Rental Analysis

6 Replies

Hi Everyone -

I've been doing direct mail marketing to absentee owners. Although I'm a rehabber, I get a lot of leads for properties that are tenant occupied. In an effort to not pass up a lead, I'm analyzing a triplex with a garage in Drexel Hill, Pennsylvania (20 minutes outside of Philadelphia).

Here are the facts:

  • Rents:
    • Unit #1 - $10,200/year
    • Unit #2 - $9,900/year
    • Unit #3 - $7,080/year
    • Garage - $1,500/year
  • Landlord expenses -
    • Property taxes - $6,000/year
    • Insurance - $1,000/year

I'm going to assume (for projection purposes) 8.33% vacancy rate, 6.00% property management fee and $50/unit/month in repairs & maintenance. In terms of a rental, it seems to be in decent shape. If I were to flip it though, I would update each unit (kitchen, bathroom, flooring and paint).

My opinion is to get it under contract for cash and assign it to someone that invests down in that area of Delaware County, Pennsylvania.

The owner of the property seems motivated to downsize so I'm likely to be able to negotiate him down - he's asking $200,000 for this property.

I'd love to hear the community's perspective. It would be interesting to get the perspective of a buy and hold investor in that part of Delaware County to see what they like to find in a rental in terms (ROI and monthly cash flow, refinancing requirements etc. etc.)

Looking forward to the discussion.

So it looks like gross income is $2390/mo.

Using the 2% rule as our back-of-the-napkin analysis, the "ideal" all-in price for a $2390/mo property would be $119,500. How close to $119k do you think you can get from their $200k?

Of course there's always room to grow with a little "forced appreciation" through rehabbing. And the 2% rule is just an ideal guideline.

Don't forget to include capital expenditures and debt service in your expense analysis. You'll have to adjust your thinking a bit, because now it's akin to having holding costs in perpetuity, instead of just a few months on a flip.

@Will Porter  

The 2% thing is just a dipstick for quick triage of a deal ... it irks me when its called "rule".

@Account Closed  

When analysing a property, best to err on the side of caution.  You might want to increase your vacancy allowance to 10% {unless you have good stats on the locale}; set a 10% {of gross revenue} maintenance allowance; allow 7-10% for PM.

You also need to consider the following expenses:

  • Hydro - does the building have a house meter?
  • lawn care / snow removal
  • garbage (possibly)

Once you work in all your expenses, you will see where your Operating Expense ratio lands and what you can expect for net operating income.  It should be enough to handle your debt service and leave free cash flow (CFBT).   Where it's a triplex, I'd be looking for a minimum of $100 - $150/unit per month.

1(506) 471-4126

you are looking at 10% for PM for sure.

@Will Porter  I like the forced appreciation perspective. Although I have some digging to do, it's likely that rent could go up another $1,200/year for each unit #1 and #2. I will definitely look into this further. We'll see if he's as motivated as he appeared to be when I first met him at the property.

@Roy N.  The house is currently fully occupied so that's why I didn't bump it up to 10% vacancy but I definitely agree with increasing PM and Maintenance. The units are separately metered so all utilities are paid by the tenants. I will have to ask about the garbage. Re: your minimum cash flow of $100-$150/month requirement, how much equity would you have in that scenario? What would you need your cash on cash return to be?

@Sara Cunningham  It sounds like PM goes for 4% to 10% in this area, so I didn't think 6% was unreasonable, but bumping it up to another % probably makes sense.

Originally posted by @George Sarianos:

@Will Porter  I like the forced appreciation perspective. Although I have some digging to do, it's likely that rent could go up another $1,200/year for each unit #1 and #2. I will definitely look into this further. We'll see if he's as motivated as he appeared to be when I first met him at the property.

@Roy N. The house is currently fully occupied so that's why I didn't bump it up to 10% vacancy but I definitely agree with increasing PM and Maintenance. The units are separately metered so all utilities are paid by the tenants. I will have to ask about the garbage. Re: your minimum cash flow of $100-$150/month requirement, how much equity would you have in that scenario? What would you need your cash on cash return to be?

@Sara Cunningham  It sounds like PM goes for 4% to 10% in this area, so I didn't think 6% was unreasonable, but bumping it up to another % probably makes sense.

 George,

On a triplex, I would plan for an LTV of 80%. As for CoC, it really depends on your opportunity costs ... I have gone with a minimum of 2-points over my opportunity in the past, but am more comfortable with 4. In my current market, that would translate into a CoC of 12%+. In comparison to many of the U.S.A. markets - especially along the rust belt - that's not a high return and 15%+ is obtainable.

BTW:  The house will not always be fully occupied and you will also have bad debts and evictions, so unless you know the area vacancy rates well, better to be conservative.

As for your PM costs, I've never encountered a PM fee below 7% unless you are dealing with a large portfolio.

1(506) 471-4126

@Roy N.  , I appreciate the feedback. I'll be making the offer today and will keep you posted where I shake out.

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