Deal Analysis

7 Replies

HI All,

I just had an offer accepted on my first property. I plan on living there and renting out the other extra 2 bedrooms. However, my analysis is based on if I didn't live there. Main objective is to cash flow as it's somewhat difficult to cash flow in my area. 

Please let me know your thoughts on my analysis as the property will be going into Attorney Review most likely tomorrow. 

Purchase Price: 240,000

Down Payment 5%

Monthly Rental Value $2,400

Property Taxes $5000

Vacancy Rate $2,400

Yearly HOA $3500

Maintenance $600

Insurance $300

Total Annual Opp 12,218

Total Operating Income $16,582

Interest Rate w PMI 4.75%

Estimated Mortgage Payment 1200

Monthly Cash Flow $217

Any comments would be greatly appreciated

I dont understand your numbers.  First does maint include repairs? If so that is a little low unless the property is brand new or you are doing all the repairs, even so that is a little low.  Who is paying for the utilities and which ones?  Out of your expenses listed Total Operating Income doesnt add up, did you forget to add in something?  Where did you get your monthly cashflow numbers from?  

2400*12=28800 annual income

28800-12218(Operating expenses)=16582 NOI

16582-14400(1200*12 mortgage payment)= 2182 annual cashflow

2182/12=182 monthly cashflow

Not sure how this property meets your needs but the cash flow numbers are not that great.  Is this in an area that it appreciates nicely or is it close to your school or work because those things are factors that would outway the cashflow since you will be living there.

Changed the numbers very slightly from the actual so privacy purposes which is why the cash flow number may have gotten screwed up. The $600 maintenance includes repairs for the year. I know it's a low cash flow number but there isn't many condos that I have seen in a decent area in downtown Chicago that cash flows well. I'll be living there for a few years which will be saving me money rather than paying rent etc which is expensive in the area. My goal after the fact is to rent the property and make a small income. I do expect rent to increase & the property to increase.

Rent $2400

P&I  $1200

Tax $416

Vacancy $240

HOA $292

Insurance $80 (more than you thought)

Repair $50

CapEx $50

Cash Flow $72

MAKE SURE YOU READ THE HOA BYLAWS!!! If the bylaws say you have any rental limitations even if they are not enforcing them now you are going to have problems down the road.

I agree that your maintenance/Cap ex. seems small.  I would probably be at $1,500 per year.  Insurance seems low.

In most evaluations you should include management expenses even if you plan to manage.  That is probably 10-14%.

If I can get a 4.75% loan I expect a cap rate of 7.75% or better.  This property would not make the cut at the current price.

Good Luck.

Bill

Don -  To make the proper analysis based on the change of your situation, you also need the following information

1.   If you don't live there, how much in rent you would pay for living somewhere else.  This is the cost you would avoid by living there.

2.  How much will be the annual income for renting the 2 additional bedrooms (total including any vacancy).

3. You don't mention how much will be in PMI.

The analysis is simply a comparison of cash flows in 3 different circumstances.

1.  You don't buy the condo.  That includes you pay rent somewhere else.

2.  You purchase the condo and rent it out.  You still pay your current rent / living expenses somewhere else.

3.  You purchase the condo, live on it, and get extra income from the 2 bedrooms.

The one that provides the most cash flow (or requires the least cash flow) will be the one ideal scenario.  If scenario 1 is the best, that means the economics of the deal don't work out.  If scenario 2 is the best, you rent it out rather than live in there.  If scenario 3 is the best, then you could move in there.  To make the comparison, we need to know the 3 additional data points. 

I ended up killing the deal my realtor was obviously not happy. Realtor says they work with investors and none of them use a vacancy rate on condos with less than 12 units. Claims none of his clients ever have a vacancy. Any thoughts? Appreciate everyone's help on this. 

Welcome to BP. 

There will always be a vacancy rate factor, if there is no vacancy, your rent is very low (below market). 

Even if your realtor doesn't want to use a vacancy rate, an appraiser will use at least 5% vacancy rate when using income approach method. 

Hope it helps.

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