Second set of eyes on First deal analysis
San Francisco, CA · Member since 2016 · 20 posts · 8 votes
Hi Everyone, Hoping to get a second set of eyes on my first set of calculations. This is a TK in Indy, good B neighborhood. I still need to talk through all the details of the rehab but it will be thorough.
Quick thoughts?
Cheers and thank you!
Ben
Online sites? You're about to make a six figure investment - don't cheap out on $400 to fly there, rent a car, verify everything you've been told online is accurate, put your own eyes on the property and other deals the turnkey provider has available.
If the deal is everything it's supposed to be you're going to do more business with these people and the travel costs will really seem like a pittance. Find out that not everything is what you were envisioning and you'll feel like it was the best money you've ever spent in real estate.
Get out there.
Looking at this breakdown as long as you can keep your expenses low you will be fine. For me, i would look for something with a little more cash flow.
What will it cost to rehab?
Also, looking at your Bio you live in CA but the property is in Indy? Having to deal with a property that far away can come with the unexpected issues that can come up.
@Ben Dunning, is it REALLY a "good B neighborhood"? Being wrong by 1 grading could cost.
(I'm not saying it's not; but just suggesting: get independent verification). All the best...
@Steven Kleppin Thanks for the advice. My initial thoughts were as follows. Assuming a thorough rehab there would be limited Cap/Maint for the first year but i still want to build up reserves and I used . Of course things can happen. The numbers I have in there puts me at $1680 for Capx/Maint per year. I also planned on having 3K per properties in emergency reserves. Vacancy number are in alignment with 1 months rent which s 1K a year.
Does everyone think that is reasonable from a financials perspective? Should I be accounting for more/less?
Great advice on validating the sales price. I certainly planned on verifying Comps but I didnt know that there was a specific practice of propping up prices in hight rent neighborhoods. The initial feedback on the neighborhood is that its in a slightly higher Owner/Occupied. My thought there is that this could slightly benefit my exit strategy perhaps.
@Brent Coombs agreed i need to independently verify. Are their online sites you could recoomend in addition to talking with PM/Agents?
Thanks everyone!
Ben
Online sites? You're about to make a six figure investment - don't cheap out on $400 to fly there, rent a car, verify everything you've been told online is accurate, put your own eyes on the property and other deals the turnkey provider has available.
If the deal is everything it's supposed to be you're going to do more business with these people and the travel costs will really seem like a pittance. Find out that not everything is what you were envisioning and you'll feel like it was the best money you've ever spent in real estate.
Get out there.
@JR T. Absolutely! Have you invested in TK out of state? Any advice would be very welcome. I very much planning to go out there. The thought was due as much due diligence as possible remote, identify an opportunity then go out for a site visit while under contract round the time of the inspection. Given I dont know much about the area and you are right there are a ton of own knowns and its a significant investment. I should perhaps go out there before going under contract.
Thanks,
Ben
@Ben Dunning Sorry, was looking at the initial analysis on my phone and missed the Repairs line. $1680 certainly seems enough for a SFR.
I really don't understand how you can get to a contract without having an in-person understanding of the market. Everyone has their own investment style, but I could never determine pricing without having a full understanding of the marketplace.
@JR T. I appreciate your perspective and I do agree with you.
Closing costs seem a little low to me if you're using a conventional mortgage.
And this is just a personal thing, but whenever I look at SFRs, I start to wonder if it's worth the trouble and the risk to make $150 a month in cashflow (plus the other benefits, obviously.) If you're already going out of state, already paying someone else to do all the work, already paying someone else to manage it for you, why not shoot for a little better than 10%? Like I said, just personal preference, and I'm sure this is super attractive to someone from the highest priced area in the country :-)
As a BRRR-er, my initial reaction to this was "NO WAY." I appreciate all of your discussions on this because it has enlightened me to some degree about why the deal may be a good one.
Would (any of) you mind helping me with a couple of questions?
So, the "what if" regarding appliance/other minor repair happens is nagging me? I can easily see a murphy's law issue in the first year or two that would eliminate all the cash flow or a major chunk of it. Because there's really no equity in the property except for the cash flow, how does this make sense to potentially be underwater or just breaking even on the deal a year or even two after purchase (I assume the $140 per month Capex and repair amounts are positioned for this instance, but $1680 seems like a bit of a low amount amount considering what could happen? Maybe I'm just not as fortunate with my repair issues, lol).
What is the exit strategy? Again, because there is no equity to begin, how to you get out of this deal if 1) repairs start eating you up 2) the market drops and the value of the property loses 10% or 3) you want to recap this money to be used in a different venture?
I apologize if these are dumb questions. I don't think I'm seeing it from the right perspective, and I appreciate your responses in advance.
@Jason V. I certainly hear you. Everything I am reading indicates prices are rising and cap rates continue to compress and rent in the midwest tend to stay flat. I want to do something but things are pretty rough here in NorCal regarding cash flow for sure. I do have realistic expectations that I am not going to 10% invest myself to retirement but its a start but with amortization, appreciation due to inflation :) and tax benefits due help. I could probably make 5-10% more if I was "In Market" if I got into DIY. Trying to balance time/money/risk tradeoffs.
Open to other investing ideas as well.
Thanks,
Ben
I look forward to hearing more about your experience @Ben Dunning . I'm likely headed down the path of out of area investing and have been researching TK providers.
Hi Everyone, Hoping to get a second set of eyes on my first set of calculations. This is a TK in Indy, good B neighborhood. I still need to talk through all the details of the rehab but it will be thorough.
Quick thoughts?
Cheers and thank you!
Ben
Make sure you are super 100% confident in what the rent will be.
Also, don't know anything about the property, but your CAPEX looks low compared to what I would use. Depends on the property size, type, etc.
@Ben Dunning I wish I had an answer for you bud - if I did, I'd probably be out marketing it to everybody who's in your situation (wanting to invest in REI, but living in an area that makes that prohibitively expensive.) There's just such a huge demand for this type of thing right now that the deals get thinner and thinner (like just about everything else.)
I think the drawback of Turn Key is that you're giving the margin you normally make as an investor to everyone else in the process. You're not finding the deals, you're not buying below market value, you're not doing the rehab, finding tenants or managing them - you're just bringing the money and taking ownership. In return you're getting whatever cashflow there is, and taking on all the risk.
In a way, you're making an appreciation play - but there's no 'value add' buffer in case you don't get it. Loan paydown on a $100k loan isn't nothing, but it's secondary in my mind to cashflow and built in equity in this situation.
If your criteria is 10% return with minimal involvement, save yourself some travel time and expense and look into performing notes, REITs, or find a group of friends to gang up on a deal locally and take the driver's seat for some extra shares of the deal.
I like the idea of TKs, but I never understand the PM part of it...
For $80 a month, how hard would you look after a property that already has a 1 year lease?
For $80 a month, how hard would you remarket a property?
For $80 would do you have any incentive to keep the costs low?
Does it make sense to protect a $90,000 dollar asset with a 0.08% monthly investment? Hell I bought my car for less than 10k, and I still take it to get the oil changed and washed once a month ~$40. 40/10000 = 0.4% monthly investment in my car. I mean this is an asset that's going to bring you retirement, and you only care about it that much 0.08%??
After all that are you still comfortable with the idea of property management?
Let me preface this by saying that I'm a small time investor with just six SFRs in the suburban Cleveland area. I've only been at this a five years so I'm not the most experienced investor. In fact, I just found this site a month ago, and until then I haven't had much exposure to other investors. All this is my way of saying that I'm a noob and I don't know what sort of sophisticated investment strategies might be out there, or what other investors expect from their investments.
But here's my inexperienced two cents anyway: I'm with the others who think that a $166 monthly profit is not worth the effort, energy or risk. Also, that a 10% CoC ROI is not good. Even if it is, so called, TK. So many things can go wrong and that modest cash flow will be gone in a minute. It's not like you're buying savings bonds here, things can and will go wrong. I think you need a great deal more cash flow and and higher CoC return to invest that kind of money.
Maybe it's just the suburban Cleveland market, but I've been able to average 26% CoC and $520 per house (If I take out one under-performing property that I rented to my nephew on the cheap, I'm averaging almost 27.6%). I don't know what other markets produce or what other investors are getting, but I'm trying my best to find places that will return a 25% or more and generate at least $500. It takes a while, but I've managed to find them without too much effort here. I've settled for a little less, but that's what I'm trying for.
So take this with a large grain of salt because I might not be a typical investor. I might have been lucky and living in a optimal market. In any case, good luck.
As a BRRR-er, my initial reaction to this was "NO WAY." I appreciate all of your discussions on this because it has enlightened me to some degree about why the deal may be a good one.
Would (any of) you mind helping me with a couple of questions?
So, the "what if" regarding appliance/other minor repair happens is nagging me? I can easily see a murphy's law issue in the first year or two that would eliminate all the cash flow or a major chunk of it. Because there's really no equity in the property except for the cash flow, how does this make sense to potentially be underwater or just breaking even on the deal a year or even two after purchase (I assume the $140 per month Capex and repair amounts are positioned for this instance, but $1680 seems like a bit of a low amount amount considering what could happen? Maybe I'm just not as fortunate with my repair issues, lol).
What is the exit strategy? Again, because there is no equity to begin, how to you get out of this deal if 1) repairs start eating you up 2) the market drops and the value of the property loses 10% or 3) you want to recap this money to be used in a different venture?
I apologize if these are dumb questions. I don't think I'm seeing it from the right perspective, and I appreciate your responses in advance.
These are not dumb questions at all ... the answer is that there is no exit strategy ... it either works out as a rental as projected (without much margin for error) or this guy loses money. All the meat has been stripped off the bone on this deal already and will be put into the turnkey provider's pocket, because that is the business they are in. Otherwise, why would they sell it as opposed to just keeping it for themselves? And why a guy living in one of the most profitable RE markets in the US would feel the need to invest turn key out of state is beyond me, but that's a whole other conversation.
I like the idea of TKs, but I never understand the PM part of it...
For $80 a month, how hard would you look after a property that already has a 1 year lease?
For $80 a month, how hard would you remarket a property?
For $80 would do you have any incentive to keep the costs low?
Does it make sense to protect a $90,000 dollar asset with a 0.08% monthly investment? Hell I bought my car for less than 10k, and I still take it to get the oil changed and washed once a month ~$40. 40/10000 = 0.4% monthly investment in my car. I mean this is an asset that's going to bring you retirement, and you only care about it that much 0.08%??
After all that are you still comfortable with the idea of property management?
Michael, I didn't quite get your point. You suggest that 0.08%/m is too little (but who said it was only 0.08%/m anyway)? Whereas, at the end you seem to suggest: don't even bother with PM?...
I didn't see an address...? Did I miss it?
@Ben Dunning Fellow Indy market newbie here. Just my two cents, but I think you can do much better in this market if you currently have $18,000+ cash to spend. My business partner and I are in the process of exploring which investment strategy will serve us best, so I don't want to comment on any alternative strategy in your case. But I will say that my day job is in the commercial real estate sector, and your cash flow calculations do not appear to be extremely appealing (even if they're on the conservative side).
Either way, you seem to be very informed and prepared. Good luck!
@Ben Dunning (1) Important: Check the sales comps; (2) Equally As Important: Make sure the comps are actually "comparable" - sounds humorous, but if you don't get this right, your investment could be upside down from Day 1. In a city like Indianapolis, where values can change drastically within 1-2 blocks, not all properties on a sales comparable sheet are indeed "comparable" to the subject property - this is difficult for an out of state investor. Ask anyone who actively invests in the Indianapolis area, and they will tell you the same thing about the variances in sales comps. Good luck!
I think the drawback of Turn Key is that you're giving the margin you normally make as an investor to everyone else in the process. You're not finding the deals, you're not buying below market value, you're not doing the rehab, finding tenants or managing them - you're just bringing the money and taking ownership. In return you're getting whatever cashflow there is, and taking on all the risk.
I have to respectively disagree. Buying a turn key can be far less risky than doing everything yourself---especially for an out of state investor. Buying and rehabbing can be very risky and the average new investor with no experience can get really burned. On the other hand, the turn key company has taken all of that risk out. As far as buying below market value, that doesn't exist. Very rarely are properties sold below market value. Distressed properties are sold below their potential ARV but are not sold below market value. They are sold at the market value of their current condition. That an individual investor can buy and rehab a property for less than a turn key. There are several reasons that quite often, an individual can't do it cheaper than a turn key company.
Unless the turn key company is pricing above market value, which some do but plenty of others don't, it is extremely difficult for the individual, particularly and inexperienced, out of state investor to do it for less than a turn key company given all of the above advantages that the turn key company has. Plus, the individual takes on all of the risk doing it themselves, not the other way around.