First Investment Property Evaluation

Real Estate Deal Analysis & Advice
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First Investment Property Evaluation

Steve Cook
Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes

Hi guys,

I'm running the numbers on my first investment and wanted to get your thoughts. It looks like a great deal to me from a numbers perspective. I'm a buy-and-hold investor and am not concerned with appreciation. This is a turnkey property and I'll be conducting reference calls with some of his other clients and talking with the property manager. For other turnkey and out-of-state investors, what other steps have you taken to mitigate your risk from a distance?

Details

Location: Indianapolis

3 Bedroom / 1 Bathroom

Completely rehabbed in 2013, list of renovations include:

New decking, new roof, all new joists, insulation, drywall, all new plumbing, all new electrical, new exterior siding, new flooring in all rooms, new kitchen cabinets, new kitchen counter tops and sink, new shower/tub & surround, new vanity, new toilet, all new light fixtures, new tile flooring, new carpets, new doors, new paint in all rooms.

Financial Analysis

The property is currently leased at $775 for 1-year. I've also assumed $2,500 for closing costs. I'm not sure if closing costs are typically included in cash-on-cash, so I've included that metric with and without closing costs.

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Chris ClothierBusiness Member
Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
12y

@Steve Cook - I would confirm very carefully the closing costs with the lender. At 20% down, a GSE lender is going to charge you points. If you increase it to 25% you can reduce out that money into bought equity instead of a closing fee. Also expect them to tack on a fee for a low price loan. It will balloon the percentage to purchase price that you pay for closing costs. Neither of these are bad things and they will not make the deal go bad, but you just need to be aware of them.

Lastly, a lot of the advice on here is about percentages which is usually the way we think. With a lower priced house, you really need to think in terms of dollars as well. I am not sure of the poster, but someone pointed out that it would take multiple years to save for a new furnace or hot water heater or A/C unit.... Hopefully you get the point. You need to price these things and account for them now. Either by putting the money to the side in an account that you will not touch, or calculate building that fund with your cash flow over the first year or so while you prepare for what will eventually happen.

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30 Replies

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    Your listed total for operating expenses is so low - some of us who self-manage might have a tough time being that low. And you have the PM fee in there ...

    1Reply
  • Greg Rulfs
    Los Angeles, CA · Member since 2013 · 66 posts · 18 votes
    12y

    Hi Steve,

    Your ROI seems right with those numbers. Is the tenant paying all utilities? Are there no HOA fees?

    You may want to factor in a Turnover allowance, depending on how your rental agreement is written up with regards to Security Deposit/Early Move Out Fee.

    Congrats on getting a deal together. Good Luck!

    1Reply
  • Dewayne Gammel
    Real Estate Investor · Memphis, TN · Member since 2013 · 37 posts · 21 votes
    12y

    @Steve Cook

    Yes I consider closing costs as well as a down payment cash-on-cash. If I have to spend initial cash to acquire a property I do factor that as cash spent. In this case your cash on cash is 21%.

    However what is the areas cap rate? I figure mine at 20% and fluctuate it from 15-20.

    At:

    10% =$58658.52 which equals no equity except the down payment.

    15% =$39105.68 better

    20% = $29329.26 best

    I am not familiar with the area however I would definitely ask what are the cap rate ranges for the area. I would want some equity going in, other than my down payment.

    0Reply
  • Robert Lasko
    Investor · Martinsburg, WV · Member since 2014 · 28 posts · 16 votes
    12y

    I agree with Babiak. I think you should double your maintenance percentage. From your calculations, it will take you 10 years to save up for new furnace.... That's if nothing else goes wrong. Even with maintenance doubled, it still looks like a nice deal.

    0Reply
  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    12y

    I agree with those saying to up your maintenance expenses. I would put it at $2,500 to be conservative. Even if you don't spend that much in year one, you should still be accruing for maintenance and repairs because you will have to spend that money down the road.

    0Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    @Steve Babiak @Robert Lasko Wholeheartedly agree, before I move forward, the property will be subject to an independent inspection looking at all the big ticket items. This was just on on-paper exercise, but I plan to leave all the cash flow in a dedicated reserve account until I hit a certain threshold, I was planning on $5K. At that point, any excess would be used to fund the next property.

    0Reply
  • Steve Chaisson
    Nashville, TN · Member since 2013 · 86 posts · 40 votes
    12y

    Your numbers aren't right.

    Maintenance reserve at 8% might cover long term physical depreciation but not expenses. You are way off. Add another 15%-20%. If this property is in perfect condition in an appreciating area and you are buying equity on the front end, it might be a good deal. It's very difficult to qualify the value of a $58,000 investment with a cap rate, because small fluctuations in expenses mean large variations in cap rate. The aesthetics, the physical condition of the property, the potential for appreciation, the ease of management and maintenance - these are things that are much more important in the consideration of a single purchase. If you are an institutional investor and you purchase hundreds of these properties with more conservative expense numbers then assumptions within the model become more important.

    0Reply
  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    12y

    @Steve Cook Property taxes in Indianapolis are 2% for investors, around $96/mo not $42.

    0Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    @Ciprian L. Totally agree with you. This immediately stood out to me when I compared it to other properties, with property taxes of 1.5-2.5%. This is the actual property tax paid last year based off the assessed value, which was pre-rehab. From what I've read, property taxes in Indianapolis are not reassessed on transfer of ownership. Do you have any insight here?

    1Reply
  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    12y

    Yes, I have properties in Indianapolis. On one of them the taxes more than double in the first year compared with the previous year. Maybe it won't happen in the first year but I think they verify the homestead deduction every 3 years.

    It's better to do your calculation with 2% for property taxes in Indianapolis when you are looking to purchase an investment property.

    1Reply
  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    12y

    @steve cook, I live here in Indy and only look here. This isn't a bad deal, but there is certainly much better deals out there. Don't settle for less than 15% cap. Also, taxes are 2%.

    0Reply
  • Steve Endress
    Sheffield, IL · Member since 2012 · 85 posts · 27 votes
    12y

    My thought would be that you're not getting a lot for the Fannie loan that you're using up (if my assumptions are correct). I am purchasing new single family's in nicer areas for about double that cost and still good cash flow. if you are limited on your fannie loans then you should consider higher priced properties to extend your leverage further.

    0Reply
  • James Syed
    Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
    12y

    @Steve Cook Welcome to BP.

    You have got quite a few responses. Your anticipated expenses figures are quite low. Especially you are combining your replacement reserves with your regular repair and maintenance @ 8%. It's too low.

    Also insurance looks low as well for an investment property. Check last 3 years of expenses from current seller.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    I'm not in total disagreement about your maintenance estimate. 8% isn't horrible for a freshly rehabbed property. For the first couple-few years there should be minimal maintenance but then it will increase as years go on. Unless it's a really old property, then repairs will happen faster (and going by that price range and rent, it's probably older). Absolutely get that property inspection for you.

    A couple things to note about the lending. Do you have a lender for the property already? Most lenders won't lend less than $50k, meaning a property for $58k may not be able to get you a loan (80% of $58k = less than $50k). Some small banks will do it, but be sure you have one who will because they won't all. The other thing to be warned about it the appraisal system in Indy right now is in the toilet and there is a huge chance the property could appraise low meaning you'll need potentially a lot of extra cash out of pocket. It's not a bad thing assuming you have the cash, but it is if you don't.

    And last thing to check, make sure the property isn't considered to be in a flood zone. Flood insurance there can get astronomical, so you don't want that expense sneaking up on you.

    2Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    @James Syed Appreciate the response. Per my earlier note, I'm not planning on taking any of the cash flow out of the property until I've hit $5K in total reserve. If we did this on paper it's effectively a 38% maintenance reserve per month for the first 16-months.

    @Ali Boone I'm speaking with a lender tomorrow who will lend under $50K in Indianapolis and deals frequently with investors. Great idea on the flood zone, I'll definitely look into that. Build year is 1957.

    0Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Steve Cook , you have gotten some great analysis here. I have three more important things to add. Location, location, location. Make sure of your area. Make sure it is as nice of a neighborhood as your purchase price allows. War zones make money ... if you live there and are a dam good manager. They break absentee landlords. There are dozens of folks on BP from Indy who know the good and bad areas. PM them and get their opinion. I like your numbers, even though your cost side is too low, but your location is possibly more important. Good luck

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    12y

    @Ali Boone is absolutely right about flood insurance. Not many people think to include that in their due diligence. Great advice from Ali once again.

    0Reply
  • Shawn Holsapple
    Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes
    12y

    Good point @Ali Boone , I have seen flood insurance kill at deal at the closing table because of ridiculous increases.

    A $165k retail flip just fell apart at the table because the old insurance was $2650 per year and the new buyer found out the day of the closing that their insurance was going to be $7875 per year!

    0Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    @Ali Boone Confirmed that this property is in a low to moderate risk flood zone.

    @Jerry W. I'm not an expert in Indianapolis, but have been researching which townships to focus on and this is in a good area in the Pike township, certainly not a war zone property.

    @Josh C. I'd be interested to see where you're seeing 15% cap rates in Indianapolis in good neighborhoods for SFH's. After researching for the last couple months, I think duplexes might be able to create those returns in Indy, but I'm not interested in the increased vacancy risk and lower quality of tenant.

    0Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    Thank you all for the feedback, I think the main concern for me is that the property is reassessed and the taxes are doubled, which I have no control over. That alone reduces monthly cash flow by $51. If I also double the maintenance to 16%, the revised scenario looks like this, still nice to see that it's cash flowing. Based on some additional information, I've also increased my lending rate to 5% and lowered property management to 8% (my desired PM's rate).

    0Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    12y

    @Steve Cook - I would confirm very carefully the closing costs with the lender. At 20% down, a GSE lender is going to charge you points. If you increase it to 25% you can reduce out that money into bought equity instead of a closing fee. Also expect them to tack on a fee for a low price loan. It will balloon the percentage to purchase price that you pay for closing costs. Neither of these are bad things and they will not make the deal go bad, but you just need to be aware of them.

    Lastly, a lot of the advice on here is about percentages which is usually the way we think. With a lower priced house, you really need to think in terms of dollars as well. I am not sure of the poster, but someone pointed out that it would take multiple years to save for a new furnace or hot water heater or A/C unit.... Hopefully you get the point. You need to price these things and account for them now. Either by putting the money to the side in an account that you will not touch, or calculate building that fund with your cash flow over the first year or so while you prepare for what will eventually happen.

    Podcast Guest on Show #224
    REI Nation4.576 Reviews
    WebsiteView Page
    3Reply
  • Steve Cook
    OP
    Real Estate Investor · San Francisco, CA · Member since 2013 · 60 posts · 28 votes
    12y

    @Chris Clothier Appreciate your insight, thank you. I'll be back with more details on the lender and closing costs.

    Regarding maintenance, we're on the same page, this is essentially what my investment would look like for the first 20 months, which is how long it would take to build up my maintenance reserve, 16 months if I incur no vacancy loss. Strategy is to direct all cash flow to a reserve account until I hit $5K at which point, cash flow will be redirected toward reinvestment.

    0Reply
  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    12y

    Sounds like you have a really good plan and are listening and adjusting as you get good advice. That is a great approach.

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    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Just make sure you go ahead and get the flood insurance quote though. No telling what "low to moderate" means in terms of $. I've seen a lot of properties lately, one that was only 0.5ft into a flood zone, require $4000/year insurance. @Shawn Holsapple is totally right on those numbers. Flood insurance is killing deals left and right in Indy right now.

    0Reply
  • Shawn Holsapple
    Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes
    12y
    Originally posted by @Robert Lasko:
    I agree with Babiak. I think you should double your maintenance percentage. From your calculations, it will take you 10 years to save up for new furnace.... That's if nothing else goes wrong. Even with maintenance doubled, it still looks like a nice deal.

    Don't forget that maintenance items here in the Midwest are low cost. I typically pay under $900 for a new furnace installed here in Indianapolis.

    I would suggest using 10% as a reserve for maintenance. This is probably high since the subject property has had a recent thorough rehab.

    1Reply
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