I am just starting out and I have recently found a house on the MLS that is a duplex which needs some work but it is selling for 99,000 and has 1 existing long term tenant already paying rent of 825 per month.
2 questions:
1) What is the exact formula or guide i can use to analyze this house (Duplex) to see if it is a good investment as a rental property?
2) Will the information on the MLS page be sufficient to run this calculation or do i need other information and where would i get this other information?
The formula I use is (monthly rent * .6) - profit = debt service. Now this needs some explanation.
Monthly Rent: I get an idea of what the monthly rent should be by going to sites like rentometer.
.6: I multiply the monthly rent by 60% to take out 40% for the following: 10% vacancy, 10% property management, 10% maintenance, 10% property tax and insurance. (These are estimated amounts. If I get a counter offer, I will get more exact with these numbers)
profit: Subtract out whatever profit you want to make. Our minimum is $200 per door.
debt service: This is the monthly mortgage payment you can afford to make. Once I have this number I go to a mortgage calculator and plug this in as the payment amount and calculate what loan amount this payment can support. This gives me an idea of what to offer on the property.
The formula I use is (monthly rent * .6) - profit = debt service. Now this needs some explanation.
Monthly Rent: I get an idea of what the monthly rent should be by going to sites like rentometer.
.6: I multiply the monthly rent by 60% to take out 40% for the following: 10% vacancy, 10% property management, 10% maintenance, 10% property tax and insurance. (These are estimated amounts. If I get a counter offer, I will get more exact with these numbers)
profit: Subtract out whatever profit you want to make. Our minimum is $200 per door.
debt service: This is the monthly mortgage payment you can afford to make. Once I have this number I go to a mortgage calculator and plug this in as the payment amount and calculate what loan amount this payment can support. This gives me an idea of what to offer on the property.
@Dave Lloyd has the correct approach, although the general "rule of thumb" on BP is the 50% rule, where you subtract 50% of monthly income to account for expenses.
Don't forget to set aside a percentage for CapEx (big ticket repairs).
Also don't forget to account for utilities - does the tenant or the owner pay for utilities?
If you include those considerations, then Dave has the right idea for a guess / estimate of a property.
Once you determine that a property has potential, then you will need to complete your due diligence - determine all of the actual expenses such as taxes, insurance, utilities. Then take a look at the property and determine if 10% for general maintenance, plus another 10% for CapEx, is enough to maintain the property. Older properties may need more maintenance, while newer properties need less. Either way, keep CapEx at or above 10% to prevent nasty surprises.
Find those numbers, run them in a full calculation, and that give you a more accurate number for cash flow.
@Dan Smith - @Dave Lloyd did include taxes and insurance as an estimate of 10% of the property's income. For an early evaluation, you make an estimate like this because it's a lot faster than plugging in all of the numbers on every deal that you run (if that makes sense)
Understood Ben and thanks for responding - Now i get that but i guess i am confused on what tactic I want to move forward with. I am unsure if I want to do a buy and hold or a BRRRR, A BRRRR seem more complicated because it involve obtaining hard money upfront and then a traditional loan to refinance.
Isnt the goal to do a BRRRR and refinance so you could capitalize on the equity in the house to use that for your next real estate investment (property)?
If so why would any investor do a buy and hold if they are looking to invest in a next property?
@Dan Smith - BRRRR is the strategy used by most investors in order to grow faster. However, not all investment properties have a forced appreciation factor that is available.
For example, not everyone wants to fix a place up in order to add value. Because of this, they would purchase a turnkey property, where I use this definition for a property that needs no repair work and is ready to rent from day one.
Since they are not increasing the value of the property, they will not have any appreciation to draw equity from.
In this scenario, an investor can still make good passive income each month. However, they will not be able to refinance in the same method as a BRRRR example.
It sounds like you have a great understanding of the concept behind BRRRR - however, both are "buy and hold" since you are not reselling the property.
@Dan Smith - Not sure of your living / family situation but explore the possibility of a house hack if that is a possibility. There is a huge opportunity in my opinion for younger single people that have the ability to go down this path.
There is extensive information on hacking in this forum.
Understood Ben and now i get it - Thanks for explaining that!
This helps me understand a little more about what approach i should look for. I believe i need to look for a turnkey investment property with positive cashflow from day one.
I see you have a calculator tool of your own and i have also downloaded your spread sheet. Which one of these will help me analyze properties with my goal in mind?
Also i know about the calculators here on BP but which one of these would be the one i would use if your tools are not exactly what i need to analyze properties with my goal in mind?
Thanks for all you help!
@Dan Smith it sounds like you have a good understanding of BRRRR, so you're on a good track of learning.
I personally prefer cash flow properties, with easy value-add opportunities such as raising rents that are below market, splitting utilities, utilizing space more efficiently, etc. This allows me to increase income or decrease expenses for better cash flow, without needing to refinance or do extensive repairs.
That being said, I certainly won't shy away from a good flip as a source of growing my cash reserves. Buy and Hold cash flow properties is what I focus on, but I have other tools at my disposal if I choose to deviate a little.
You're also on the right path when you say that you want to focus on turnkey investments / buy and hold. You need to have a goal, and a method of getting there, or it can be easy to get distracted by all of the cool things that you can do in real estate investing! There are just so many options!
Tools: I use a 50% tool first in order to screen properties. There are so many properties, and I don't have time to do a complete study of all of them. So the first place to start when evaluating a property is to determine what is important to you (cash flow and Cap Rate, in my example), and do a quick analysis for those criteria.
If a property passes that, I go on to a more in-depth tool and plug in actual numbers in order to get a better understanding of a property. If it passes, then I will get a viewing of the property or talk with the realtor / seller and go from there.
I actually just posted on BP last night with an example of an evaluation using the tools - I'll do a duplex or something smaller later today and will post it as well.
For tools on BP - the Rental Property Calculator should align with your goals of cash flowing properties.
Keep the questions coming!
@Dan Smith - here is an analysis of a duplex that we just closed on. The property is two blocks from my residence, so I didn't bother with property management. The tenants are both long term, so I didn't worry about that either.
When I did my walk through of the property, I found that one of the water heaters had some rust damage so I included a replacement cost. Other than that, the property was basically turnkey.
Rent is below average, so I plan to increase that in the future - however, even at current rents the property is sitting at over 8% cap rate.
Inputs - basic details such as purchase price and repairs. I usually aim for a cap rate of 8% or better - this "desired cap" will calculate an estimated value of the property later in the outputs:
Financing details: I went with a standard 30 year conventional loan through a portfolio lender:
Two units, no additional income. I grabbed the last three years of records from the last owner to fill in the expenses. The heating is electric, and the electric is already split and tenant-paid. I put in an estimate for insurance, which may be a little high for the sake of the analysis. Taxes are based on the last assessment, which was done in the past three years so I don't have to worry about a large spike in the next year or two.
Percentage expenses - don't forget them, or they'll bite you in the butt like a rabid bunny rabbit hopped up on caffeine: surprising, fast, painful, and deadly. I didn't include property management since it is so close to my residence and is only two units.
Outputs - based on an 8% target cap rate, the property is worth close to $50k. The 2% rule puts it at $60k. In both scenarios, I'm purchasing for less than these valuations. Since this is not a commercial property these values aren't as useful, but I still like to have them on hand. Cash flow is not the best, but it's also below market rent values so I know that I can bring that up.
I break out the monthly expenses just to see what they are since I'm curious.
So overall, not a bad deal for the area. Actual comps in the area for a duplex are around $65k, so I'm getting it well below that price. Rents are below average, so I have room to increase income through that.
That's the tool that I use for evaluating a duplex - now you have an example.
I hope that helps! Let me know if it raises other questions