Property to buy?

Question

Micah Copeland · Answer

Account Closed

Of course.. its a pretty simple concept to get your head wrapped around.

A class areas - They are your super nice areas where you should be able to rent your property out to great easy tenants that make a lot of money... Usually your highest walkable areas with nice restaurants and bars around as well..

B Class - Would be one step down... Maybe a suburb not too far from the heart of your city with great middle to upper middle class tenants..

C class - Starts getting a little sketchy here but I wouldn't consider these area to be "the ghetto".. I tend to love C class areas.. They usually cash flow very well and if you can find a great C class cash flowing property that stand in line for appreciation you have a winner in my book.

D class - Take a gun when you collect rent.

A lot of investors will determine an all in price (purchase and repairs) for a property from its rent and class.

A class - 1%

B class - 1.25%

C class - 1.5- 2%

D class - 2+%

So in an A class area if the total all in cost is 100k you would want about 1k in rent.. But it is just a rule of thumb and you should run your numbers to confirm cash flow.

Account Closed · Answer

Can you explain the different class areas in more detail?  I am not aware of these classifications and what it means.  Thanks

Micah Copeland · Answer

I would love for you to invest in TN as well. That way I could wholesale you some great deals (:

Brandon Duff · Answer

obviously I would love to invest in place like Tennessee  which can easily cash flow for 200 a month.. but its much further away..

Micah Copeland · Answer

@Brandyn  Duff

Why yes sir I do know the 1% rule isn't the end all be all.... but its a good eyeball test for a reason.

Well you do have more info to help people help you evaluate the deal. Peachy.

I wouldn't pull the trigger unless I am cash flowing at least 200 and thats with the property management 10% factored in. They only way I could justify this property to myself is if it was in an area that is set to appreciate drastically, or in an amazing A class area. If this is a C class area I would run away fast.

It looks like you have ran the numbers well and if you are happy with 150 a month without getting paid for your time managing the property then move forward with confidence.

Brandon Duff · Answer

@Micah Copeland

You mentioned the 1% rule of thumb.. not the end all..

If I did my calculations right.. It should cash-flow $154 a month after all expenses.

10% of 1000 = 100 a month for Repairs

10% of 1000 = 100 a month for Cap Ex

Property Tax: 750 a year

Insurance: 300 a year

Morage with PITI = $510 @ 4%

If we follow the 50% rule.. Its about 1000 *.5 = 500 - mortgage which is (- $100)

Another rule of thumb

I ran the numbers and this is what I put 10% vacancy rate ( I put it high, i think its closer to 7)

Revenues

Rental Income

1,000

Vacancy/Loss Rate

10.0%

Vacancy/Loss Value

(100)

Gross Income

900

Expenses

Property Taxes

Annual

744

Insurance

Annual

300

Maintenance & Repairs

Annual

2,400

Utilities

Annual

0

Advertising

Annual

0

Administrative ( I just added this for some reason)

Annual

150

Variable Cost PM

(% Income)

0

Fixed Cost PM

Annual

0

Other 1

Annual

Other 2

Monthly

0

Total Expenses

Expenses as % of Gross Income

NOI (Cash Available)

493

Mortgage

421

Total Cash Flow

71

Cash ROI

CF & ROI (Doing My Own PM)

Annual Cash Flow

$2,153

Cash ROI

5.90%

Total ROI

10.15%

Micah Copeland · Answer

@Brandyn  Duff

I don't believe anyone can give you great advice without more info..

What area class is it in? An A,B,C, or D class area?

I don't understand what you mean in I did 10% repairs and cap ex expenditures and the vacancy part when you just listed rent at 1k? Did you take out all of those percentages to get to 1k or is the 1k before you have taken out all said expenses?

If the purchase price is 117k and rent a month is 1k it doesn't even meet the 1% rule so I would immediately pass.