Deal Analysis Help!

14 Replies

Hello BP-ers, relatively new to this whole RE thing and I am trying to make sure I am analyzing deals the way experienced investors do!

I have an example of a property located in Cleveland, Ohio (Specifically Lakewood) and would appreciate some feedback on my analysis and where I can improve.

property https://www.realtor.com/realestateandhomes-detail/...

This is a duplex, and my goal here was to find the purchase price that would yield a Cash-on-cash ROI of at least 10%.

I have attached a picture of my analysis:

Assumptions made during analysis: closing costs: 3.5%, pre-rent holding costs: 2 months worth of income, pre-rent repair cost: 10,000, repair monthly expense: 5% (IF THESE ASSUMPTIONS ARE ILL-ADVISED PLEASE LET ME KNOW!)

Ultimately I am looking for an experienced investors analysis to answer the questions seen at the below:

1. what price would you pay to achieve a 10% COCROI?

2. Based on a purchase price of 77k, how close is my NOI and CapRate?

3. How far off would you say I am in pre-rent repair cost?

4. other tips for a newbie!

Please help, this would be largely appreciated!

Chris Zeh

5% seems pretty low for repairs. I'd do at least 10% repairs and 10% CapEx.

Howdy @Chris Zeh

Answers to your questions:

1. You answered your own question in your analysis. Purchase price is not the driving factor to CCR. Your total cash outlay and the NOI are the determining factors.

2. Again Purchase price is not key to NOI. Accounting for all expenses is. In your analysis you did not include any utilities. Are you sure the owner is not responsible for some of them? This is a Duplex and we do not use Cap Rate since it is considered Residential property and not commercial.

3.  There is no way to know Rehab costs without inspecting the property.  If you have a list of needed repairs then a ruff estimate could be made.

4. Properties that are 1 to 4 units are considered Residential. Therefore, you need to determine what the Fair Market Value (FMV) of the property is based on similar properties recently sold in the area (comps). You need to know that to establish an After Repair Value (ARV). This is your starting point to determine your Maximum Allowable Offer (MAO). It will also help you decide if the asking price is reasonable or not. In your example the asking price is $110K, but, you are using $77K for the purchase price. How did you arrive at $77K? I'm not saying it is wrong, but, you need a method to arrive at that amount.

@Chris Zeh , as well as the points raised above, are you sure you can borrow 80% LTV?

Getting your finances/Lender in place first, can be a key ingredient to success.

If it turns out you have to put down 25% instead of 20%, and/or you can't get as low an Interest Rate or as long a term as you thought you could - that'd severely affect your CoC! All the best...

A few notes: 

- Lakewood taxes will be more like 3.33%, but the vacancy rate will probably be lower. Lakewood is a competitive rental market.  I would factor 5-7% rather than 11%.  

- Investor loans will probably be higher than 4%, unless you plan on living in one of the units.  I have paid 4.5-5% in the last 2 years.  If 4% is an actual quote, please forward me your lender details!

- Insurance will probably be a tad higher.  $60-70.  Again, if $50 is an actual quote, please let me know.

- Property Management is generally 10%

Good luck!  77K with little rehab is a decent deal for Lakewood these days.

@John Leavelle very good insight on all your responses!

2. how would you go about finding out if the owner is responsible for them in during your analysis? would you analyze to the point of calling them during your analysis to see who is responsible for what? was also unaware CapRate was only a commercial thing!

3. Brandon Turner's book always recommended laying out an estimate for rehab during your analysis of the property, how would you go about doing this John? as I wouldn't want to deeper dig into rehab costs on every property I viewed, right?

4. I arrived at that price by trying to swing a 10% COCROI but now I am realizing that is not the best way to do it because to your point Purchase Price does not have a huge effect on COCROI. Could you walk me through how you would arrive at a Purchase Price?

I would truly appreciate it if you continued to help, your comments have already taught me some things!

@Brent Coombs thanks for the comments Brent! 

My follow up to that would be how would a savvy novice investor (or even yourself) go about acquiring this info if they don't plan on purchasing a property within the next 6 months? ...Right now I am in the educational side of my journey but I still think it makes sense to know where I stand, to your point.

Originally posted by @Chris Zeh :

@Brent Coombs thanks for the comments Brent! 

My follow up to that would be how would a savvy novice investor (or even yourself) go about acquiring this info if they don't plan on purchasing a property within the next 6 months? ...Right now I am in the educational side of my journey but I still think it makes sense to know where I stand, to your point.

I would suggest talking to lenders and letting them know your situation, the types of properties you are looking at and what your end goals are. See if they are aligned with your vision and what programs they can offer you in advance.

@John Koster Thanks for the insight!

Follow up to your points... So I see you reside in Valley Village, Cali and I live in Cleveland yet but you have a better nose for what the taxes would be, which shows me how much I have to learn, how did you arrive at those numbers? The best I can ever come up with is a quick search on google for "lakewood property tax" and/or "lakewood vacancy rate". I think hearing how you arrived at numbers you feel confident in, would be huge for me.

I was using this home as a proxy to evaluate where I am at with analyzing and all those numbers were estimates, so I will not be able to provide you a lender or insurance! (but I was unaware that investor loans tend to be higher than a home you'd live in, so thanks for that note)

Looking forward to your response!!!

I grew up in Lakewood and have a few properties in the area, so I studied up on the tax rates after realizing the stark differences between some of the suburbs.  Garfield & Shaker are above 4% while most of Cleveland is 2.86%.  Cleveland.com had a a breakdown of the different rates at the beginning of the year which I am having problems linking.    It is http://s.cleveland.com/4Ug4hcl   If that doesn't work the post was from 1/25/17....Googling it might work.  

What are you assuming for repair costs? You are probably going to need between 3-5k for that porch alone. I just did a repair like that on a lakewood duplex last year, and a lot of times you will discover a whole can of worms once you pull the porch apart, especially once the City gets involved. I hired some carpenters direct from my company and bought materials direct, and it still cost me $3500 to do mine.

@Chris Zeh

I invest in specific zip codes and neighborhoods.  I continuously research the market in those areas.  Class of neighborhood, schools, crime, types of rental properties, rental rates for each type, ALL sales in the market, etc ...  This includes utilities operating in the area.  

I conduct my analysis in three phases.  After a property is identified through “Driving for Dollars “, searching websites, or lists sent from my Realtor I will do a quick 10 minute analysis.

Phase I:  Quick analysis.

Does the property meet the 1% rule based on List price and stated rental income. Will the property provide a minimum of $100 Cash Flow per unit using the 50% rule (I actually use 55% to be extra conservative). I also use conventional lending with 25% down payment, 4.5% APR/30 years for this analysis. If it doesn't meet these ruff requirements I move on to the next property. If it passes I I do a little more thorough analysis.

Phase II:  Proforma Analysis.

I have my Realtor obtain as much information as possible from the Seller. Anything not provided I will use may researched data. I include all possible expenses (including such things as Pest management, Legal, and Accounting). I will walk the property with my Realtor making a list of obvious repair items. From this list I develop a tentative SOW (based on the checklist in J Scott's "The Book on Estimating Rehab Costs ") for my contractor to create a Rehab bid/budget. We create an ARV based on the most recently sold comps in the area. I use the BRRRR strategy as my primary investing method. So the properties I buy are distressed. Here's how I determine my MAO. These require non-conventional financing (Cash, Hard Money, Private Money) and doing a Cash-out Refi later.

ARV x 70% = All-in Costs basis

All-in Amount - Rehab Costs - Closing Costs - Holding Costs = MAO

If needed repairs are not as extensive, then, conventional financing would be used up front.

Phase III:  Due Diligence Analysis 

If the offer is accepted I would schedule a property inspection to determine what the current condition of all major components and appliances are in. From this report I finalize the immediate Rehab costs and develop a more accurate CapEx reserves requirement. We confirm all previous data collected as well as complete all other due diligence items.

I also want a minimum of 10% CCR for non-BRRRR deals. BRRRR returns tend to be infinite if done correctly.

Originally posted by @Chris Zeh :

@Brent Coombs thanks for the comments Brent! 

My follow up to that would be how would a savvy novice investor (or even yourself) go about acquiring this info if they don't plan on purchasing a property within the next 6 months? ...Right now I am in the educational side of my journey but I still think it makes sense to know where I stand, to your point.

My response would be the same as what @Brian Garrett wrote above: Talk with Lenders.

[I don't actually live in Ohio, so can't offer specific advice for there]. 

Also I suggest: have a good look at what @John Leavelle wrote regarding property analysis!

Originally posted by @Chris Zeh :

Hello BP-ers, relatively new to this whole RE thing and I am trying to make sure I am analyzing deals the way experienced investors do!

I have an example of a property located in Cleveland, Ohio (Specifically Lakewood) and would appreciate some feedback on my analysis and where I can improve.

property https://www.realtor.com/realestateandhomes-detail/...

This is a duplex, and my goal here was to find the purchase price that would yield a Cash-on-cash ROI of at least 10%.

I have attached a picture of my analysis:

Assumptions made during analysis: closing costs: 3.5%, pre-rent holding costs: 2 months worth of income, pre-rent repair cost: 10,000, repair monthly expense: 5% (IF THESE ASSUMPTIONS ARE ILL-ADVISED PLEASE LET ME KNOW!)

Ultimately I am looking for an experienced investors analysis to answer the questions seen at the below:

1. what price would you pay to achieve a 10% COCROI?

2. Based on a purchase price of 77k, how close is my NOI and CapRate?

3. How far off would you say I am in pre-rent repair cost?

4. other tips for a newbie!

Please help, this would be largely appreciated!

Chris Zeh

 All in on a Lakewood duplex for under $100k is a home run. You should hop on that before it's gone. I assume this is on the East side of Lakewood. It's worth noting that West side Lakewood duplexes sell for $200k+

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

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