First Potential Investment Needs Seasoned REI Review

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First Potential Investment Needs Seasoned REI Review

Juan Silva
Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes

I'm considering putting an offer on a NOO duplex in Pierce County, WA, and since this is my first time jumping into the deep end of the pool :-), I'd appreciate a review/spot check from this seasoned BP community to make sure I'm not missing anything. Without further ado, here's the annual financials:

1. Offer Price: $199K

2. Financing & Mortgage: 25% down, 30yr Fixed @ 4.625% = -$9194

3. Scenario 1 - Based on Current Below Market Rents:

a. Total Expenses: -$6152

i. Property Tax: -$2652

ii. Insurance: -$890

iii. Maint & Repairs @10%: -$2310

iv. Other Admin: -$300

v. Self PM: $0

b. Gross Income: $21175

i. Rental Income: $23100

ii. Vacancy @ 8.3%: -$1925

c. NOI & Cap Rate: $15023 @ 7.56%

d. CF: $5829

e. CCR: 9.77%

4. Scenario 2 - Based on Increasing Rents To Market Rate:

a. Total Expenses: -$6482

i. Property Tax: -$2652

ii. Insurance: -$890

iii. Maint & Repairs @10%: -$2640

iv. Other Admin: -$300

v. Self PM: $0

b. Gross Income: $21175

i. Rental Income: $26400

ii. Vacancy @ 8.3%: -$2200

c. NOI & Cap Rate: $17718 @ 8.92%

d. CF: $8524

e. CCR: 14.29%

Scenario 1 would be the current reality with Scenario 2 being the upside potential. Am I missing anything from these numbers? Does this read as a good investment on paper?

Thanks for any and all feedback.

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Bill Jacobsen
Salem, OR · Member since 2013 · 701 posts · 159 votes
11y

I use your interest rate of 4.625% as your cost of money.  I would compare that with your cap rate including property management.  I would want a cap rate of 7.625%.

If rent on a property is $800 per month I am going to base value on that.  If rent could be raised to $1,000 per month because of my efforts I am not going to give the seller credit for the extra $200.   I may give him credit for 1/2 of that.

If rent is $800 per month with a 50% expenses ratio I will value property at $62,951.  I might raise the value to(( $900X12)X.5)/.07625 or $70,820.

I hope this helps.

Bill

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  • Jeff McDermott
    Involved In Real Estate · Camarillo, CA · Member since 2014 · 44 posts · 14 votes
    11y

    Looks good to me!  A decent cap rate and there is always avenues to lower expenses and account for raises in rent.

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  • Bill Jacobsen
    Salem, OR · Member since 2013 · 701 posts · 159 votes
    11y

    I expect as cap rate that is 3 percentage points above my cost of money.  This cap rate has to include all expenses including property management.  This property does not give that return.

    If I can increase revenue I am only going to pay 50% for it since I am doing it, not the seller.

    Based on that I would not pay $199,000 for this property.

    Good Luck.

    Bill

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  • Juan Silva
    OP
    Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes
    11y

    @Bill Jacobsen to make sure I follow your rationale, please help me understand what you'd consider my cost of money to be in this example. Can you also help me understand what you mean by:

    "If I can increase revenue I am only going to pay 50% for it since I am doing it, not the seller."

    Thanks in advance for your guidance.

    0Reply
  • Juan Silva
    OP
    Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes
    11y

    @Bill Jacobsen  I just read one of your other posts on

    http://www.biggerpockets.com/forums/88/topics/1610...

    and think I understand now what you mean by cost of money. In my scenario, at 4.625% interest on my 30yr mortgage, you'd look for a cap rate of 7.625%. Is that correct? 

    I'm still unsure what you mean by:

    "If I can increase revenue I am only going to pay 50% for it since I am doing it, not the seller."

    However, if I get rents back up to market rates, that would translate to an 8.92% cap rate. Understanding it's not a given, but with this potential upside, does that make the deal more palatable to you?

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  • Bill Jacobsen
    Salem, OR · Member since 2013 · 701 posts · 159 votes
    11y

    I use your interest rate of 4.625% as your cost of money.  I would compare that with your cap rate including property management.  I would want a cap rate of 7.625%.

    If rent on a property is $800 per month I am going to base value on that.  If rent could be raised to $1,000 per month because of my efforts I am not going to give the seller credit for the extra $200.   I may give him credit for 1/2 of that.

    If rent is $800 per month with a 50% expenses ratio I will value property at $62,951.  I might raise the value to(( $900X12)X.5)/.07625 or $70,820.

    I hope this helps.

    Bill

    1Reply
  • Juan Silva
    OP
    Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes
    11y

    @Bill Jacobsen   Your explanation perfectly clarifies it for me, so thanks for that. Following your advice by giving seller 1/2 credit for increasing rents to market rates, here are my revised income/expense financials:

    1. Total Expenses: -$6482

    a. Property Tax: -$2652

    b. Insurance: -$890

    c. Maint & Repairs @10%: -$2475

    d. Other Admin: -$300

    e. Self PM: $0

    2. Gross Income: $22688

    a. Rental Income: $24750

    b. Vacancy @ 8.3%: -$2063

    3. NOI & Cap Rate: $16371 @ 8.24%

    4. CF: $7176

    5. CCR: 12.03%

    My revised cap rate meets the 3% cost of money threshold, and unless I'm missing something else, your guidance is greatly appreciated!

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