Here's my analysis:
I don't like it because the numbers look pretty tight. If your rehab is off by 10 - 20% - as many people are - these numbers could easily flip into negatives. I'm curious to see what others think.
Originally posted by @David Schulwitz :
Here's my analysis:
Sorry Dave, you cannot expect 6% of its income to cover vacancy, repairs and cap ex!
Who fed you those figures? Please come back when your numbers look more realistic.
And by the way, you should be aiming to have zero dollars left in each deal after refi.
[Having a LTV of 77% will not help with that]. But, good practice. Thanks for asking...
- I'm with Nathan on the deal being 'tight' when looking at Cash Flow. If your acquisition, project, and ARV are high confidence estimates, you have some room there. With that said, we don't know your constraints. If you need cash flow, stay away from this one. If you are fine there then go for it.
- The project budget is pretty massive. Was this analysis yours or did some turnkey company or GC give you this analysis? Unless this is a full gut-job 70k for a remodel is pretty steep. Granted I don't know that market and finishes can add up quick with a middle/higher end product. Once you get into systems work (HVAC, electrical, plumbing) especially comprehensively then I could see something approaching that... However that's a very very extensive rehab.
And 6% to cover your vacancy, maintenance, AND capex? Unfortunately that's not going to pan out. Our vacancy rate is less than 5% (based on actual data) and even that gets a lot of verrrryyyy skeptical questions. 2% just isn't going to happen for a new retail investor (retail just meaning you're an individual, not an investment company). Even companies that do this stuff day in and day out- with economies of scale, a network of vendors, a solid marketing plan, and a professional management team behind them- don't get 2%. Yes, you can minimize maintenance costs by installing new capex items during rehab, but that's a big upfront cost (though perhaps that's where the 70k comes from? all new everything?) and eventually everything does need repair or replacement. But for vacancy especially, a 2% rate basically means you only have tenant turnover (on average) once every four years, and you'd need to re-lease the property immediately so you only have one month of vacancy every 48 months? Long tenancies definitely do happen (and are always the goal), but its unlikely (and definitely can't be guaranteed) over the course of a 30 year loan. With a 2% estimate, that means if you have even one longer turnover, a big messy move out that requires a lot of work, or literally any other inconvenience that keeps you from plugging in a new tenant right away, your numbers are going to look a lot different.
I do agree that your rehab budget is pretty huge. Our rehabs usually cost 30-40k depending on the state of the property at purchase, so 70k would be nearly a full gut job. Again, like Jim, TX is not my market so I can't say with any certainty that your number is definitely wrong, but I would be curious as to where you got it, and from who. If it is high, and you can lower your loan amount, then this might pan out differently. But, even assuming it is accurate, your other numbers seem like they've been massaged to make this work, which is never a good first step. If these numbers came from someone else, I'd maybe question why they provided them, and what data backs them up.
Your profile says you already have some experience with buy and holds, which is awesome experience to have under your belt. I'd be curious, however, if those investments produced the expenses numbers you're assuming in these calcs? How long did you hold them and what was the real-world vacancy, maintenance, capex? If your previous investments were in the same, or similar, market and property class, and especially if you've held them for several years, I'd recommend using those numbers for your calculations. If you did indeed manage to maintain 2% for all three expenses over time, definitely let us all know how you accomplished that! You'll be the new BP guru if you have the secret to those numbers ;)
As is, I'd personally pass on this one. But it's great practice to run those numbers, and you're clearly dedicated to your REI goals, so I'm sure you'll find the right investment soon.
Best of luck!
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