Hi everyone, I'm finally getting off the sidelines and I'm ready to start investing here in Maryland. I'm trying to understand the market and how to analyse a deal so that I can start making offers!
I live in Baltimore and I'm currently looking for 2-4 unit properties in Baltimore City, Baltimore County, the eastern part of Howard County and the northern part of A.A. County (perhaps as far south as Crofton). That's probably too big an area for someone just starting out so I hope to narrow it down a bit as I go along. I plan to stat by using my personal money along with some private money to BRRRR. I'd like to buy and hold getting a minimum $250 cash flow per door with a 12% IRR.
For starters I'm looking at REOs on the MLS and I have a hypothetical deal that I'd like to get input on from people who know the area. I'm making A LOT of assumptions here so any insight would be helpful. Here are the details:
3511 Powhatan Ave, BALTIMORE, MD 21216 (Forest Park neighborhood)
4 units: 3x 2br, 1x 1br all separately metered
Rent = 3x $950 + $795
Refinance 70% LTV = $129,500; 30 year fixed 5.5% = 735.29 / mo
Cash flow $1,071.71
Assuming a sale at the start of year 5
Total PV - Rehab Cost = Purchase Price
144,036 - 60,000 = $84,036
Again there are a bunch of huge assumptions here but I'd be happy to elaborate on why I chose certain numbers. I also don't know if there is ground rent or not.
Thanks in advance for any feedback on the numbers, where I'm looking, strategy, etc.
Seems like you have thought about all the possible expenses. However, I would recommend to add 5% of your rental income to keep aside for taking care of vacancy. If you don't have any vacancy. that is good and extra money in your pocket. But when you perform deal analysis, you should built in 5% for vacancy.
I would also recommend to use bigger pocket rental calculator to validate your number with the result using bigger pocket calculator.
Good luck with your investing. I am also new investor. Would love to know how thing goes with you and share your lessons learned with me. Thanks.
Thanks for your response. If you look at the first picture there is a Vacancy & Credit Allowance just under the Total Gross Income and I've accounted for a 10% loss. In the book "What Every Investor Needs to Know About Cash Flow" the author talks about not just vacancy but also factoring in rent that you can't collect for various reasons, for example a tenant who refuses to pay but is still living in the property (not technically a vacancy). Given the area I want to be conservative so I chose 10% over 5% for that expense.
You are basing your numbers on the future. What are today's numbers? You are basing your cash flow on future refinancing. What kind of financing will you get to acquire and rehab the property? What will that do to the cash flow?
Is it currently rented? If it is not rented how long to renovate and get it rented.
@Ned Carey Your point is well taken. In this specific instance I could get it done with personal money (leaving money in reserve just in case) and a private loan of $50K at 8% interest only with a balloon after 12 months. I believe the property is currently vacant and I'd like to get the rehab done (mostly using contractors) and have the place rented in 4 months.
If you have the time to read my explanation below I'd love to get your opinion. Perhaps I'm over-complicating things or perhaps I should be looking at different metrics. I'm trying to get to a point where I can determine if a deal is good for me or not and I still have a lot to learn. Thanks
Gross rent in Year 1 [4 months vacancy, no mortgage]; $1,807 * 8 = $14,456
Less interest only payments; $14,456 - $333.33 * 12 = $10,456 cash flow Year 1.
Refinance at the start of Year 2; $185k ARV * .7 = $129,500
- $50k balloon = $79,500
+ $12,744 [cash flow from rent with new mortgage] = $92,244 cash flow Year 2
Sell in Year 5;
less the balance due on the amortization schedule $121,909
= $63,091 cash flow Year 5
The present value is now $135k which means that if I put in $140k at the start ($80k purchase price + $60k rehab costs) I overpaid by $5k.
I realize there are a lot of limitations to this, for starters I didn't increase the rent at all and I assumed no appreciation beyond the ARV. I also didn't factor in any fees at closing in year 5. There are probably some other factors I'm missing and I probably could have used Net Present Value to make it look neater.
Now I realize that your point was about numbers now vs. the future but I think that projecting future cash flows and using PV helps me to understand what I can pay for a deal now if I want a certain rate of return.
@Eric Masi I haven't answered before because I haven't had time to go through such in dept numbers. Let me just say that you must account for time. While you certainly have taken time into account are your assumptions accurate?
The time is takes to renovate could be longer than you anticipate. Not due to your fault, but delays by others; ie utility hookups or change in service, Use and occupancy permits, and the time to get the property up and fully rented.
Once the property is ready to rent, it won't all rent at once. You will fill one unit. then it will take time to fill the next etc. Lenders may want the property to be fully performing for a period of 6 months to 1 year before refinancing. i would assume I could rent one unit a month for 4 months. If it takes 4 months to renovate then it would be 8 months before being fully rented.
In addition to time a property manager will typically charge 1 months rent to fill a unit.
Glancing at the numbers this look like a viable deal for you since you have the cash and reserves to do it. If you were doing this with little in reserves I would be concerned that the smalest miscalculation or cost overrun could kill the deal.
@Ned Carey Thanks for your insights! I probably was too optimistic in my assumptions about how long it's going to take to get everything up and running. I'll be a little more conservative in future evaluations, at least until I have more real world experience to base my assumptions on.
Also, I'm planning on self managing to start but I get you're point about property management fees. And I want to start factoring in all those costs now because I know that some day I won't want to manage the properties myself.
Thanks again, and good luck to you during the tax lien auction!
@Eric Masi even if you self manage you cannot exclude the cost of management from your calculations of ROI or IRR etc. This is because some of the money you are making, is from your management role. There is certainly nothing wrong with that. The money you save from self managing is NOT a return on the investment of your MONEY. It is a return on your time and effort.
You are fooling yourself if you think the money you invested is doing better because you self manage. Again nothing wrong with managing a property yourself. It is just not part of the return on your financial investment.
I completely understand @Ned Carey I always include property management fees as part of my expenses (10% of the gross monthly rent) and I do not consider that money as part of my IRR.
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