Case Study with real numbers. To invest or not to invest, that is the question

14 Replies

Hey guys, I am a new REI looking to invest in my first out of state investment property. Been on the BP forums for a few months trying to grasp as much as I can and over a year now doing daily research about real estate. It's time to start making some offers! My plan is to buy a property every year until I achieve financial freedom.

Been looking in the Hampton Roads area in VA and have my eyes set on this property which we'll call Waldo II ;)

Here are the details:

Property type: 4Plex

List Price: 190,000


Unit 1: 500 Lease (1/2014 - Dec/2014)

Unit 2: 595 Lease (5/2013 - April /2014)

Unit 3: 595 Lease (7/2012 - July/2014)

Unit 4: 700 (Section 8) (Oct/2011 - Oct 2014)

My out of state Realtor took a look at one of the units and showed me a video and it looked in great shape. They have a policy that they wouldn't show the other units (although promising they're identical in quality) because they don't want to disturb the tenants until they have a ratified contract. If there's anything we don't like about the other units after seeing it, we can withdraw the offer. Of course I'll have that as a contingency in my offer and won't take the seller's word for it

Pass 50% rule of thumb? YES - should cashflow around +$200

Pass 1% and 2% rule? YES

Rehab budget: 10k

Closing cost estimation: $9500

After running the numbers. I am inclined to pass on it as it does not meet my personal goal of total ROI > 14% (my numbers show 9.14%) and a Cash on cash > 10% (currently 6.2%) and these numbers were calculated on the fact that they accept my low ball offer of 170k!

I think what's killing me in the apts < 200k that I've been checking is the low rentals they have and leases that aren't due till the end of the year which makes it impossible for me to get in , renovate a little, and charge higher rents. Do I have really high standards ? because I keep reading on the forums that +200 cashflow is worth considering, but for me anything that low isn't worth my time! Am I being realistic?

PS: My plan as I have heard it on the podcasts is to install water meters and have the tenant pay their own water. How do ppl feel about that?

Attached are the last 3 yrs of property mgmt statements:

How are you calculating that it passes the 2% rule?

2,390/189,500 = 1.26%

@Dawn Anastasi sorry I'll edit it, I meant 1% rule, it does NOT pass the 2% thanks for the correction

Are you financing it? What are the terms? I like $500 cash flow personally and that is on SFR houses under 150k.

I would say walk. You have a lot of leases expiring and youre inheriting tenants you havent screened. It seems like you have too much uncertainty about the deal and I would continue researching other deals, plus this deal is out of state so I don't know if you're going to be able to personally manage it.

@Mark Ferguson I agree with you 100% that's my magic number as well. And yes I am taking an investment loan (30 yrs / 25% down)

@Jordan Thibodeau but that seems the case with most of the apts I am looking for, it seems ppl in that area are selling after renewing the leases in order to show that they have no vacancy. I am an out of state investor that will get a property mgmt company to manage the property for me.

Section 8 is showing higher than market rents. When section 8 readjusts market for the area which might happen you could lose a few hundred a month.

So I would discount that money down to market rates in my analysis just in case it happens.

The section 8 and the one in December have crappy expiration lease times. It looks like landlord currently pays the water. Whether you can individually meter will depend on what is customary for the area.

If most landlords pay water around there then tenants will leave you and go elsewhere and you will have spent that money for nothing. Also even if you can put direct meters in there you might get pressure for the tenants to pay less rent. In that case you save on water but rents go down so the effect is marginal at best on boosting NOI. For landlord water I go 60% costs and not 50%. The landlord seller always shows you the best unit and tenant if they are smart so that you do not feel as bad about the other units.

I think this deal is marginal on the numbers you are looking at. I also think you will find things once you go deeper than this which will make the numbers look even worse than they are now. It would be a pass for me.

well said @Joel Owens . Your input is greatly appreciated. I think that's the direction where I am headed as well.

Quick pass.

Cap rate is about 8% (and that is buying at 170k, as you mentioned).

4 units means you should be looking for a minimum cash flow of $400, and you stated this deal offers only $200.

You'd have to get the property for about $145,000 to make it worth pursuing, IMO.

@Georges Arnaout

Just a head's up in case you haven't heard it:

BP#60 - Serge Shukhat talks about how he individually metered and how it worked out for him. Talks about the type of company he used, etc.

Best of luck investing!

@Georges Arnaout

Ooops.. I just saw how you mentioned the podcast as the place you got the idea ^^

By the way, I was wondering how you figured out your numbers? As a newbie, I was trying to do the calculations myself but I wasn't able to make them work.

For the Cap Rate, according to what I've read on BP:

You take the NOI and divide by the price you paid (including closing / repairs):

EGI = $28,680 ($2,390 x12)

2013 Expenses = $16,821 (according to the statement - 59% of EGI)

NOI = $11,859 (no vacancy considered)

Cap Rate ($11,859 / $189,500) = 6.2%

Is this what you meant by the Cash on Cash in your post?

Cash on Cash, from what I understood, was the Cash Flow / Investment Basis.

$42,500 (Down Payment) + $19,500 (Repair + Closing) = $62,000 Investment Basis

Cash flow = NOI - Debt Services (I just calculated 25% down on 30 year fixed at 7% - about $850 / mo)

Cash flow = $11,859 - $10,200 = $1,659

Cash on Cash: 2.7%

For the ROI: Using JScott's spreadsheet (the author about the post above), I calculated about 4.8%

Anyways, I'm sure you're busy figuring out if you want to make the deal or not, but if you ever have some time, I'd be curious to know how you ended up with your figures and what mistake I made in my calculations.


@Georges Arnaout

Cashflow way too low.

A buddy got a 4 unit rents it out not 900 per unit but $550 per bed to a special population (student housing) the house has 14 beds that's $7700 a month $5000 a month after expenses.

When looking at a property see if there is a better and highest use.


@Daniel Ryu These were really rough calculations using the 50% rule, I use the same sheet (a little modified) but I only crunch down the real numbers when i'm in the final step of my due diligence right before submitting an offer.

The purpose of my post wasn't to ask if this is a good deal or not but more of asking if I am being realistic with my numbers or not because I am having some trouble finding a cashflow investment property.

Account Closed This is exactly what I had in mind when first started. Find a 4plex with at least 2 bedrooms/ unit, rent it out by the room and get 8 rents a month. I will offer them EVERYTHING included (and factor it in their rents). I have seen many students pay outageous rents for that. However, what really kills you is the high turnover! Students come and go, and for out of state investing , the PM will probably charge you a fee every time someone moves in/out which kills that extra profit you made. If I was the landlord myself, I would do that w/o hesitation. Great idea!

Can anyone verify if the the current PM expenses are too high or is that something normal with quads?? I see 60-70% on expenses - that is HIGH! I already moved on and not considering the deal but just to have an idea fo rfuture properties, any MF investors out there can give a rough range on what to expect from a quad as yearly maintenance expenses? I thought the 50% rule was conservative but it seems 60% if not more are the numbers I see whenever there are 4 units in a property.

Because if that's the case, I need to start looking at condos as all my friends with condos pay around 10-15% expenses + condo fees which is still way cheaper.

any advice?

I have a duplex and the 50% rule is spot on. Going from 2 units to 3,4, and so on I would expect building maintenance expenses to increase so the 50% rule might not accurately capture this. BTW I would use the 50% rule as a quick and dirty estimation tool because each property has difference expense characteristics.

As far as condo, be aware that your investment is only as good as the HOA that maintains the building and your freedom to make decisions about your property can be limited by the HOA.

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