Why are all the deals I find online seemingly profitable

Question

When I analyze properties I always seem to evaluate a lot of good deals, numbers wise.

I always wonder if I am doing something wrong.

Of course it’s not every property, but its enough to question if it should be harder to find good deals, at least by the numbers.

Typically if I find a rental property, say a duplex worth 100k, I find a mortgage, at a rate at say 5-8%, with 20% down. estimating it to cost 1-3 points.

I estimate the rents based on rentometer and average comps I find, then say I save around 10% each for capex, management, repairs, vacancy.

How do you guys analyze a rental property? Do you do it different for mobile home parks, or multi unit properties?

Genny Li · Answer

I got nosey and looked on Zillow.  This is what I found within a few hours of Charlotte under $150k:

https://www.zillow.com/homedet... 2 studio apartments, and you have all the capex of a duplex? Hard no.

https://www.zillow.com/homedet... Vacant and uninhabitable. Noooooo.

https://www.zillow.com/homedet... Triplex with new roof and windows, but it's been on the market 188 days. I'm really afraid that the inside is hiding something horrifying, like major structural damage, but I'd look at it. Pie in the sky chance of it not containing horrors.

https://www.zillow.com/homedet... A not-so-great house plus an oooold but clean and updated manufactured home, which is basically free. Still, no thanks.

https://www.zillow.com/homedet... I have an irrational love for old houses, but this looks like a lot of work for me. There's no central heat, only resistance baseboard, so you're going to have a hard time keeping renters with how high the utilities will be.

https://www.zillow.com/homedet... 5 trailer trailer park. For the land? For the trailers, too? Who knows?

https://www.zillow.com/homedet... AAAAAAAAAAAAAAAAAAHHHHHHHHHHHHH

https://www.zillow.com/homedet... A package deal on 4 white elephants! A flipper might like this, but those roofs tell me that there are nightmares inside.

Jim K. · Answer

Hey, I bought the duplex I live in for $45K cash, as I've often crowed about here on BP.  Took me forever to get it liveable, but I rent out the top unit for $930/month and live downstairs. For my cheap little heart, nothing is better than living free. Is it in a D-class neighborhood? No, it's a solid C-, in my book. A busboy named Da'Shawn got blown away in the back alley trudging home from work two years ago (the makeshift memorial really brightens up the block) and the convenience store down the main drag did have that drive-by three years ago...the clerk (who I know) heard the shots, then a guy stumbled in covered in blood.and screaming, "Dey shot mah baby!" So it turns out his pregnant woman was in the car with him and my friend the clerk didn't know if he meant that it was the woman or her baby inside her that got shot.

But I digress...cheap duplexes under $100K do exist, at least in some less-than-savory areas of our fine metropolis.

Joe Splitrock · Answer

@Owen Thornton if you are shopping $100K duplex, you are looking at D class properties or very rural. The cash flow will appear higher because the risk is much higher. These type of properties are management intense, so you earn your cash flow. You may also realistically need to plug in higher numbers for CAPEX and repairs because the properties are likely not updated and the type of tenant who rents will be harder on the property.

Genny Li · Answer

It really depends on where you live.  The phrase, "if I find a rental property, say a duplex worth 100k" elicits wild, hooting laughter in most of the country. lol.  BTW, investment properties usually--not always--take 25% down.  (Some portfolio lenders will take even 10% down!!!)

And I'd hesitate to call anything a good deal that cashflows less than $500 on paper, bare minimum, because there's always *that thing* that bites you.  I really wouldn't want to own anything long term (I know people have strategies based on selling and make tons of money, but I mean if you intend to be a long term landlord of that specific property) that nets less than $400 a month, over the long haul, just because my time is worth too much to expend the effort of managing a property for less than that.

10% for capex, management, repairs, and vacancy together seems awfully low to me if you're buying an older duplex. Eventually, you might hit that number, especially with a lot of units in an area with really low vacancies and you're a marketing guru who can keep your vacancy rate below 3% (almost no one is), but initially, I'd expect it to be quite a bit higher, so it'll take a while before things are in the black.

I think the standard number is 10% for vacancies alone and 5% for maintenance if you do your own PM, and an extra 3% if you don't.  Capex is wildly variable, but I'd go with at least 3.5%, playing off the 27.5-year depreciation rate for residential properties...but that's only AFTER the initial period, over a very, very long period, if you are tightly controlling costs. 10% is more reasonable, and some years, especially early on with delayed maintenance, it'll probably be 100%+.  First year, if it ain't turnkey, you're unlikely to make any money.  So now you're at at least 25% for overhead.  That's mostly safe.  You should out-perform that.

I think a lot of people don't look at the state of a specific property close enough.  How many years does the roof have? The A/C? The water heater? The furnace? The major appliances? The exterior siding/trim/whatever?  There's a clock on all of those things. And a lot of times if someone is selling their duplex, it's because these things are looming and they don't care to invest in them.

I think that's why so many people BRRRR.  Aside from being a good strategy (which would cause lots of people to do it), you kinda have to do the rehab bit a lot of the time, and when you refi, you recapture some of the capex in a more usable form.

Genny Li · Answer

You're good at fixing stuff up, though.  If you're a baby at renos without a lot of construction experience, I wouldn't touch most of those, though some are more personal taste--I might be interested in a 20-unit MHP, but a 5-unit really doesn't make sense to me unless the MHs come with it.

If you're a patient person who is willing to learn to do things right, and especially if you can live right next to the place you're renting out, sure.  But I was assuming this guy has a FT job in Charlotte itself and would have to drive out to these places to be able to deal with them!

The really old house actually does have a lot of potential for someone who can either run hydronic baseboard or do ductwork and drywall (depending on whether gas is available or just oil).  I'm just kinda burned out on old places, and again, that's not something you want to do when you live hours away.  As soon as you start doing anything, you're going to find 5 other things to fix.Those four houses could also be really good for a flipper, depending on how much water damage from the failing roofs that they have.  But I would not touch them for a rental.

I personally have a soft spot for rundown fourplexes built after 1975. lol.  They're kinda the sweet spot of "already insulated, have ductwork for heat if not AC, windows are not completely failing and rotting out the house" for me, and they're the most available MFHs in where I invest.  You can get each unit for less than $50k sometimes, so I guess that's in the same ballpark as a $100k duplex!  The nasty ones are usually renting for $550-$650, with no central AC.  Market rent for non-nasty rentals is more like $800, but you need AC.

Jim K. · Answer

You cannot make money in D-class unless you break the law. I do not break the law and thus I do not invest in D-class. The dividing line between C and D is really lawlessness, in my book. If you pick up the phone and call the cops and the cops are there are and ready to do their jobs in fifteen minutes or less, it's not D-class. While my target area is very much a low C-class area, the law is here and it doesn't play around.If you choose to be a handyman and if you choose to live in your target area and if you accept certain risks as given and if the lack of social status doesn't particularly bother you, there is nothing as reliably profitable on a small scale this side of the law as C-class housing. But you have to make the commitment to do it. This is not passive investing by a long shot. You are not going to live on the coasts and whine about your property manager and collect your rent remotely every month.

If you try to hotdog it, you're going to get screwed so hard you'll walk funny for the rest of your life. In cheap housing, you have to make a decision to be a local, on-site landlord. Choose. Commit. Follow through. Or else. And when you're done, which you should plan on in 20 years or less, you need to have a viable exit strategy in place.

Allen L. · Answer

rural properties may not be too terrible, but D class properties in cities are to avoid. Just make sure you can find a manager for it or manage it yourself. There are some parts of the US where if you drive 30 mins away from a city hub it becomes completely rural, and that type of area is probably worth looking into but few investors do.

Alex S. · Answer

@Owen Thornton

I use rentalpropertycalculator.net

It covers most of the expenses you should be including.

Robert Tinker · Answer

@Owen Thornton Where can you find a duplex for that price? That would be awesome.

Genny Li · Answer

That is...depressing.  I have this weird hobby of watching singlewide BRRRs (people do this--without the refi bit, so one fewer Rs), but I've always wondered how much money they make in the end.

Why are all the deals I find online seemingly profitable

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