetings. I have had many investors send me their entire portfolio and asked me if I want to cherry pick before they even list, this is simply because they wanted to scale up or had other opportunities to diversify into non-REI businesses. My last two multifamily deals came from these meetings and have a list of properties that haven't even hit the market yet.
I'm in nashville as well and MLS deals have terrible for years now. I have to do my own marketing to get anything.
just sold a CLASS C/D duplex I've owned for a while with leases and no repairs needed, rented at 1690/mo, for 192.5k. MLS. How on earth is this guy making any money...
@Christopher Davis,
Is there a way to house hack it? I know it’s not ideal, but you can generally get better interest rates and you can then do the remodeling slower and when you can afford it.
I’m on my second property here in Los Angeles and that’s how I’m making it work.
@Christopher Davis I didn’t read every reply post on here so I may be repeating something but I am under contract on my first buy and hold in Pittsburgh....I’m from California and definitely had to be open to the long distance option to find any deals that would work for me. I’ve slowed down now that I found something but I was definitely analyzing multiple deals a day in different markets until I found something that worked. Remains to be seen if I can manage the rehab and have all my math hold up but I’m learning a ton in the process even if it’s just break even! Best of luck!
@Christopher Davis when I’m shopping for income properties with my buyers the asking price is the last thing I pay attention to. We make our own numbers. The numbers will be slightly different from one investor to another so offer what works for YOU. If they don’t take it you didn’t lose a dime sending that offer.
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.
The real estate market these days is competitive. Without knowing your numbers exactly can and will hurt you. This can cause you to over pay for a property or not able to bid one. I would recommend build a spreadsheet or build a program to do it so you can account for the actual property tax, vacancy based on a given area (also based on different asking price), maintenance cost per property condition (again asking price) and etc.
Since I already spent some time on your post, I thought I might as well bring up another point that was missing in your original example. If you buy a property for 140k, spent 30k to renovate, the new property value should be greater than 170k and you should make sure it is. If this is not the case, you have overpaid for the property or over did the renovation. The additional equity gain through renovation is the key to a single family rental or a multi family rental. The right house, right price and right amount of renovation should increase this equity tremendously and therefore allows a BRRRR strategy or at least allows you to reach >5x leverage. Once you get this part down, you should be able to throw away at least 90% leads that you see on the market and only do detail analyzes on a handful that may work.
Good luck!
I'm in nashville as well and MLS deals have terrible for years now. I have to do my own marketing to get anything.
just sold a CLASS C/D duplex I've owned for a while with leases and no repairs needed, rented at 1690/mo, for 192.5k. MLS. How on earth is this guy making any money...
"How on earth is this guy making any money..."
In the last few years, I've said that 10000 times about people buying my properties or people heavily out bidding me on properties. To the point where I stopped asking, and would just shrug. Then I stopped shrugging and started eye rolling. Now I don't even do that.
@Christopher Davis
I think markets are fluid up and down may be hard to find a deal. Keep looking stick to net cap rate formula. There’s other ways to analyze. Don’t look at down payment as a negative. It can raise your net income. Other investors use that net cap when buying so remember that because someday you decide to sell.
Not sure if you've been corrected or not but that's not true. Down payment does NOT impact your NOI. And the NOI, and resulting CAP, are not effected by if you have 100% loan or no loan.
When you are looking at what type of deal is a good deal and where is a good deal for you. I would say that you need to be very cautious in asking this question, the reason is this is the "HOW" part of investing which in my opinion is the 2nd part of the equation.
I think you need to focus on the first part of the equation which is the “Why”.
Focusing on “YOUR" goals and what you want as a result of owning real estate is the most important. Sit back and ask what and how your life will be impacted as a result of owning real estate assets. The result of owning is what?? is it cash flow, appreciation, 1031, pass down to family as a legacy, this is also what your exit strategy will be. Not many people think about the end goal and the exit strategy when looking at deals. I know because I was one of those people. I kept asking if a certain deal was a good or bad deal and would go with concensus of people and make my decision. However if I ever created goals and an exit strategy then I would have realized that these properties did not align with my goals. I think it aligned more with their goals which to no fault of their own, were not even close to my goals.
So my strategy (my “How”) did not align with my goals (my “Why”).. and this was disastrous for me.
Focus on the goal end destination. Then you build your strategy that’s going to get you to your goals it’s kind of like where you’re driving to is the end destinations and the freeways are the strategy that will get you there.
No one ever asked or advised me on this and it almost made me bankrupt. Don’t ask if it’s a good or bad deal, have your definitions and strategy set first. Then focus on the market / city that will get you to your goal based on the strategy. That’s my advice I give to owners and leads that want to buy or learn to buy investment properties, we manage thousands of properties and 50/60% of our clients are new to real estate or learning how to truly build wealth and do not live locally or in the same state or country. I always stress them knowing what is a good deal for them, not for me. To me that’s helping people build wealth, not just telling them to buy or not to buy.
Good luck to you