Please help me understand Variables in Rental Property Calc's

14 Replies

I've started to try and analyze properties, to get into the practice, however there are several variables that I do not know when it comes to estimating.  I'm aware these are very beginner questions, and appreciate any help you can offer

1. When you figure out the Interest Rate, how do you determine what number to use?  Do you have to go figure out what banks would charge *you*, as in go get preapproved/prequalified before this is analyzed?   If not, where do you recommend I find the Interest Rate information, so that I can have a carefuly considered analysis?

2. In Insurance, how do you come up with your numbers?  Do I have to call an Insurance company with the property address for every individual property every time, to get that estimate?  Or is there a way to figure out a comfortable guess.

3. Is there a way to figure out if I pay the utilities, or the tenant does?

4.  I have heard of Property Management fees, ranging from 6-8% in Podcasts.  How do you find the most accurate figure for your Property Management Fees?   Do you have to call several agencies in your area, and then average them to find out what they are? 

Thank you in advance.  I'd love to learn how you guys dig up certain details.  I feel like the better you understand the numbers, the better you can analyze these.

Best,
SC

Hey @Sean C.

First, have you watched the webinars here on BP that explain the process? If not, start there. After that, take the time to watch @Mitch Messer 's deal analysis series he put together. Each episode an investor goes through their deal analysis with the help of Mitch and other attendees. Fantastic content for anyone starting out in REI.

Still happy to answer your questions but I'd recommend watching the above videos first to see if you can answer them yourself after!

1. Best way is absolutely to get pre-approved or speak with a lender about current market rates for your asset class. However, I'm sure you can also find this information online. Right now owner-occupied residential you'll be around 3%. Residential investment is around 4%. Again, if you want more accurate numbers, speak with a lender. Or, speak with a lender anyways since this is the perfect opportunity to start looking for that team member.

2.  Same as the above but instead you need to speak with an insurance agent. Remember, if you're serious about investing in real estate you're going to want one on your team so why not start reaching out to some now. Give them the address of the subject property and compare their rates and what is covered. Now, you'll have a decent idea of what insurance will be for that type of property in that area and you may even have a new member of your team. I do not have an estimate on this one for you since it really depends on the area and property.

3. That one is entirely up to you. In some markets it's standard one way or the other but it's still up to you. Just make sure you adjust rent accordingly to keep with the market.

4. Same answer as 1&2, but most folks use 10% as their estimate until they've built a relationship with a PM and know the exact figure. 

It's really all about your team and constantly improving your assumptions. Each bit of new information you find on a property changes the underwriting a bit. 

Hope this helps and please, feel free to reach out to me anytime if you have other questions or just want to chat!

Hello Sean, for the interest rate I would guess around 4ish % you don't really know this number until you work with a lender. I also had this issue when starting out.

I would also say call an insurance agency and then guesstimate up or down like $30 for each property you look at depending on the price (more premium for higher priced home and more premium for damaged building)

For utilities, ask local investors

Call property managers

@Sean C.  

I am quite new to analyzing myself! What I am wondering is, are you analyzing just for practice? Or are you analyzing a true potential deal? For myself personally, I am analyzing types of properties all over the country that meet my criteria as I will be buying a long distance rental. 

I am using most of the same numbers for all of this in my initial analysis as I want to be very conservative with my numbers. 10% for property management, a higher amount for insurance (depending if the property is in a flood zone I will add more) and maybe $150 in utilities that I would have to pay month to month. For the interest rate I have been using 4.5% across the board on my analysis. I have low DTI and high 700s for credit score. I should hope my interest rate is around there. If a properties numbers still look good for my desired metrics (good cash flow) after using my conservative numbers, I will verify that all my initial calculations are correct. Like calling a property manager in that area to verify how much their monthly fee will cost me. Calling an insurance agent in the area to get a solid quote. Making sure my lender will give me the interest rate I used in analysis. verifying with my agent all of the monthly owner costs associated with the property.


In my initial analysis, if I would have to bleed a property of 2-3% extra in property management fees or I would have to pay $150 extra every month in either utilities or the mortgage just to make the deal look "decent" to match my criteria, I can pretty safely say the properties numbers are to far from comfort for me. To make the numbers better for me, I would have to either low ball on the offer or the deal just will not work for me. 

I hope this help! Cheers!

Originally posted by @Corey Frank :

@Sean C. 

I am quite new to analyzing myself! What I am wondering is, are you analyzing just for practice? Or are you analyzing a true potential deal? For myself personally, I am analyzing types of properties all over the country that meet my criteria as I will be buying a long distance rental. 

I am using most of the same numbers for all of this in my initial analysis as I want to be very conservative with my numbers. 10% for property management, a higher amount for insurance (depending if the property is in a flood zone I will add more) and maybe $150 in utilities that I would have to pay month to month. For the interest rate I have been using 4.5% across the board on my analysis. I have low DTI and high 700s for credit score. I should hope my interest rate is around there. If a properties numbers still look good for my desired metrics (good cash flow) after using my conservative numbers, I will verify that all my initial calculations are correct. Like calling a property manager in that area to verify how much their monthly fee will cost me. Calling an insurance agent in the area to get a solid quote. Making sure my lender will give me the interest rate I used in analysis. verifying with my agent all of the monthly owner costs associated with the property.


In my initial analysis, if I would have to bleed a property of 2-3% extra in property management fees or I would have to pay $150 extra every month in either utilities or the mortgage just to make the deal look "decent" to match my criteria, I can pretty safely say the properties numbers are to far from comfort for me. To make the numbers better for me, I would have to either low ball on the offer or the deal just will not work for me. 

I hope this help! Cheers!

Corey,

Thanks for weighing in.  I am brand new to analysis.   I am doing it, right now, purely for the practice, reps and insight.   I do not know if I could get a property right now if I found one, so while I get those ducks in a row, this is for exercise.

I have lined up one person on my "team".  A real estate agent, that sold my house to me years ago, and was one of the most stand-up quality humans I have ever met.  I do not know ultimately if he's the best fit, as far as if he has the knowledge of an investor.  I asked him if he invested, and he said he used to, and ended up on the bottom side of that, due to real estate volatility.

He'd also never heard of Rich Dad Poor Dad, so again, I don't know if he will stay on my "team" but what he is great at doing, is faithfully culling MLS listings and sending me those, being available for any questions (except he hasn't answered my invite to take him to lunch today, yet) and sends me local area analysis of activity, sales, and any changes and numbers indicating growth here. He also advised the finance and mortgage brokers products are always changing and recommended a couple that he highly respects.

Anyways, I'm really wanting to learn the best practices, for analyzing.  Here is what I have so far.

Initially I was analyzing *everything*.  I looked at a multi family in Asheville, a fixer upper in a place 2 towns away, you name it.

Now, as in 30 minutes ago, I think what I'm going to be doing is the fast "test" quick math using the 1-2% test.  I'll use the asking price of the property, and the Insights on the address to estimate area "rent", and plug those in.  If it pegs at 1-2% or higher, I'll dig into the weeds a bit more with analysis, and if it doesn't, no cash flow, and I'll move on.

I'll confess, I'm all over at the moment, but what I am thinking right now, is

1. "speed pay" my home off. I have less than 20k to go. 

2. Make that a rental property, for cash flow.

3. Maybe get a HELOC towards a House Hack multifamily (that eventually passes analysis, due diligence, and the careful counsel and advice and possibly someone might want to mentor me by then from the network of, I hope, friends I've made through the BP community).

4. I do not know what my credit situation might be, but I want to pull the report and get with a banker and strategize what can I do, do I need to do to get into the best position down the line, for when I am actively ready to buy.

5. Tied up in all that is a substantial investment into my website, that does bring in income (I teach online all over the world) to bring in more students via a marketing and a rebranding effort, but that would open up a cash flow, every month, in and of itself.  This would put me at least part way into the B side of the cash flow quadrant.  If that improves, my speed payoff will be that much more pronounced.

So, at present, that's my operating "plan".  

Best,

SC

@Sean C.

Welcome to BP! Love that you are practicing your analysis. All good questions that show you are really digging in. I would definitely follow the advice in the first post. Good all around info.

I would also think about getting another realtor. While they may be an outstanding human, if they don’t understand your goals and how the process works they won’t be very helpful. If you do decide to stick with them, try to educate them. Maybe you can help them get on a better path as well and you can grow together!


Originally posted by @Brenden Mitchum :

Hey @Sean C.

First, have you watched the webinars here on BP that explain the process? If not, start there. After that, take the time to watch @Mitch Messer 's deal analysis series he put together. Each episode an investor goes through their deal analysis with the help of Mitch and other attendees. Fantastic content for anyone starting out in REI.

Still happy to answer your questions but I'd recommend watching the above videos first to see if you can answer them yourself after!

1. Best way is absolutely to get pre-approved or speak with a lender about current market rates for your asset class. However, I'm sure you can also find this information online. Right now owner-occupied residential you'll be around 3%. Residential investment is around 4%. Again, if you want more accurate numbers, speak with a lender. Or, speak with a lender anyways since this is the perfect opportunity to start looking for that team member.

2.  Same as the above but instead you need to speak with an insurance agent. Remember, if you're serious about investing in real estate you're going to want one on your team so why not start reaching out to some now. Give them the address of the subject property and compare their rates and what is covered. Now, you'll have a decent idea of what insurance will be for that type of property in that area and you may even have a new member of your team. I do not have an estimate on this one for you since it really depends on the area and property.

3. That one is entirely up to you. In some markets it's standard one way or the other but it's still up to you. Just make sure you adjust rent accordingly to keep with the market.

4. Same answer as 1&2, but most folks use 10% as their estimate until they've built a relationship with a PM and know the exact figure. 

It's really all about your team and constantly improving your assumptions. Each bit of new information you find on a property changes the underwriting a bit. 

Hope this helps and please, feel free to reach out to me anytime if you have other questions or just want to chat!

Hey Brenden,
A big thank you my friend!  Super helpful advice.

I have watched, and am still watching the webinars here, on the process.  That is how I got started "practicing".  I have not seen/heard of Mitch Messer's deal analysis, but I will certainly look around for that.  I'm educating myself as much as I can.    I'm getting into the habit of the Funnel concept, of analyzing properties and identifying deals/leads.

Thank you for the tips, this certainly helps.  Of course nothing substitutes for due diligence and checking/inspecting property that makes it to the end of the funnel, but this helps me know if I'm in the ball park with a little room, if actual numbers are low or high.

Best,

SC

 

Originally posted by @Dave E. :

@Sean C.

Welcome to BP! Love that you are practicing your analysis. All good questions that show you are really digging in. I would definitely follow the advice in the first post. Good all around info.

I would also think about getting another realtor. While they may be an outstanding human, if they don’t understand your goals and how the process works they won’t be very helpful. If you do decide to stick with them, try to educate them. Maybe you can help them get on a better path as well and you can grow together!

Thank you Dave!

As I am new, what would be the best way to find another Realtor in my area?  Just call and ask if they work with Investors, or know of Bigger Pockets?  What would you advise are some good "screening" questions to asses if they are potentially a good fit?  Ask the usual "Do you personally have/investments in RE" kind of questions?

Best,

SC

 

Originally posted by @Stephen Brown :

Hello Sean, for the interest rate I would guess around 4ish % you don't really know this number until you work with a lender. I also had this issue when starting out.

I would also say call an insurance agency and then guesstimate up or down like $30 for each property you look at depending on the price (more premium for higher priced home and more premium for damaged building)

For utilities, ask local investors

Call property managers

Thank you Stephen, 

That certainly narrows things down for me.  I know who to call, and that I'm thinking about this the right way.   I like your tip on the 30.00 guesstimate to work in a high low cushion depending upon property condition.   This is all helping me!  Thank you!

Best,

SC

 

@Sean C.

Asking if they own rentals or invest in real estate is a great place to start. It is not a requirement as you can train a good agent what you are looking for, but it certainly helps.

There are tons of agents here in BP that you can connect with that already understand the process. Search them out, connect, and start having conversations!

@Sean C. It sounds like you have a good plan and that you are self identifying the inefficiencies in your processes! For me, I often lose sight of the marathon, wanting/wishing I had the intuition of a veteran already. But this is defiantly a marathon! Steady gains will win!! Goodluck and keep us posted! =)

@Sean C. - I'm more than happy to help you with some "rules of thumb" for the Asheville area, as I'm an investor and agent here.  I would assume 10% for property management.  For interest rates, it will vary depending on your situation but 4% is probably a good starting point right now.  I assume around 5% for vacancy knowing it can vary depending on the property/location, etc.  I typically see my annual insurance premium for small multi-family is similar to my annual taxes for the county so I use that as a "rule of thumb" when doing a quick screening before I get quotes.

@Sean C. much of this information can be gleaned from online.  Here's a breakdown of where I pull my information:

1. Interest Rate - Depends on the purchase money mortgage.  For Hard Moneymost lenders will have varying rates dependent on your experience level.  They can range from 7%-15% depending on the lender and their terms, and most usually have Points due at closing ranging from 1%-3%.  Be sure to pay nothing up front before closing.  The best option is to do some research on various Hard Money Lenders.  For Commercial Loansin my experience, these are best for purchasing cash flowing rentals with tenants in place, or ready to rent.  Most require 20-30% down payments, but interest rates are comparable to residential loans.  The key with Commercial Loans is that the qualification process is different, and there's no artificial Fanny/Freddie limit to the number of loans you can have.  Then there's the old staple of Residential Mortgages. I use this term to encompass everything from Government Backed Mortgages (FHA, VA, USDA) to Fixed-Rate, Adjustable Rate, Jumbo and Conventional. These mortgage generally carry interest rates close to Prime plus a little.

2. Insurance - This is dependent on the type of policy you're getting.  For rentals, I use a Landlord Policy.  For flips, I use a Builders Risk Policy. Both of these policies are significantly different from a standard Homeowners Policy.  Prices are generally lower because they aren't covering personal belongings. As a business owner, it's also a smart idea to have a General Liability Policy to cover any unforeseen issues not covered by the other policies to minimize the potential for litigation.

3. Utilities - This depends on the way the property is situated.  Single Family is easy, and it's up to you.  Multi-Family is where it gets tricky.  Some duplexes, triplexes and quadplexes aren't individually metered for utilities, most likely because they were converted from Single Family.  There are companies out there that can install individual sub-metering, and/or separately bill your tenants a portion of the entire bill (for a fee). These are called RUBS. See the difference.

4. Property Management - In most places, property management is usually around 10%.  For deal calculations, this is the number I use.  Some management companies also charge premiums on the first month's rent, or on a lease renewal.  There are companies out there that do it for as low as 7%, but beware of companies like that because they aren't making much per unit, and might not be a very good company in general.