Deals don't pencil. Overestimating expenses? Interest rates to blame?
Hi All!
I am having a hard time finding deals that make sense. I know most BRRRRs won't pencil upon refinancing because of the high interest rates, but I also wanted to make sure I am not overestimating the expenses that crush my RoC and CoC. See below an example of a pro forma:
Rent
$1,200 /Mo
Expenses
- Vacancy Allowance: $60 / Mo (5%)
- Property Taxes: $99 / Mo (from County's Tax Assessor)
- Insurance: $83 / Mo (Avg policy $1,000 per year)
- Property Management: $120 / Mo (10%)
- Repairs & Maintenance Reserve: $96 / Mo (8%)
- CapEx Reserve: $96 / Mo (8%)
NOI
$646 (54% of NOI / Expenses represent 46% of NOI)
Mortgage Payments
$590 / Mo (70% LTV, $80.5K loan amount, 30 year am, 8% interest)
Net Cash Flow
$55 / Mo
Even deals that comply with the 2% rule still don't pencil. Any feedback on how you model your pro formas? Am I being too conservative on the reserve accounts?
Thank you!!
Most deals don't pencil for me either. I look 30 - 40 wholesale deals before buying one. And that's off market!
I think we're in weird spot in the market right now. Prices are just now starting to fall, but rates are hopefully near their highest point. The next few years will be on a downward trend if unemployment rises like expected. Deals will make more sense in the future. I don't think your numbers are too conservative. In my opinion that's not a bad deal. It will break even/ cash flow a little immediately. When interest rates drop it should cash flow more.
Here's how I roughly do my capex/maintenance. (I use one %) Also I change the number some depending on the condition of the property. A 150 year old building that has been re-done at top quality might be closer to an A for me.
A Less than 10 years old (10%)
B 11-30 years old (15%)
C 31+ (20%)
Yeah, people are buying these deals here in Cleveland that I just can't figure out how they're making money on. I have such a pulse on the market that I can simply look at the list price of the property and instantly know if it'll be worth even considering, and let me tell you, those are few and far between. This year, I think I've found <10 deals total that I think I would buy myself. Some of my clients are less conservative in their numbers and are willing to go through with houses I wouldn't, and I tell them this, but they like what they see. I'd say hold your course. I'd like to hope the conservative investor wins in the long run personally.
Appreciate the thoughtful answers! Looks like I'm not being too conservative, the market is just going through the end of a cycle.
Thanks! @Allan Smith @Hunter Purnell @Shane Kelly
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#3 General Landlording & Rental Properties Contributor
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Quote from @Patrick Zepeda:
Hi All!
I am having a hard time finding deals that make sense. I know most BRRRRs won't pencil upon refinancing because of the high interest rates, but I also wanted to make sure I am not overestimating the expenses that crush my RoC and CoC. See below an example of a pro forma:
Rent
$1,200 /Mo
Expenses
- Vacancy Allowance: $60 / Mo (5%)
- Property Taxes: $99 / Mo (from County's Tax Assessor)
- Insurance: $83 / Mo (Avg policy $1,000 per year)
- Property Management: $120 / Mo (10%)
- Repairs & Maintenance Reserve: $96 / Mo (8%)
- CapEx Reserve: $96 / Mo (8%)
NOI
$646 (54% of NOI / Expenses represent 46% of NOI)
Mortgage Payments
$590 / Mo (70% LTV, $80.5K loan amount, 30 year am, 8% interest)
Net Cash Flow
$55 / Mo
Even deals that comply with the 2% rule still don't pencil. Any feedback on how you model your pro formas? Am I being too conservative on the reserve accounts?
Thank you!!
All my deals over the last 10 years. (about 500 of them) are cash purchases. All have had not less than 10- 25% or much better net caps) I just closed yesterday on a 7 unit, all in 200k, NET income about 40k,,, about 20% net. Next week closing on a 4 br, all in 75k, 1300 rent, 2 br all in 55k, rent will be 850. Its all about knowledge and your network. I can get as many as I want , all with about 2% rule. BTW I do all this living out of state.
All the best,
Deals don’t work right now because we are in a bubble here in NJ. Single family homes are overpriced what you could rent for. People are pushing up the price of investment properties even though they can’t be rented for that price because people are living in them etc.
660 yearly profit/34,500 investment (downpayment) = 1.9% cash on cash which is not a very good starting point, unless you got some significant value add planned.
The only thing that seems off is your interest rate of 8%. I"m getting quotes around the high 6's.