Help Analyzing My First Deal

[John Garretson]

Hi All,

I'm getting ready to do my first deal and I wanted to get some sense of whether the numbers work well...

Fully renovated, new roof, new interiors, granite countertops, LVP on all floors, etc. Basically look like luxury apartments. Place is completely redone.

Fourplex around 3,800 square feet.

Sale price: $400,000

No off-street parking. That's common in this city. In a medium-sized city. Not major city. Real estate prices here are generally reasonable.

Rents are $1300 in 3 units, and $1225 in one of them.

We're going to do owner-occupied and put 5% down.

The place is beautiful on the interior, and we won't have to put any work in at all because they just completely redid the place...

PITI total should be around $2900 per month. Taxes are around $7,500. Principal and interest around $1800. Tenants pay their own utilities.

Trash, sewer, water is picked up by landlord.

Is this a good deal or should I look elsewhere? I don't want to get in over my head... Will reserves and cash flow be good on this? Thanks for any guidance you can provide.

[Ben Wilkins]

When looking at an investment, you have a few expenses that you need to consider. These are not concrete expenses such as taxes or bills, and are instead calculated as percentages of the income (I call them "Percentage Expenses")

Maintenance: 10%. This is for every day wear and tear, repairs, removing bee nests, etc

Capital Expenses (CapEx): 10%. This is your major repair items - basically, you're saving up for when the roof needs replaced, the water heater needs repairs, etc

Property Management (PM): 10%. Even if you plan to manage the property at first, you might decide not to later. Also, your time should be worth something

Vacancy: 8%. This should be based on the average of your market, but 8% is a safe, conservative number.

A quick method for evaluating is to assume 50% of your income will go toward your percentage expenses and your utility expenses. The remaining income will be an estimate of your monthly NOI. As a side note, 5% down on a $400k loan would make P&I closer to $2040 rather than $1900, and that doesn't include PMI or taxes.

So say you rent out three of the units for $1300 = $3900 monthly income.

Now, subtract 50% for expenses and you're left with $1950 as your NOI.

Take out your mortgage payments of $2040 = -$90 monthly cash flow

So you'll have negative cash flow based on this very loose evaluation, and assuming you live in one unit. If you rented all four units out, your number would change to $560 monthly cash flow.

On paper, it's actually not a bad deal, and you can live in one unit for only $90 per month. Once you move out, you can have $560 cash flow, which is better than $100 per door.

Now, the major "but":

This was done using 50% for expenses, which doesn't take into account PMI or the higher taxes. This is a good example of where the 50% Rule might not be a great first analysis.

My suggestion would be to do a full analysis of the property rather than depending on the 50% Rule. For the sake of keeping this post a little shorter, I'll run a full analysis in a second comment ;)