[Calc Review] Help me analyze this deal
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Hi, I just joined BP Pro and I would love to heard from any experience investor if this deal is a good deal. This report is exactly how I am getting the deal from the seller. The seller is paying for utilities and that's why the report shows 300+ on monthly expenses besides tax, insurance, vacancy, and Capex. Most likely I would have to negotiate with tenants because I like to only pay for fixed expenses like trash and sewer. The property is a 2bd1ba and 1bd1ba at 95820. This is going to be my first multifamily deal and I would love to heard from people who has been doing it for years.
Couple quick thoughts:
I usually use 8.3% for vacancy (1/12 months)
Id add in a management fee 8%+ even if you will be managing it yourself but for future you
You also do not have any expenses for maintenance and capex
Are you paying all cash? I dont see a mortgage
Is insurance really $1452 a year?
Hi,
Thanks for replying, indeed I didn't account for any of those expenses because I wanted to show the community this deal as I am getting it.
I am going to edit the expenses and most likely would be around the highs 4%, which in paper doesn't look like a good deal, but there is a good bit of land for future construction (ADU or maybe another unit since it is zoned RD-10).
Yes, this deal is a cash purchase and most likely I would get a small discount after inspections and because the owner wanted a fast close and 10 day inspection. The property was listed for 418k
Yes, I am in Northern California and the insurance and everything else is expensive.
What do you think about the deal overall, maybe getting 5% CoC ROI?
Quote from @Josmar Burga:
Hi,
Thanks for replying, indeed I didn't account for any of those expenses because I wanted to show the community this deal as I am getting it.
I am going to edit the expenses and most likely would be around the highs 4%, which in paper doesn't look like a good deal, but there is a good bit of land for future construction (ADU or maybe another unit since it is zoned RD-10).
Yes, this deal is a cash purchase and most likely I would get a small discount after inspections and because the owner wanted a fast close and 10 day inspection. The property was listed for 418k
Yes, I am in Northern California and the insurance and everything else is expensive.
What do you think about the deal overall, maybe getting 5% CoC ROI?
Maintenance/cap ex on a 2/1 and 1/1 will be closer to $400/month than $137. Property tax will be ~$400/month (versus the $257 you listed). Property tax for underwriting is 1.2% and typically/hopefully is closer to 1.1%.
>What do you think about the deal overall, maybe getting 5% CoC ROI?
My thoughts:
- It does not look like COC will be 5% when properly allocating for expenses. The 50% rule is going to more accurate than your projection.
- I can get better than 5% in money market, t-Bills, etc currently with less risk and effort. Historically S&P 500 has returned close to 10% over its life. Over the long term S&P is low risk (short term has risk). Note residential RE is not passive even with the use of a PM.
- With 0 leverage, virtually all your return is coming from the COC. Why would you not leverage the asset to produce better return?
- I would not take this on at this return. Too many other lower risk and more passive options available that provide similar or better returns.
Good luck
A few things
I agree with @Eric Greenberg, I think the vacancy should be higher to be safe, and the property mgt should be in there at around 8%. If you are accounting for a 4% vacancy, that equals about 25 months of full occupancy. So, you would hope the tenants don't change often. Plus a higher vacancy amt can help offset any overages in maintenance and capx, since it was built in 1957 and may have some maintenance and capx surprises waiting.
I don't think most people include a mgt expense if they are managing themselves, but then they don't look at it as a business. You wouldn't (or shouldn't) buy a business without taking into account operating expenses, and mgt is an operating expense. And if you manage yourself, you just pay yourself that income, but that is separate from the income the property is producing.
Insurance looks reasonable. Did you get an actual quote from an Insurance Agent? You should and I have an excellent farmers agent if you need a referral, or if you can (if you or a family member was/is in the military) check with USAA. I have found them to have great rates, including rentals.
Property Taxes - Your estimate is low, @ around .8% of your purchase price. CA taxes are a flat 1% of assessed value + local voter indebtedness, abatements, etc, usually in the 1.12-1.2% range. I looked at the taxes on the Subject property for the past 2 years and it shows around 1.2% is reasonable (see jpg attached). That will be based on the market value when you purchase, which will most likely be your purchase price, therefore $391/mth (see attached jpg).
So, using your other expenses, that works out to around 5.29% coc return (without adjusting some of your expenses). Generally, that doesn't sound terrible for an unleveraged investment, but it isn't great from a pure cashflow perspective either. But, when you look at it from your value-add potential (adding a unit/adu), that may make it more appealing. My guess is you would only be allowed to add an ADU, since R-10 zoning allows for a max of 10 units per acre, or 1 unit per 4,356sf. But, maybe you could get a variance and put a unit and an adu, which may significantly help the cashflow and return potential.
Oh, also keep in mind the values in CA may be near a cycle high, so you may be better off not to expect too much upward potential, at least in the near term. But, with the value-add potential that may not matter as much. Good luck and let us know how it goes!
