Cash flow analysis.

41 Replies

Hey everyone. I am new to BP and I currently do not have any investment properties. I plan to close on something this coming March. I have the idea of starting out with a single family or a condo/townhome for a rental property after living there for a year or so. I want to post a possible deal for second opinions. Even though I am not pulling the trigger on anything yet, I just want to know if my head is in the right spot or if I need to rethink somethings. So here is the kind of possibilities I am looking at. I plan on putting 5% down on anything I do. Also, how much should I ask off of the listing price? Thanks in advance.

Here is the description:

"Move in Ready two bedroom town home located in desirable area. Recently painted and new carpet in bedrooms make this the perfect investment property or starter home. Main level is complete with kitchen, dining area, pantry and great room which is perfect for entertaining family and friends. Two spacious "master-like" bedrooms in upper level with bathrooms. Home is located near shops, restaurants and entertainment."

 2bed 3bath 1254sqft condo.

Listing price :$124,500

HOA: $145

Build date: 2003

Mecklenburg annual tax: Approx. $1300

AVG. rent: $919 according to rentometor

No one has answered bc there is not enough information.  I would do more to find out market rents than rentometer.  HOAs can suck you try and complicate things so you need to know the rules there too.  This would be more of a local question to answer what things cost, what are the caps or cost/rent ratios in the area, etc.  Being close to a lot of things is great if it makes it a desirable area, but i think most important is what you are paying.  What are the comps?  What are others renting for?  What is your end goal?  How do you plan to put 5% down?  What makes this a place you want to buy.

I have to agree here. When it comes to property for personal use versus investment, knowing what other properties are selling for is critical. You would need to talk to a local real estate agent to get that answer.

Honestly though, I would not invest in a property that had a HOA for my first investment. Those dues are easily changed from year to year and can kill any cash flow.

Also, you need to factor in that since you are not putting down the standard 20%, you are going to be paying mortgage insurance (unless you are going VA). Count on paying .1% of the loan annually - more if FHA.

As stated above there is not enough information to give an accurate answer.  At the current price, rental rate, and using a 50% expense ratio, you come up with a 4.4% cap rate.  Most likely your cost of money will be that high or higher.

Even with your proposed scenario, this is too much to pay.  You need to determine your required rate of return.  I, personally, require 3 percentage points above my cost of money.

Calculate your offer price based on your required return.  Your offer price should have nothing to do with the list price.

Good Luck.

Bill

Hi @Mark Albano  yes, you need to dig deeper into the numbers.

Your question is about cash flow analysis.

At first blush, the average rent you posted isn't even 1% of list price. At $124k, you would want to see monthly rents closer to $1200 at minimum. You would never buy based on that guideline alone, but it's a starting point. From there, add your other expenses, from vacancy to insurance to repairs, to estimate what the property will really cost you.

Example: $599 mortgage, $107 tax, $145 HOA = $851/month PLUS insurance, repairs, vacancy, property management, PMI, etc.

Your example as-is creates negative cash flow.

For beginning investors, it's extremely important to look for positive net cash flow. This means that after all expenses are paid, including mortgage, the property leaves you with money in your pocket.

You're asking good questions and hopefully will find something that works for you.

PS - Ask the real estate agent what "perfect investment property" means. Then ask them about cash flow, and how they came to that conclusion. Then look for a real estate agent who owns rental properties themselves and knows what to look for.

@Hattie Dizmond  - your answers are always good, but you nailed this one right to the cross...lolol  Can I translate - quit wasting our time; go use the calculator!

Is that about right, Hattie?

Hahaha

Originally posted by @Mark Albano:

Here is the description:

"... this the perfect investment property ..."

Ask the agent: "If it is such a good investment, why aren't you buying it?"

Be prepared for that agent to look stunned :)

@Pete T.  

@Simon Campbell  

@Hattie Dizmond  

@Steve Babiak  

@Ben Leybovich  

@Susan Gillespie 

@Bill Jacobsen  

Hmmm well I mentioned the listing price but I never mentioned an actual purchase price....Say I stole it for $90,000. I was more so just throwing out a scenerio on an actual listing I saw. Not actaulling buying for $124K. Just doing some quick math I know that doesn't make sense. I guess this kind of analysis needs to be more research on my personal area (Rent rates, area desirability, insurance, etc.)

But what information am I missing. I will be glad to research it. Like I said I have no experience at this. I definetly have some learning to do. I don't know what the 50% rule is. I did have a crack at the analysis calculator but like I said. I don't know what the 50% rule is so I'll go and learn that right away. But I like your style Steve Babiak, put him right on the spot! Simon Campbell, I have heard of HOA fees raising from year to year. But I had no idea it could go up enough to kill cash flow!

So it sounds to me like if I took a pole on SFH vs. Town home/condo, the SFH would win.

But what information am I missing. I will be glad to research it. Like I said I have no experience at this. I definetly have some learning to do. I don't know what the 50% rule is. I did have a crack at the analysis calculator but like I said. I don't know what the 50% rule is so I'll go and learn that right away. But I like your style @Steve Babiak , put him right on the spot! @Simon Campbell , I have heard of HOA fees raising from year to year. But I had no idea it could go up enough to kill cash flow!

So it sounds to me like if I took a pole on SFH vs. Town home/condo, the SFH would win.

 1) how much is the real estate taxes?

2) does the tenant pay for the utilities or will it be the landlord? In Chicago Cook county, the landlord almost always pays for the water for example.

Once you have these info, you can use my Cashflow Analyzer (screenshot below):

You can download the actual spreadsheet here on BP: 

http://www.biggerpockets.com/files/user/Mister4clo...

Where are you getting a 95% LTV on a rental?

Only way I'd ever consider any rental in any HOA would be if I had 51% or more of the voting ights in the HOA!!!!

Never use income projections from the seller or a Realtor, you can only use fixed expenses of the owner after a close examination as your position will always be different than the current owner's.

The 2 and 50% rules are not real rules to arrive at any buy decision, they are to use based on what you think the sale price might be or the list price is better (it's higher) while driving by or viewing data to see if it's worth getting more involved. Different parts of the country yield different returns from different sources, appreciation could be great in one place, really poor in another, taxes will vary and tax credits may be in the mix, so you need to pencil it out yourself in your reality.

Consider management, unless you are expecting to work for nothing.

The buy decision is an economic consideration, not strictly a financial one. The finance side tells you if you'll be paying out of pocket, economic considerations tell you the benefits of owning. Then you can place a value on those benefits.

You also need a known return to meet your goals if you look to cap rates, which can also be misleading unless you are doing a more sophisticated analysis than 95% of small investors might do. You're also looking at pro forma estimates, your real cash flow is never known until you have received it and past some point in time.

I understand looking at the figures for a buy decision, but can you tell me why you need a cash flow analysis, not a pro forma statement for the lender, but an expected, pro forma cash flow analysis??? 

My guess is that folks have time to kill with unnecessary calculations to keep their nerves in check or to put smiles on their faces.

Do your due diligence, cost it out, determine the cash received, estimate expenses, have reserves, determine the benefits of holding, buy it and move on. 6 months later review it, then at tax time, thereafter count your money from your deposits to your accounts. I only have (had) time for results not fantasy or estimates or hopes or calming fears.

When you have ten properties, your business is usually at a point where your accounting and financial analysis might be reviewed. One of the basic considerations of analysis and accounting systems is that the effort and benefits must be worth it, if you're playing with the calculator you're not looking at your market or reading about changes in laws or doing something else that actually has greater value to you and your business.

Students learn financial analysis (maybe in college) and learn by looking at some small business making 2,5 million annually, then they take the same approach to their business of 2.5 thousand annually or 25 thousand, when you bring back the deviations to the present value it might amount to dinner out! Saying, folks usually have better things to do than trying to analyze income from a rental house.     :)  

At first glance it doesn't even look like this property is going to cash flow. Maybe, depending on where it is and I'd have to see more numbers, but it's looking low. Also, you can't buy an investment property with 5% down. It will likely be 20% for a SFR for 25% MFR. Sorry!

Ahhhh, gotcha.

And, there IS your REASON to BUY!  :)

Then live in it, initially select a decent area, you know where you would live (LOL) then later on, look at it to rent, if not, sell and move on. That is how I started! 

@Bill Gulley  

Oh cool. It's obviously has worked well for you =) But yes, I will abolutley pick an area I will feel comfortable in. After a year or so, just like you said, rent it, if not sell and move on!

Yes, what we get here are a bunch of analytical types, for fun or fortune, they just have to play with a calculator to figure out what most don't know, but think they are accomplishing something. You do realize that after you live there for while, your market can change making all you do today, irrelevant. If you like living there, you probably have a good rental.

Pretty simple. :)

@Bill Gulley  Yes I did take in to account that the market could change. I'm usually the opposite of being analytical. But in this case, being so new to something, sometimes I don't have a good reason for asking something other than just learning different stratagies, ideas, and getting a different perspective on things from different, successful, investors. But yes it does seem simple enough!

Originally posted by @Mark Albano:

@Bill Gulley  Yes I did take in to account that the market could change. I'm usually the opposite of being analytical. But in this case, being so new to something, sometimes I don't have a good reason for asking something other than just learning different stratagies, ideas, and getting a different perspective on things from different, successful, investors. But yes it does seem simple enough!

Mark, I know you said you'd live in the home first, but let's say it is in fact a 124k home that would rent for $900. Have you thought about finding a home like this for rent and just renting for a while and spending some more time here on BP learning before buying a house? Either way, if you rented or sold, I don't see an upside whether you do either in the next 3 years. When you rent, you don't have to pay for as many fixes as if you were a home tax payer. Consider the potential loss of your time involved in any work you do on the home. I've done it and regret spending all that time of my life painting. You don't get that time back. 

@Scott Stevens  

I see what you are saying and you make a valid point. I don't want to rush into anything. That is why my game plan is to buy this coming April or May. By then my lease will be up (I am currently renting a townhome) and I will have a good bit saved for a down payment. I study something new about investing everyday and have been for the past 8 months or so. I know I could never know everything I need to know in that amount of time, but I would think I would know enough to get started... I think. I know at some point I just have to pull the trigger on something. What is your opinion? Does that sound like a game plan? Is there a certain amount of time gaining knowledge before I buy?? I'm all ears. Thanks in advance.

@Mark Albano  

This is a definite pass as a buy and hold investment.  You will lose a fair amount of money on the place once you move out.

Here is what the numbers look like if you finance it at 90k with 20% down. Remember, these number don't change much year over year. The only thing I'd imagine changing is the HOA fee, which is bad for you.

Simply because you liked living there DOES NOT make it a good investment.  If condos in your area are increasing in value at 5+% a year, then this property could make you a bit of money when you sell it.  Just bear in mind your Realtor fee is going to eat 6% of the final sale price.

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $386.51

Taxes $108.33

Sewer and Water $- tenant

Trash $- tenant

Heat/Utilities $- tenant

HOA $145.00

Cap Ex and Ops $150.00 (this could be argued that it will be less, maybe $100/month because it is a condo)

Insurance $75.00 (i made this up)

Mgmt Fee $95.00

Vacancy $76.00

Total Expenses $1,035.84

Total Revenue $950.00

Cashflow/month $(85.84)

Cash on Cash Return-4.38% 

@Mark Albano  

I'd go buy something like this on a 203k loan:

http://www.realtor.com/realestateandhomes-detail/1...

I don't know anything about Concord, NC, but it is within 10 miles of Davidson.  I like the concept of living in a 2-4 unit property and having the other units cover most, if not all of the bills.  Plus this place looks like it will cash flow even after you move out.

$550 seems like a reasonable number for renting a 2/1 apartment in that area.  The numbers jump to $650+ for 2/2s.  

@Aaron Montague  

The HOA fees seem to be the cash killer. But that place in concord could use a lot of work! Is there something I'm missing?

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