Real Estate Deal Analysis & Advice

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Brady Ascheman
  • New to Real Estate
  • Benson, MN
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Deal Crunch (Help Wanted)

Brady Ascheman
  • New to Real Estate
  • Benson, MN
Posted May 16 2022, 19:31

I was wondering if you could walk through a potential deal with me? Asking price $89.900. 2 bed 2 bath. I estimate monthly rent to be anywhere from $750-$800. I used bigger pockets calculator and calculated an offer of $75,000 10% down payment, interest rate 6% loan term 15 years. $10,000 estimated repair costs.3% Vacancy 3% Maintenance 3% Cap Ex. $794 Tax $500 Insurance. Now what I am curious about is when you analyze a deal at the end what numbers do you look at. I have a 2.2% CoCr and 9.6% Cap Rate. What number do you base your buy or pass up decision off of?

Rochester, Minnesota

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Tim Herman
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Tim Herman
Replied May 17 2022, 06:41

@Brady Ascheman You have to use some realistic numbers to run your calculation. My bare minimum for capex and maintenance is $150 per month. Using % you will be at $48. It is better to run the budgets, A long term vacancy of 3% is hard to achieve. Most banks use 5%. 3% is the equivalent of your tenant staying 33 1/3 months. What happens to that 3% when it takes you 3 months to evict. your next tenant will have to stay 100 months to get back to 3%. This how a maintenance budget works. Cost to rehab between turnover plus service calls. Assume $1500 to rehab plus 3 service calls at $150. $1950/ 33 1/3 months= $59 per month for maintenance. One item in a capex budget. Floors. Go to your favorite flooring store and ask what is the commercial warranty. Most will be 10 years or lees. That is you lifespan. Assume 1000 sf of flooring. My are it is $6 sf to replace. $6000/120 months lifespan=$50 per month for 1 item. Already exceeded your budget and you have not saved anything for roofs, hvac, appliances, hot water heater, future kitchen and bath updates. etc. Remember capex and maintenance are estimates only and don't occur when scheduled. That is why reserves are a must. For me cash on cash. 

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H. Jack Miller
  • Lender
  • Delray Beach, FL
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H. Jack Miller
  • Lender
  • Delray Beach, FL
Replied May 17 2022, 08:05

I think the numbers your using are very low. In the real world for this type of product a 3% vacant is almost impossible over a period of time. Some tenants don't pay and it takes months to get them out, sometimes there is a turn over time and then you have the unexcepted events like Covid. I would use 15% vacancy. 3% cap ex and Maintaince again is VERY low. I would figure 5k annually,  what every your using for taxed and insurance I would raise it. Insurance is going up and so is taxes. Cap rates are hard on properties like this, but I think your is very low.

I feel bad, saying all this, but real world can be much different then text book. I also would keep a lot of cash reserves, that's your best protection.

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Conner Olsen
  • Real Estate Agent
  • Austin, TX
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Conner Olsen
  • Real Estate Agent
  • Austin, TX
Replied May 17 2022, 09:06

@Brady Ascheman Dollar amount return is more important than a percentage in my opinion. 2.2% CoC is extremely low for a return especially if the price of the property is $89k.

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Cal Martin
  • Real Estate Agent
  • Moscow, ID
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Cal Martin
  • Real Estate Agent
  • Moscow, ID
Replied May 17 2022, 17:30

Personally what I prefer to do is to establish a substantial "doomsday pool" for vacancy, repair, and cap ex that I fund by taking the cash flow and putting it directly in that pot. The size of the pot depends on the property itself. Is it brand new or was it built in the 1800s? If it brand new then cap ex and repairs, as well as vacancy will be less than a property built more than 100 years ago. Personally, I would find other local investors in your area through here at BP or ask a local real estate agent for investors that they work with and you will most likely find what you are looking for!

As for the buy/pass number it depends specifically on the market. Some places still operate under the 1% rule while others have negative cash flow. It all depends on your market. Don't be afraid to ask a local agent as they will be very happy to be receiving a call from a potential buyer!