How to analyze a buy and hold property?

5 Replies

I am interested in a duplex which has 2 tenants paying $775 a moths each. It is in a great location and $1700 is the tax amount. It need some updating but it is in good condition. 


How Can I analysis this deal? 

I tried to use Bigger Pockets tool but it was confusing for me. 

Thank you,

Try watching some YouTube videos. Then the BP calculator will make sense. It is excellent.

Go pro and start watching archived webinars by @Brandon Turner . He does an excellent job of explaining how to use the calculators. Going pro was the best real estate investment I've made and the webinars are what gave me the final push to invest in real estate.
Originally posted by @Mahan Shahverdi :

I am interested in a duplex which has 2 tenants paying $775 a moths each. It is in a great location and $1700 is the tax amount. It need some updating but it is in good condition. 


How Can I analysis this deal? 

I tried to use Bigger Pockets tool but it was confusing for me. 

Thank you,

how much in rehab? and whats the purchase price?

We need a lot more info.

If you have your figures...

PGI--potential gross income
-VCL-vacancy and collection losses
+OI--other income (laundromat, etc_=
=EGI--effective gross income
-OE--operating expenses...
=NOI---net operating income

you can divide NOI by purchase price to get a cap rate though most people rarely use this on SFR

once you have this info you can deduct your financing (if you have any) to get BTCF--before tax cash flow...
also don't forget...one item not mentioned is CapEx---which is major repairs...and cannot be deducted in the first year as an expense but rather depreciated...

this is a quick general guide...and if you ever become an agent you may be taught this. Don't forget when deducting for operating expenses to figure everything including property management. If your avg vacancy is expected to be 1 month deduct at least 8% for vacancy and collection losses. Figure about 10% for property management per month. DON'T play with numbers to make yourself sure it is a good deal and convince yourself. Use worst case scenario numbers...and then if you do better than that in real life, you make more money. Don't force the deal to make sense. Either it does or does not.

You should decide on a goal first (i.e. cash flow vs. building wealth). The analysis is a lot easier if you're a cash flow investor. Looking at projected ROI numbers can be confusing because of the baked in speculation (appreciation and equity) and additional numbers you have to consider.

If you're a cash flow investor cash on cash return should be the number you focus on.  Things to consider:

Purchase Price

Check the comps in the area to see if you're getting a good price. If you can't find a similar property, you can see what other multi-units have sold for in the area (in similar condition), find the cap rate, apply it to your property, and back out for a price. Ask how old the roof, furnace, hot water heaters are. Factor deferred maintenance into your price consideration.  The numbers might look great as it stands, but you might be inheriting a ton of deferred maintenance  which would negate any discount you thought you had. 

Rental Income

Double check the stated rent in your area.  Tenants already in place, but if they vacate you want to know you can fill it with at least the same rent. 

One of the things that could crush you is long-term vacancy.  You can run a quick check online on rental vacancy numbers in the area or reach out to property managers to get some insight. 

Costs

I try to use a worst case for all of my estimates.  Theoretically worst case could actually be worse than my worst case, but that's a risk you'll have to take.

-CapEx & Maintenance - Common practice is 10% combined for both.  I do 15%. 

-Utilities, Water, & Garbage - Who pays? How much is it? 

-Vacancy Allowance - I do 1 month of rent. 

-Property Management - Most companies charge 10%, it ends up being 12-14% if you consider tenant placement & marketing costs. 

-Misc Expenses (landscaping, snow removal, etc.)

-Property Tax - Is $1700 the tax amount you'll see after you've purchased the property? Or is it just what the current owner is paying?

-Insurance - There are sites that'll spit out an avg for a zip. Or you could reach out to insurance companies and get a quote. 


With the info above you can calculate your projected NOI. Subtract your loan payment from that and you'll have your projected Cash Flow. Divide that by your initial investment (down payment + closing costs + rehab) and you'll get your cash on cash return.

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