Hello everyone, I am possibly looking into my first deal. I am extremely new so please take it easy on me ;-). I by no means think I have it all together or want to. I would greatly appreciate any info as well as perspective when looking at this deal, thus why I am putting myself out here with such little knowledge.
I am using the Rental Properties Investment calculator on BP, however I am finding out that I still have quite a bit of a learning curve to understand all that goes into my first deal. One thing I know for sure is that once I master this process I will be in a great place. I do not want to get wrapped up in emotion but numbers. I just need some guidance on figuring out that formula to the best of my ability. Any help would be much appreciated!
1) So starting out on the calculator, I am not to sure what my area's average cap rate is. How do I go about figuring that out?
I am looking at a property that was recently built within the last 7 years and if all the numbers add up correctly, I would probably negotiate a price of about $167,000-$170,000. I have spoken with a realtor about what the possible rent could be for this property and she checked with a management company that told her between $1,400 to $1,450.
2) Is there any other due diligence that I can do to make sure this number is correct? I have checked craisglist but their are not many on there to compare rents with.
Property taxes are $2,900
I would be putting down 20% and am looking into a 30 year fixed around 5.2% to 5.5%.
I am assuming that electricity, water, sewer and garbage would all be paid by the tenant. I am checking to verify that there are no HOA's but I believe there are not.
3) What would be the best way to figure out what insurance would be on the house? Is there a particular formula to calculate that or do I need to call an insurance company?
I picked about 8% for a vacancy rate. I am in a very desirable area and school district so I believe it may be a little high but however I would rather be safe then sorry.
4) Not sure what % to chose for Repairs and Maintenance since it is a fairly new house? What would you suggest?
5) What % should I use for Capital Expenditures, this I really have no idea about.
I have added 10% for Property Management even though I will most likely manage this one but I still want that in the budget because when I decide to change or scale up I want that already apart of it.
6) When it comes to future calculations, what is a safe rule of thumb for Income Increases per year (%), Property Value Increases per year (%), and Expenses Increases per year?
Please feel free to add anything else I may be missing or need to consider. Again I appreciate all of you working with me to help me understand everything that goes into this process. I hope that I learn to develop my skills in the future I will be able to add value back to BP as well.
I AM ALL EARS!!!
call an insurance company for a quote or for figures sake go with $1,000 yearly.
try using rentometer.com to get rental idea, its free.
@Jonathan Gregori , love your thoroughness. Great questions. One thing I noticed, that others will likely chime in about, is that $1,450/month gross rents on a property you're buying at $170,000 doesn't even meet the 1% rule, never mind the 2% rule. I'm new, too, however I won't really consider anything where the monthly rent / purchase price ratio is less than 1%.
Hey @Jonathan Gregori ...
I agree with @Mark S.
Unless you really feel there is a lot of appreciation on that property, it sounds like a pass for me too. I just would want a much larger return on your money. After your expenses its going to be tight making anything on it cash flow wise, and thats before anything breaks.
I'd look at areas you know, and ask realtors/investors who know the areas well that have great rentals, and see what people come up with. Look on zillow or other sites where there are a lot of rental options (for renters) as well, and then look at those areas and see what they are renting for.
Also, you can buy a less desirable house you have to put some money into, and get more equity/cash flow that way. Hope that helps.
@Nathan Brooks hey nathan can you elaborate more on what you meant in regards to the appreciation. Thanks!
I use $1,000 per year for maintenance and I use $.67 per square foot for capital reserve up to $1,000.
I usually don't look at appreciation but am trying to determine a current cap rate. Your total return is your cap rate + appreciation rate. If I am calculating appreciation I use 2-3% for income, expenses, and value. Once you estimate the value of the property several years out you have to remember that selling costs will be about 7%.
After adding costs for maintenance and capital reserve I get a return before appreciation of about 5%. Your cost of money is higher than that so I wouldn't be interested. Just my opinion.
@Bill Jacobsen Thank you for weighing in. I appreciate your input. I still feel lost. What info am I missing to make a better decision that I can bring to the table for this property? I am not trying to make this one work, I am just wondering if there is info that I am leaving out. I know we never should do a deal based on appreciation. I think the way I looked at this house was also to consider the following-- because of the area that it is in, the growth that is going on in that area, a new highway project that is just about to start and because it is in a good school district while being in the center of it all. I assumed if I can just break even monthly that I would be able to exit out in the next 3 to 5 years with appreciation. Again I am completely new to this and would be open to any insight. Let me know what other info I would need to even see if this would fit. Thank you again for your help.
I mean that for instance, you buy at $100k, and within a certain period of time you believe the house would be worth substantially more, therefore you could cash flow for a period of time, and then sell.
The other issue here to consider is, even if it DID become worth more, you can hypothetically sell it for more, doesn't mean that someone would want to make even lower return.
You always have to separate things that you "like" ... deals that you are emotionally driven too, and be able to walk away. I am not saying this is it, but if you have become too emotionally invested in this, you should walk.... I have made this rule for myself, and I have never once been upset after. I am sure I have missed a few deals, but the no and moving to the next was much cheaper than the deals I said yes to, and then had to live with my decision.
My take is too look elsewhere. While I am aware some areas like California and such, are happy to break even or even negative cash flow, because of the appreciation. And over the years that has worked well for that area.
Texas is a fine state, but it's not Cali.
If you are looking for rental properties, buy/hold, the unit must cash flow for multiple reasons.
Appreciation is just icing on the cake.
I am a newbie myself, but I would never buy a property that I know going into it wouldn't cash flow a minimum level of $100 or more, after accounting for ALL expenses.
@Nathan Brooks I hear you loud and clear.
@Jonathan Gregori Cool ... hope it was helpful.
And listen, the best advice I can ever give is get a great mentor. It's a life and business changing thing.
@Nathan Brooks I agree with that 100% I firmly believe in mentorship. I have many mentors in many areas of my life. Just starting out on this journey and I am looking to find another one for this new area of my life.
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