Help analyzing a potential first property

12 Replies

Was hoping to get some perspectives on a three unit (2-2br, 1-1br) deal I'm evaluating (would be my first property). I put a quick analysis below (hopefully it's clear). It doesn't appear to have the best numbers but it's a pretty much turnkey property in one of the best school districts in the state with very little inventory. Would be curious as to anyone's thoughts.

Estimated Purchase Price 215,000
Cash down 43,000
Closing Costs 5,975
Total Cash Needed 48,975
Financed 172,000
Interest rate3.88%
Current Rents 2,150
Monthly Rent Estimate 2,400
Estimated Rent to Purchase Ratio1.12%
Year 1
Gross Scheduled Income28,800
Vacancy Rate8%
Net Rental Income26,496
Other Income120
Gross Income26,616
8% Repairs and Maintenance2,304
8% Property Management Fees2,304
Taxes5,833
Insurance1,200
Utilities (water & common)1,000
Total Op Expenses12,641
Net Operating Income13,975
8% Capital Expenditures2,304
Debt Service9,706
Before Tax Cash Flows1,965

Your interest rate looks very optimistic.  I use 5.375% with an excellent credit score for modeling purposes.  Investor interest rates are higher than owner occupants.

Your insurance looks a little high, but you can get a quote from your broker before making an offer.

Closing costs look a little low for my area, but they may be fine for your area.

I've recently received interest rates from a small, regional bank of 3.875% on a 15 year mortgage, so it might not be too far off, but from the debt service expense, it looks more like a 30 year, so this may require a second look.  To your point though, I've also encountered rates of 5.75% on a 30 year mortgage from larger lenders.

As for the deal itself, your property management may be a little low.  If you find 8%, that's great.  I see a lot more that ends up being north of 10% after their base fee plus 0.5-1 month's rent when filling a unit.

Some other expenses you may want to consider are landscaping, snow removal (if it applies to your area) and trash removal (if not included within property taxes).

You may also experience some growing pains in the near term.  If you believe you can increase rent, you may not be able to do it with all the current tenants, leading to some additional turnover and higher vacancy rates until the units are occupied again.

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Thanks guys. I used the interest rate that was provided by my lender as of yesterday. I had been using a higher one. Same with insurance, that was their estimate, I have typically been using $1,000/yr but bumped it to their estimate.

I should have mentioned that I plan to manage it myself to get the experience but it also happens to be a couple miles from my house. I've included the 8% to be conservative just in case, but in reality it should be close to 0.

Landscaping, snow removal will be me doing it, and trash is included.

I've been told that one unit is month to month, one ends in September, and am unsure on the third.

Also, I just realize my utilities are low. I've gotten an estimate of $115/month for the common G&E, so that plus water will be much higher.

Based on your inputs, Cash on Cash seems a bit low around 4% ($1.96k/$49k). If you consider the comments that @James Mc Ree and @Brandon Roof made, Cash on Cash will be closer to 0% or negative. It will be difficult for you to cover all of your expenses with monthly rent at $2,400. 

Also, if you consider any rehab costs, legal fees, or contingency in your initial out of pocket, that cash on cash return could be negative. Unless you're projecting 10%+ appreciation per year in this market, I would stay away from this one as you're likely to lose money every month.

Hope this helps!

@Scott Lyons Even if you plan to manage it yourself, always include a property management fee in your analysis. This ensures that if anything happens to you (you move or can't manage anymore for whatever reason), the investment can still be profitable.

Thanks for the input Elijah. My analysis always includes property mgt fee, but in instances where I know I'll at least initially be managing myself I tend not to worry too much on whether it's 8% vs 10% vs. whatever.  Very good points on the cash on cash. I don't think I can justify this property. It was so tempting with it being nearby and in a very good area.

Originally posted by @Scott Lyons :

Thanks for the input Elijah. My analysis always includes property mgt fee, but in instances where I know I'll at least initially be managing myself I tend not to worry too much on whether it's 8% vs 10% vs. whatever.  Very good points on the cash on cash. I don't think I can justify this property. It was so tempting with it being nearby and in a very good area.

Before you give up on it can you come up with with a purchase price that makes sense, that would give you the cash on cash you want and then make an offer? 

@Scott Lyons you have some pretty aggressive numbers there for maintenance and CapEx. Budgeting 8% for maintenance and 8% for CapEx seems pretty high to me, especially if you are self managing. Make sure you don't analyze yourself out of a good deal. These numbers are market specific, so make sure you are "sharpening the pencil" so to speak and using market specific numbers.

If I underwrote 40% of the gross to go to maintenance, CapX, management and vacancy, I would never buy a building in my market. The reality is that in the Chicago suburbs, I know I can run a building well on closer to 20% of the gross for all four of those items, so I buy buildings. 

@John Warren Thanks for the info. I've been using between 8-10% on those numbers because that is what I have previously read on these forums as good estimates to use. Good to see that I may be too high on that because like you said, it's very tough to make any property look like a deal and I have been struggling with that. Since I haven't purchased a property yet I haven't gotten a good sense of what is accurate. Sometime I'll lower it if I know it's in great shape.

@Account Closed It wasn't owner occ rates, I confirmed. The rents were under market. I thought I could bring them up, depending on the existing leases, but still not high enough to make it work.

@Scott Lyons make sure you are using local market data. In some markets, those numbers are accurate. In other markets, they are so conservative that they will kill every deal. I would speak to some experienced operators in your local market to see what numbers they use. 

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