I'm aggressively looking for and analyzing deals and have found many that come just shy of hitting my hard metrics of $300 dollars a month cashflow and 12%COC ROI.
An example would be one that cash flows $290.55 and has a 22.83% COC ROI.
I know hard metrics are there for a reason, but I wonder if I'm going way too conservative when I'm doing my analysis?
Should I budge some numbers around to make it work or continue to stick to the line and wait till a deal hits the mark?
I am not familiar with your market and how competitive it is but personally, I would look at your ROI before the cash flow number. If you are able to find a deal with 22% ROI you are doing pretty good. In the example you gave, you cash flow is 80% higher than your target and but cash flow is only 3% lower than your target. I would take that deal!
Thanks for the response! I feel like I'm being ultra conservative on my numbers as well but I think you are right.
@Ethan Wilson , "hard metrics"? Who says that's a thing? And if it's a thing, won't too many other Investors out there know that too? (And Sellers?) So, they might offer a bit more, to see you off?
Instead/as well, do you know how to find, and fix, distressed properties? Expand your horizons?
More importantly, you can never know in advance what your exact cash flow is going to be! You're reckoning that if your "hard metric" figure comes to $300/m, buy, but if it only comes to $290.55/m, don't?
You've even admitted yourself that your figure can be set according to how conservative you might feel on any given day. (But either way, that won't affect the actual future outcome!)
I agree with Chris that your Cash-on-Cash per year return is more relevant than how many exact dollars it is per month. eg. Which is better: $300/m from a deposit of $80k, or, $300/m from a deposit of $20k? But even more important to me: is it a "bargain"? Good luck...
If you are finding 23% CoC then I would recalculate your numbers just to make sure and if it is still correct, run and jump at that opportunity! I would budget maintenance expenses as well as capEx. Look around the forums to learn about more hidden expenses you may not immediately think of.
I think I got the idea from guests on TBPP who have mentioned evaluating numbers they won't budge on before offering on a deal (Ep. 226 with David Osborn 15% COC ROI, and the book on Rental Property Investing mentions Brandon Turners's numbers, which I think are close to my own).
I definitely added the term "hard metrics" and maybe that was my misinterpretation of the metrics used to analyze deals.
I think you are right about the subjectivity of the numbers and about the unknown variable in a deal. It may just be a reason for me to back away from properties.
Do you use any specific metric to determine your willingness to offer on a deal?
Here is a snapshot of my analysis.
I went with the lowest average rental rate for a similar property.
Vacancy is 5%,
Maintenance and repairs is 8%
Cap Ex is 9%
Property Management 10%
@Ethan Wilson , my thought is to only look in markets where even at market value, I'd still get a gross rent of 1%/m. Then, I'd look for properties that will get me as much above that 1% as possible per my lowball first Offers, or even my maximum allowable Offers.
Why 1%? Because if it's less than that, it'll be much harder to make the numbers work once you're borrowing 75% of its cost. (Because, why wouldn't you maximize OPM?)*
Have you come across the "70% Rule" (of thumb)? It says that in order to get ahead in the Real Estate game and be able to scale quicker than just by saving new deposits every time, you should look at paying no more than 70% what sold comps are going for - and that includes your anticipated rehab and holding costs before renting it out (or selling it). Cheers...
* OPM = Other People's Money.
I just saw your analysis. $290/m net, forever, for just $16k outlay, seems impressive to me.
Are those sort of deals a dime a dozen in that location? If so, might it be a rough neighborhood? Is there actually more risk rather than less risk in your percentages?
What if vacancy costs etc. are higher? [There's more to numbers, than just numbers].
These deals are fairly rare but its a very stable smaller community with great schools. The original asking price is 65K but it's been on the market for some time. They only issue is smaller square footage vs comps in the area. It's around 1k sqft.
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