Deal Analysis

12 Replies

Am I doing my math right?

I found a place for around $130k. Mortgage with 20% worst case is $700/month. Research is telling me I can get around $1200-1400/month for rent. Here are the numbers:

20% down = $26,000

Overestimated closing costs = $10,000

Minimum Rent = $1200/month

High Property Manager Cut at 10% = -$120/month

So here's the math:

(1200-120)/(26000+10000)=33%

So WORST CASE SCENARIO is about 33%. Am I missing something??

The neighborhood is decent. Schools are decent. There's a couple average schools nearby, but beyond that radius the schools are mostly 8/10 and above. Crime heat map is green.

The problem I have: it is out of state, I don't have a property manager set up. I pretty much have my loan, but nothing else is set up. Am I letting my emotions get to the better of me? Am I just walking around with dollar signs in my eyes?

@Jerry Poon  If you're planning on investing out of state, you may want to connect with @Ali Boone  . She's a fellow Californian and specializes in this area. Her articles can be found on the BP blog and are very helpful. To my understanding, she does recommend hiring property managers when investing out of state. Best of luck! 

You forgot about taxes, insurance, factoring in allowances for vacancy, repairs & maintenance and reserves. Also, does the tenant pay for ALL the utilities? In some states and some cities, the landlord is required to pay for the water (like Cook - er Crook county in IL).

Use my Cashflow Analyzer right here on BP:

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

Below is a screenshot of how it looks like:

Account Closed Thank you for that! Is there a glossary list for some of these terms? And are they annual or monthly numbers?

With the exception of rent per unit (which is monthly), all the other numbers are annual.

@Jerry Poon  

I would find out exactly how much the following expense are going to cost you each month. "The tenant pays" is a good answer as well. Put those numbers up here and I'll tell you what I would pay for the place.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops (my personal minimum is $150/roof/month)

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Account Closed wow this isn't such a great deal after all. only $150/month cashflow

Account Closed What is amortization and why is the default 25?

@Aaron Montague  Do you typically take a percentage out of your earnings to put into reserves?

Originally posted by @Jerry Poon :

@Aaron Montague Do you typically take a percentage out of your earnings to put into reserves?

 Yeah, that is my Cap Ex and Ops line.  Some months that is snow plowing, my places are in Vermont, and sometimes I'm saving up for the next blown water heater.  That is why I never put less than $150/month/roof into that account.

@Aaron Montague   Would you mind walking me through your evaluation process? I am interested to know what you take into considering when evaluating a new property.

@Jerry Poon  

Rental Property Evaluation:

1% rule - Do monthly rents equal or exceed 1% of the purchase price.  Purchase price is not the listed price but the amount you could reasonable expect to pay.

Determine monthly expenses.  Subtract the following from my expected monthly rents:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops (my personal minimum is $150/roof/month)

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

My basic returns must be at least $100/door cash floor and 15% Cash on Cash return to continue.

Once that is done I determine the "headache" level.  I evaluate the level of annoyance that running this property will cause me.  If I believe it is worth it, I go buy the place.

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