Need help with first Deal Analysis

Multi-Family and Apartment Investing
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Need help with first Deal Analysis

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Richmond, VA · Member since 2014 · 14 posts · 0 votes

I've never done deal analysis before and I am very, very new to real estate. I am not considering buying this property, or any other property, for a year or so. However, this is a real property and I wanted to see if the numbers worked out. Please advise!! Thanks BP!

P.S. I would live in one of the units to qualify for FHA loan at 3.5% down and 4.5% interest rates...That's how it works, right? (for calculations sake pretend I don't live here, though)

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The house costs $200,000

I put $7,000 down and take a mortgage for $193,000 at 4.5% interest rate.

At 30 Years Fixed this is $977.90/month

The three units together bring in $4,470/month. (In reality these units are actually already rented out)

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Using the 50% rule for a quick glance,

$4,470 x 50% = $2,235 for expenses and $2,235 to pay the mortgage

$2,235 - $977.90 = $1,257.10 (cash flow)

$1,257.10 / 3 units = $419.03 cash flow / unit

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When I plugged this into the Rental Property Calculator I used these parameters -->

Property Taxes: $7,000

Points/Lender Charges: $0

ARV: $0 (no renovations planned or needed)

Electricity & Heat: $0 (Tenant Responsibility)

Water: $100 (guess)

Trash: $100 (guess)

Property Insurance: $150 (guess)

Vacancy Rate: 5% (guess)

Repairs & Maintenance: 5%

Capital Expenditures: 5%

Management: 10%

Future Assumptions: 2% (For all three)

The Rental Property Calculator gave me expenses of around $3,000/m and cash flow of around $1,200/m, which was around what I got with the 50% rule.

What am I missing? What would you do different? Thoughts? The property has had renters for a long time so I am assuming it is in livable condition with no serious structural/cleanliness issues.

Thanks again, BP.

Casey

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    Casey, I don't mean to be chasing you around, but saw the forum title before I saw who posted it.

    First off, if you are not living there, you will probably be ineligible for the low down payment. If you're not living there, you're probably looking at 20% down for a non-owner occupied rental property.

    When I run my numbers, I try to be as conservative as possible, ie: I want my expenses to appear high on paper, so when rubber meets the road, the actual expenses come in lower than my estimates, meaning more cash stays in my bank account.

    From the gross, I usually take 10% for vacancy, 10% for repair reserve and 10% for management. If management charges 1 month's fee for lease up, your management expenses jump to 20% (10%/month plus 1 month's fee, which is about 8%, total of 18%, round up to 20).

    Depending on the situation, water can be significantly more expensive. One of my units, has a lot of people living in it, but their water/sewer bill is consistently $140/month. If you've got three units and the water/sewer is combined for the three, your water/sewer bills may be surprisingly high.

    What type of heat is it? If it's an old house converted to a 3-unit w/ central system, there would be no way to separate the heating cost per unit.

    I usually check local rents by using both craigslist and rentometer.com

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  • Account Closed
    OP
    Richmond, VA · Member since 2014 · 14 posts · 0 votes
    12y

    @Liam Goble Not at all Liam, thanks a lot for the input.. It's cool to see how active everyone is on BP!

    I understand why its a good idea to be conservative... however,

    Would this affect (lower) your vacancy %? -> Tenant 1 has occupied for 3 years, tenant 2 for 4 years, and tenant 3 for 8 years.. Also it is near a major university and several miles from the Washington D.C. border.

    Heat -> I can't tell if they share heat or what but I know that the heat bill is on the tenants, not the landlord

    Water -> Your probably right on this because there is a total of 7 bedrooms between the 3 units so the water is probably higher than my estimate..

    Management -> Most of the analysis I look at assumes a 10% management fee; is it standard practice to include that fee as well?

    Thanks for the help Liam.. Hope to hear from you again

    Casey

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  • Christina R.
    Investor · DMV Maryland · Member since 2013 · 867 posts · 370 votes
    12y

    Is your property insurance $150 per month or is that per year?? I'm assuming the former . . .

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  • Account Closed
    OP
    Richmond, VA · Member since 2014 · 14 posts · 0 votes
    12y

    @Christina R. Hi Christina.. I'm pretty sure everything is monthly except for the property taxes

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    Casey, From what I've seen, 'typical' management fees are 10% per month, but do not include the lease up fee, which can be 1 month's rent, or about 8% of your gross.

    For your vacancy, I would actually say that because the tenants have lived there longer, there may be a higher probability they will leave sooner, rather than later. Again, I simply try to be as conservative as possible. I would rather have cash in my account at the end of the year, than to scramble to pay a mortgage because of a vacancy. I live in a university town, so there is actually more 'churn' with tenants than what I think may be experienced in non-university areas. Undergrads are usually year to year, grads and PhDs are 2-5 years, depending on the program.

    Once you have a healthy savings account for vacancies and repairs, you can devote less per month to that account (in my opinion).

    Lastly, my aunt in Silver Spring doesn't know any Realtors; not sure how she doesn't, but she doesn't.

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