Analyzing Deals: How Can We Help?

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Connor Ryan
Financial Advisor · Boulder, CO · Member since 2019 · 38 posts · 75 votes
5y
One of my biggest confusions is finding the right % to take out of rents for CapEX, Vacancy, Repairs, and Property Management. I know this can vary from market to market, but always good to confirm averages from other investors.
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  • Connor Ryan
    Financial Advisor · Boulder, CO · Member since 2019 · 38 posts · 75 votes
    5y
    One of my biggest confusions is finding the right % to take out of rents for CapEX, Vacancy, Repairs, and Property Management. I know this can vary from market to market, but always good to confirm averages from other investors.
    55Reply
  • Brett McManus
    Minneapolis, MN · Member since 2020 · 94 posts · 161 votes
    5y

    Please add a check box function in the BRRRR Calc. that includes rehab in the acquisition loan!!!! Alters how holding costs, costs to close, etc. are reported.

    23Reply
  • Erick Sembrano
    Rental Property Investor · Wakefield, MA · Member since 2018 · 65 posts · 108 votes
    5y

    I'm new and just started house hacking. Looking for deals on our second house hack and I'm confused as how to apply the rules / guides (1% rule, 50%, or 70% etc) into house hacking numbers especially in a high cost of living area (I'm in Boston, MA). Any way to help place this in perspective would be appreciated!

    31Reply
  • Joe Hannigan
    New to Real Estate · La Mesa, CA · Member since 2020 · 1 post · 13 votes
    5y

    When I analyze a deal the cash flow looks okay, then I go to the bottom of the page and look at the 50% rule cash flow and it is significantly lower. Makes me feel like I'm not accounting for enough in my analysis. Still not sure on what percentages to be using for repairs and CapEx.

    13Reply
  • Lian Lebret
    Member since 2020 · 4 posts · 10 votes
    5y

    I just think the calculators are missing some key points. For example, hard money loans and how they are paid. Would be great if there was a way to know by market, the average costs for maintenance etc, as I find that my market is significantly higher than most, so the recommended percentages are misleading.

    10Reply
  • Alecia Prigmore
    Rental Property Investor · Reading, PA · Member since 2020 · 17 posts · 8 votes
    5y

    That I cant save the analysis half way through to go back to it. A link to updated property tax for the area would be very helpful also.

    5Reply
  • Dean Person
    Member since 2020 · 1 post · 6 votes
    5y

    One concern that definitely goes through my head while analyzing deals is.... am I even in the right market? I know that is taking a step back from the actual deal analysis but having confidence in the market prior can be discouraging!

    Taking the 1%/ 50%/ 70% rules into consideration wherever you are, has its limiting factors but is a really good frame of reference! Are there any other high-level rules to follow when looking at deal analytics?

    6Reply
  • Lauren L.
    Accountant · Member since 2020 · 17 posts · 31 votes
    5y

    I hope the OP replies to this because I have ALL of the questions those above have. 

    I would like to know which rules/ratios we should not budge on they indicate a deal breaker. 

    I also don't know how accurate the BP Insights rent projections are. In 2 instances I was analyzing deals where the rent wasn't even close to what is actually being paid, like less than half. 

    I also wish there was a feature where I could submit a deal for a second set of eyes. 

    19Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Connor Ryan:
    One of my biggest confusions is finding the right % to take out of rents for CapEX, Vacancy, Repairs, and Property Management. I know this can vary from market to market, but always good to confirm averages from other investors.

     Hi Connor, 

    We help a lot of first time investors in MA and NH and this is a very common question. I normally advise using rations between 5-10% for each of those categories. This will of course differ from market to market but it is supported by the fact that the banks typically use a 25% discount factor to account for all of these operating expense when they underwrite for a loan. That would equate to somewhere between 6-7% per category. If you want to be conservative go higher, if you want to be aggressive go lower. 

    All that being said when you're running the calculations in BP just be consistent so you're always comparing apples to apples across properties. If you change your ratios from property to property you won't be able to compare them on a level playing field. This is meant to help you decide which properties are worth going to see. Once you go and see the property you then cater each of the ratios to the specific property.

    For example if you find a brand new property you would want to reduce the capex bucket since everything is new. If you find a property manager you like to work with and they change 9% then you plug in that number. If you find a property that is perfect for student rentals that will have a very different vacancy % then if you find one that is 100% section 8 and all the tenants have been there 5+ years. 

    I hope this helps. 

    Best of luck,

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    17Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Erick Sembrano:

    I'm new and just started house hacking. Looking for deals on our second house hack and I'm confused as how to apply the rules / guides (1% rule, 50%, or 70% etc) into house hacking numbers especially in a high cost of living area (I'm in Boston, MA). Any way to help place this in perspective would be appreciated!

     Hi Erick, 

    Boston is a tough market for those rules. If you want to look 45 mins away from Boston the 1% rule is alive and well but if you're looking closer to Boston they just don't work with the current market environment. Your best bet is to run the rental calculator for the properties you're interested and use that as your guideline. From a househacking perspective what you're likely going to find is:

    In a 2 Family - you'll subsidize some of your mortgage but pretty much end up paying yourself market rent

    In a 3 Family - You'll live at a significant discount compared to market rent, but probably not for free

    In a 4 Family - You should be able to live for free or at least get pretty close

    I'm not sure what your current living situation is but if you're open to renting out the rooms in your househack apartment the numbers get quite a bit better. We just helped a client hosuehack a 4 family in Quincy and we're working on a 203k BRRRR Househack in Southie which is pretty cool. We've also done househacks in Waltham, Boston (proper), Revere, and a bunch of other cities around Boston. These deals do exist in greater Boston I promise but you may need to get creative and act fast with confidence when they come along.

    I Hope this helps and best of luck!

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    6Reply
  • Clint G.
    Rental Property Investor · Corpus Christi, TX · Member since 2019 · 306 posts · 176 votes
    5y

    @Connor Ryan

    The toughest part for me is coming up with an ARV. I have to rely on an agent to pull comes which isn't always ideal.

    6Reply
  • Gabriel F.
    Real Estate Consultant · Chicago · Member since 2019 · 18 posts · 11 votes
    5y

    In the Chicagoland Market in Illinois, numbers for construction, permits, legal, and municipal costs change all the time, due to budget issues. What was a $250 permit in 2018 is now a $2500 permit for the same comparable apples to apples for the same work. 

    2Reply
  • Zach GringPro Member
    Realtor · Saint Charles, IL · Member since 2020 · 126 posts · 101 votes
    5y

    @Mindy Jensen

    Incorporating the tools tab of the website into the app would be great help.

    Thanks for asking

    [email protected]630-373-2554
    6Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Clint G.:

    @Connor Ryan

    The toughest part for me is coming up with an ARV. I have to rely on an agent to pull comes which isn't always ideal.

     Hi Clint,

    Yes coming up with an accurate ARV is very difficult and even experienced agents are just using data to make a logical guesstimate. Most properties SF - 10 units are appraised based on the comparative analysis approach. So basically if you have a 2 family with 6 bedrooms they try to find three 2 families with 6 bedrooms that sold in the last 12 months and boom that's how much it is worth.

    Finding perfect comps are hard, unless its a condo in t a big complex (since you'll have perfect comps), so the appraiser then adjusts the value up or down from for the differences which can be quite a few. 

    For us we try to be conservative so look at the comps and take the lower average of the 3. For example we're working on a 2 family BRRRR/FLIP in Methuen Massachusetts. The best comps we could find that sold in the last 12 months were
    $385,000 - in disrepair - not habitable
    $450,000 - habitable, rented but finishes are very dated 
    $525,000 - Turnkey investment

    We are planning to do nice "apartment grade" finishes and for our analysis we used $430,000 as our ARV. We're still in the process of turning it over so we don't know what the bank will say yet but our Hard Money Lender agreed with the $430,000 and she is a very conservative lender.

    In terms of getting the comps for your ARV a real estate agent can pull them for you or you could just go to your favorite real estate site search the recently sold nearby to find the comps yourself.

    I hope this helps, if you can get good at estimating the ARV you'll be a very successful investor but it is in my opinion the most difficult part of the process and takes practice and experience.

    Best of luck,

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    9Reply
  • Ramsey Rimkeit
    Property Manager · Hayward, CA · Member since 2018 · 41 posts · 24 votes
    5y

    Where do I start... (analysis paralysis)

    As mentioned by @Clint G. calculating ARV is a CATCH 22: I don't want to contact a buyer's agent or the view the property until I've already analyzed the property so I don't waste their time.

    Finding Rental data for Mobile Homes? I'm analyzing a mixed MF: 1 3BR, 3 Studios and 20 Mobile Homes in one. 

    How do you find comps for a mixed property like this?

    I assume the County Tax Assessor's info is accurate but Zillow quotes something significantly higher. Which is correct?

    Capex? I can only accurately calculate this after an inspection, right? This leads to another Catch 22: I won't put in an offer until I've properly analyzed the deal so no inspection yet.

    Am I overthinking everything? Is it best to just come up with an estimate, put in an offer, and decide whether to buy after inspection, etc.? 

    3Reply
  • Janeea Wright
    Member since 2020 · 6 posts · 4 votes
    5y

    The thing that causes me the most confusion is estimating repair/re-hab costs and ARV and determining reserve amounts.

    3Reply
  • Jonathan BombaciBusiness Member
    Real Estate Agent · Lowell, MA · Member since 2019 · 1k+ posts · 1k+ votes
    5y

    @Ramsey Rimkeit short answer is YES. 

    Long Answer:

    It is certainly a catch 22 and it is very easy to get overwhelmed and get into paralysis by over analysis. I'm not sure what the process is like in California but in Massachusetts our real estate transactions start with an "offer to purchase" we then have 7-10 days to do our inspection/due diligence and then we enter the formal "Purchase & Sale Agreement". 


    Given the order operations this is the normal path our clients take:

    1. Get comfortable running the numbers in BP calculators with generic plugs
    2. Find properties worth looking at, go look at them
    3. Adjust numbers based off of highlevel estimates ($10k per kitchen, $5k bathroom, $5 per sqft flooring,...)
    4. Submit offer with a $1,000 deposit, inspection and mortgage contingency  - OFFER REJECTED

    - Repeat steps 1-4 a few times until offer is accepted, in MA that could easily be 5-10 times. 

    6. During inspection bring home inspector and contractor through the property to make sure nothing is getting missed
    7. Get a firm estimate from contractor for repairs and updates 
    8. RERUN NUMBERS based off of updated information
    9. Decision time - do we move forward as is, try to renegotiate, or back out of the deal?

    - If deal doesn't connect or make sense go back to step 1. If deal goes through then move into financing and to closing.

    The hard part is finding the property, doing the du-diligence deciding to move forward. Starting and throwing in offers is the easy part, you just have to get going. If they accept your offer and  you find out something about the property that makes it not make sense then you don't need to buy the property, of course assuming you have the right contingencies in place.  

    They talk about this a lot on the podcasts, you should focus on building a strong team. Once you find your agent they should be able to help you find comps. You should get your own agent, don't just work with the listing agent. I am a real estate agent and do tons of transactions but when I invest in areas I don't fully understand I use the strongest buyers agents I can find. The commission is a small price to pay if they save you from making a BIG mistake. 

    There should be comps out there for mobile home parks, multi-families, and mixed use properties. A good agent should be able to pull these together for you, if they can't then you're probably not working with the right agent. Plus you should have the mortgage contingency in place the bank will find comps or do an income based appraisal so if you're way off they'll deny you the loan.

    I hope this helps, best of luck!!

    Jon

    [email protected]978-710-8611
    Candor Realty4.760 Reviews
    WebsiteView Page
    20Reply
  • Ramsey Rimkeit
    Property Manager · Hayward, CA · Member since 2018 · 41 posts · 24 votes
    5y

    @Jonathan Bombaci Thanks! That answer was a great help, especially the order of operations. 

    I often wonder about order of operations while listening to the podcast episodes and currently the BRRRR audiobook.

    2Reply
  • Neil Lorenzini
    Rental Property Investor · Gainesville, FL · Member since 2019 · 8 posts · 5 votes
    5y

    @Mindy Jensen

    I would love to be able to export data/switch from one calculator to another.

    I know there are different things that would need to be entered, but much of the basic criteria would be the same.

    It would be great for example to run the same property as a straight rental, a BRRRR, or as a flip.

    4Reply
  • Mason Adelman
    New to Real Estate · Chicago, IL · Member since 2020 · 49 posts · 26 votes
    5y

    @Mindy Jensen I would definitely say finding the approximate rent of the units. Especially if you want to do a rent by the room strategy.

    1Reply
  • Ari Hadar
    Investor · Member since 2020 · 401 posts · 86 votes
    5y

    The most problematic is finding the rent/value/arv  comps. 

    One more problem is that it is not in the mobile app.... 

    One more problem you must give the average ooerating expenses to that specific location... 

    Put condition of the house and level of neighbourhood  checkbox and accordingly set average vacancy, maintenance, capex, tax, insurance 

    Let put a  picture in the android chrome app calculators 

    0Reply
  • Nathan H.
    Real Estate Agent · Fort Collins, CO · Member since 2014 · 94 posts · 78 votes
    5y

    I see a lot of people mentioning confusion when it comes to ARV and projected market rent.

    My advice is put yourself in the buyer/renter's shoes. In the ultra hot markets we're seeing right now across the US, things change fast and shortage of supply causes a lot outliers in the data. 

    In my opinion past sales aren't the most pertinent piece of info in the current climate, when trying to determine ARV. The question really is, "What are a buyer's/renter's alternatives?".

    For example, if you own 1 out of the 6 houses for sale priced between 350k-400k and everything below 350k lacks in finishes or will be a bedroom smaller, and everything above prices out your target market, you just might be able to get 400k when the past sales say the place is worth 370k. The same logic applies to rent amounts. 

    Basically ask yourself, "if I'm in the market for a house similar to what I'm selling, what are my options?. In most markets the options are scarce. 

    2Reply
  • Arian Cabrera Alvarez
    New to Real Estate · Round Rock, TX · Member since 2020 · 12 posts · 3 votes
    5y

    I am personally confused how you add PMI into the loan. If it is conventional and you get some PMI (assuming you don't pay the 20% down), where can you see it? and how it affects your cashflow by the time you reach the 80% LTV and that PMI drops.

    1Reply
  • Michael Davido
    Member since 2019 · 20 posts · 7 votes
    5y

    For me, it's wondering if I'm missing something.  It's easy to analyze properties that don't make the cut and toss them to the side with no regrets.  However, when finding one that is close, I question whether there is more to it.  It seems to recommend 1-2% for closing costs, but one bank I talked to who gave me ballpark numbers ended up being at nearly 5%.  

    I find I talk myself out of it because I'm not sure if the numbers are all accurate and it seems "too easy" just to input all the numbers, use 5% for the repairs/vacancy/capex, 10% for property management, and have it spit out a good deal.  I always feel like there is a surprise waiting.

    Brandon and David make it look so simple.  I guess I am afraid of making a major financial mistake on my first deal.

    4Reply
  • Abdul Hamid
    Member since 2020 · 2 posts · 1 vote
    5y

    Jonathan, nice long answer. But the order of operations is a great help.

    Thanks

    1Reply
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