Running the Numbers... Good or Bad Deal?

Question

Before I make my first purchase I think it will be beneficial to run the numbers on as many properties as possible, but how do I know if my numbers are right or not?  I was hoping to provide the numbers for an example property and get feedback on whether the numbers look good or not!  (This property is on Zillow for those willing to look at it or actually make an offer)  So here we go:

Address: 808 Valdes Ave, Akron, OH 44320

Description from Zillow:

Located in area of well maintained homes, this home features vinyl siding, vinyl windows, new furnace April 2017, new alum kitchen sink, hard wood floors, upstairs has 2 rooms which can be a dorm or bedroom with sitting area and finished room in basement to use as a rec room or office. Large rear yard. Sold as is. Seller will make NO Repairs.

3/1 with 1163 sq. ft.

Asking Price: 32,000

Closing Cost (2% of PP): 640

Possible repairs: 15,000

Monthly Costs:

Taxes (1249/12): 104

Vacancy (5% of PP): 35

Management (10% of PP): 70

Capex (5% of PP): 35

Maintenance (10% of PP): 70

Misc. (7.5 % of PP): 52.5

Mortgage (20% down, 30 yr fixed at 4.059%): 123

Total Monthly expenses: 549.5

Potential rent: 700

Cash on Cash Return: 1.026

Monthly Cash Flow: 150.5

Do these numbers sound correct?  I would appreciate any feedback, thanks!

Samuel Bavido · Answer

If you are just guessing on the 15k repair number, then you can't know if you are running the numbers correctly. A property that is sold "as is" could need a bit of paint and new carpet, or an entire gut and work on the foundation, plus a new roof. If this is just an exercise to learn how to run numbers, I would suggest finding a different property. If you are seriously interested in this property, I would start by calling the agent and candidly asking what problem the owner is not willing to repair. If it sounds manageable, go take a look. If you aren't a handy person, take along a friend or a contractor who is, so you can get an informed opinion about the amount of work/money that will go into the project.

Joseph M. · Answer

Correct, you cannot use tax assessed values only, but you still need to know what they are. Since both you and @Nick Ferguson live in Ohio you both have a better idea of your market than I do. I've never been to Ohio, which is a completely different market then here in Virginia. To run comps you would look for similar houses in the same 3-5 mile radius and average their after repair values. Look at what houses recently sold for and how many days they were on market (how long did it take them to sale). What Nick didn't mention was how much work did he have done (cost) to get his appraised value higher? You can also start looking for contractors and ask them what it would take to get the house rent ready. If you are handy you could do probably most of the work yourself along with some friends. I don't think I would put more than 3k into it though.

Nick Ferguson · Answer

@Garrett F Anderson  Tax assessed value isn't what I would be looking at to determine a purchase price.  In a lot of areas of the country, tax assessed value may actually correlate to value but in Ohio (at least where both of my houses are) the tax assessed value really has nothing to do with the market value.  It's simply a product of whatever multipliers the local municipalities use to determine the taxes that they collect on the property.

For instance, my first property... purchased for 52K, tax assessed value at 25K, and my appraisal I had done appraised at 68K.  Purchase price, tax assessed value, and appraised value are often independent.

A better way to figure a fair purchase price would be to A) Talk to a realtor or compare local comps or B) figure out how much you need to make, what your expenses and risks are, what risks you're willing to tolerate, and then go from there.

Ryan Evans · Answer

@Garrett F Anderson I don't mind at all. I paid 24k cash plus the 10k in rehab/flights and my time. Although it was quite a mess when I got there, I got the place up and running to where it's now renting for $1300/month total. Plus $25 for the garage which I rent to the maintenance guy and pay straight back to him for lawn mowing.

I was willing to take the risk on that one because I knew I could get $900 in rent based on the current tenant. But it was a nice surprise when I found out the neighborhood was doing a bit better than I thought. Turns out I'm doing about $850 in cash flow.

I'd never expected to make 37% on a deal again, though. I consider myself lucky having survived the first deal. The next one I've got under contract is $75k + around 15k rehab over the next couple years (needs a roof soon). Will rent for $1500 pretty confidently and estimated cash flow is $600. It's financed 100%. That's a more reasonable set of numbers.

I wouldn't consider a deal with less than $400 in cash flow out in that part of the country, but to each their own!

Ryan Evans · Answer

Here's my $.02 based on my experience with a total disaster $25k property out in Cleveland that hopefully, you can learn from, too. I'm so glad I had such an awful experience the first time because now I've got a much better idea of what to expect. I put about 10k into the property. About 8k materials and the rest labor. Though, I spent 6 weeks of rehabbing and don't count my own time.

Capex - Ok this is a big one. 5% of a 3k/ month rental is much different than $700. You absolutely should not go off percentages at a pricetag of $35k. A new furnace more or less costs the same in a $500k house as a $35k house. Same goes for roofing, floors, fixtures, paint. I'm assuming it's an older house and $420 a year won't cut it. Combined with your misc cost you're doing better, but I'm just saying don't go by the %, go by the $$$.

Just to again reinforce the appraisal value issue. Just ignore it I say. Go off of comps and actually know the neighborhoods. If you have blighted streets in the area they can easily have a 20k impact on your price.

I won't comment on repair cost because that's such a major unknown. But that's what inspections/ estimates are for.

Your taxes will likely go up after the 3-year appraisal cycle. I'd budget $1500/year

Vacancy, probably safer to round up to about a month per year. You'll be in a lower class neighborhood and will probably have some rehab after each turnaround. -$700/year

Many companies have a minimum management fee. Assume $100/month unless you already have that lined up.

I've heard the market is somewhat similar to Cleveland, so hopefully, that means you can see numbers in the same range. For 50k all in, I wouldn't touch anything less than $1200/month. That likely means a duplex. Most out of state investors are going to the midwest so they can see cash flows of $400+ per month.

Ok, whew, that's all for now

Oren K. · Answer

Garrett - Some excellent comments so far. To add a couple of points;

- It' good that you put in a vacancy factor but is this the right number.  This is a single unit so 5% vacancy means ~2.5 weeks / year of no income. Even assuming the rehab work will only take you 1 month from closing to get rent ready AND you get  a tenant before you finish any remodeling work, they have to stay there at least ~2 years for this to be valid. If they stay longer, you are ahead but if they leave after 1 year, or it takes a month or two to find a tenant after rehab, your vacancy should be larger. Also, keep in mind how long you expect it will take to find the 'next' tenant.

- Also, consider the capex and maintenance. At $35 / M and $70 / M, you have $415 / Y and $840 / Y respectively or $1,255 / Y combined. This will not take you very far if there are any issues that come up. IF you really invest $15,000 in rehab and bring everything up to 'NEW', you probably will have relatively low maintenance costs but still any major 'system' (e.g. Roof, HW tank, AC, etc) will use that up and more in a heartbeat. If you are doing the maintenance yourself, that would stretch the funds but still, it may not be enough.

- Regarding the property taxes. As far as I know, most counties in Ohio generate a 'Market Value' assessment based on comparables every 3 - 6 years. The 'Assessed Value' is then 35% of the 'Market Value. The 'Mil Rate' is then applied to the 'Assessed Value'. Make sure to confirm this with the local county assessor.

I know you have to start somewhere but using average numbers based on many units (e.g. over 100) will not work for a single unit. You need to get in there, see for yourself.

Samuel Bavido · Answer

@Garrett F Anderson, it really isn't possible to estimate prices for "as is" properties unless you go on-site. Maybe, for things like new roof or flooring, you can just look up the average cost in that area...but even then, you just don't know until you see what you are actually dealing with. If the agent gives you an estimate, you can use that as a jumping off point, but don't sign on the dotted line until you have independent (and trustworthy!) confirmation of those numbers.

John Leavelle · Answer

Howdy @Garrett F Anderson

Thought I would jump in and give you some extra pointers.  First, do not use just one website (i.e. Zillow) to evaluate a property.  It may have been listed with multiple sites.  Each may provide a little different information to glean.  In your case if you check Redfin.com you will find the property is listed as a "Short Sale".  Which means the property has lost value and the current owner is probably underwater owing more than it is worth.  That is why you see the "Sold as is" comment.  Your best source should be from your own Realtor.

As @Samuel Bavido suggested there is probably hidden problems.  Look at the picture of the finished basement.  All along the baseboards and curtains appears to be water damage.  The Seller apparently cannot afford to do the repairs needed.  I'm sure there are more issues.  We don't know how old the pictures are either.

Unless you have a Realtor provide you with extremely good firm comps to justify an ARV closer to say $75K I would not touch this one.  I'm willing to bet the repairs would be more than $15K.

To answer the question "how do you estimate repairs before going to look at the property?"  The simple answer is you don't!!!!  Not unless you are an experienced Rehabbing investor or contractor.  However, there are some who go in assuming a full cosmetic Rehab (inside and out) and then adjust that number based on the inspection.  They will typically use the square footage time a dollar amount.  Like $20, $30, or $40 per square foot.   A higher dollar amount would be for better finishes.  For your property that equals $23,260 ($20 sf).  I would not recommend you do that.  I do recommend you get 2 books available here on BP.  J Scott's "The Book on Estimating Rehab Costs " and " The Book on Flipping ".  They will provide you with a good foundation on Rehabbing.

Good luck.

Joseph M. · Answer

Do you see yourself putting up $15k for repairs on a house that costs $32k? I think that number should be less, unless you were flipping the property to sale. As a rental you just have to make it rent ready. Besides removing wallpaper and painting, what else would you do? Kitchen cabinets are in good condition, you need appliances, replace/remove rug, and some paint. How did you get $15k?

I think $150 positive cash flow is good but the tax assessed value is only $15k as well (not so good). You wont have any equity in the house when you purchase it. So I would look to purchase for around 15k or less. Make an offer for less and see what happens.

Chris Bounds · Answer

@Garrett F Anderson, another note to consider is the acquisition strategy. Why would you be considering 20% down? On any acquisition, for a flip or rental, we use hard or private funds. For a rental you can then implement the BRRR strategy and refinance out with long-term conventional / commercial financing. If you buy cheap enough you will have little cash in the deal after refinancing.

Running the Numbers... Good or Bad Deal?

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