Please Review My Rental Analysis!

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Please Review My Rental Analysis!

Michael M.
Rental Property Investor · Tustin, CA · Member since 2015 · 67 posts · 19 votes

Hi All, So I think I found a duplex to invest in Clark County, Ohio (My first investment...and out of state to add to it!).

Just wanted to get everyone's thoughts and opinions prior to writing the offer. Please let me know if you think I'm missing something. I'm a little nervous (out of state investing part) yet excited (because it'll be potentially my first investment). All advise is appreciated!

Thanks!

Assumptions: 


Closing Cost: Assumed 4%


Property Tax was estimated at $2700~ on Redfin / Trulia, just pampered it a bit to be conservative just in case with whats going on.


Repairs: $5,000 - Based off photos, house looks well maintained; just a reserve amount for any touch up work needed

Interest Rate - Used 5.125% since it'll be an income property 

Rents - Prices are on par with Zillow's advertised rent in the surrounding area, verified with local REA. Also, tenant pays all utilities

Unit 1 Bd / Ba 3/1.5
Unit 2 Bd / Ba 3/1.5    
       
Asking $ 200,800.00   Down Payment 25%
Purchase Price $ 185,000.00   Loan Amount $ 138,750.00
Closing Cost $ 7,400.00   Interest Rate 5.125%
Annual Property Tax $ 3,500.00   Duration of Loan (years) 30
After Repair Value $ 185,000.00   Monthly Payment $ (755.48)
Estimated Repairs $ 5,000.00      
Total Cash Required $ 58,650.00      
   
       
Property Tax $ 291.67      
Water $ -      
Maintenance Expenses $ (126.00) 7%    
PM Fee $ (144.00) 8%    
Cap Exp $ (126.00) 7% Unit 1 $ 900.00
HOA $ -   Unit 2 $ 900.00
Insurance $ (150.00)   Unit 3 $ -
P&I $ (755.48)   Unit 4 $ -
Total Monthly Expenses $ (1,009.81)   Projected Monthly Rent $ 1,800.00
       
    NOI $ 790.19
    GRM 8.565
    Cap Rate 5.13%
    COC 16.17%
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Sam Alomari
Rental Property Investor · Alexandria, VA · Member since 2016 · 75 posts · 58 votes
8y

Hi @Michael M.

You missed a very important expense especially for a duplex which is (Vacancy)! It is my number one reason to avoid multifamily rentals. SFH has a lower vacancy rate but for a duplex, I would account for at least 10%. Now your monthly net is $610 and COC is 12.48%

I noticed that you estimated $5k repairs but for some reason you don't believe that the $5k is going to increase ARV. If that's the case, then you should buy for $180k or less. Why would you pay $185k when you know the property worth $180k? Again ARV is "after repair value", so your ARV should at least equals your (purchase price + Repair Cost).

Usually your ARV should exceed (cost+repair) because you are taking on the risk of a repair/rehab project as well as investing your own time, so I would pay $175k at most (Usually I go lower) so that you get some upfront equity. Remember, you make money when you buy :)

Cap Rate and GRM are generally used on commercial buildings and are irrelevant when you talk about residential real estate below 5 units. 

GRM is a rough estimate only, so don't worry about it. Even if we consider the Cap Rate, how do you like your 5.13% Cap Rate? I know you are probably looking at the COC, but if you want to sell your investment, and if the Cap Rate is a valid measure, then it's too low and that's what an investor would use (again, if it's valid) to figure out how good is this deal.

Residential real estate is affected by the location and crime, so if your duplex is 10% Cap Rate and in a high crime area, good luck selling or even attracting good tenants. My point is, don't look at Cap Rate, just look at cashflow, crime rate, location, potential appreciation, etc.

Finally, I suggest that you dispatch a good inspector to give you a full report about the condition. You can submit an offer with inspection contingency. 

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  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Michael M.  $150 per month for the insurance is very high.  $100 per month is still high, but would be a conservative # to use.

    Good luck!

    0Reply
  • James Canoy
    Kingston, NY · Member since 2017 · 252 posts · 138 votes
    8y

    what software did you use for your numbers? Just word or excel?

    0Reply
  • Chad Drewson
    LOCKHART, TX · Member since 2017 · 3 posts · 1 vote
    8y

    did you include a vacancy rate? Why use 8% for the PM fee instead of the standard 10%?

    1Reply
  • Michael M.
    OP
    Rental Property Investor · Tustin, CA · Member since 2015 · 67 posts · 19 votes
    8y

    @Jason Bott Thanks for the clarification,  Is that typically the value you use for multi / duplex? 

    @James Canoy I just used excel with a bunch of formulas 

    @Chad Drewson Did not include vacancy but will add for that, the units are already occupied per the REA. Also 8% are what PMs charge within Clark County

    0Reply
  • Andrew Schwartz
    Brick, NJ · Member since 2015 · 14 posts · 2 votes
    8y
    Looks good to me. Insurance does seem high. I️ would assume $100-$125, but definitely double check. Also, would strongly advise, having a property management company take a look at the property and suggest what would need to be done in terms of rehab.
    0Reply
  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    @Michael M. pricing can range for $300-$1200 depending on the age, value, construction and if you are buying insurance on 1 or 50 locations. 

    When starting out, I would suggest getting a formal quote for each new purchase.  Once you get 5-10 locations, you will have a pretty good idea of where the pricing will fall.

    0Reply
  • Michael M.
    OP
    Rental Property Investor · Tustin, CA · Member since 2015 · 67 posts · 19 votes
    8y

    @Andrew Schwartz Thanks for the advise; I plan on having a contingency offer with inspection / review of tenants and home. 

    0Reply
  • Sam Alomari
    Rental Property Investor · Alexandria, VA · Member since 2016 · 75 posts · 58 votes
    8y

    Hi @Michael M.

    You missed a very important expense especially for a duplex which is (Vacancy)! It is my number one reason to avoid multifamily rentals. SFH has a lower vacancy rate but for a duplex, I would account for at least 10%. Now your monthly net is $610 and COC is 12.48%

    I noticed that you estimated $5k repairs but for some reason you don't believe that the $5k is going to increase ARV. If that's the case, then you should buy for $180k or less. Why would you pay $185k when you know the property worth $180k? Again ARV is "after repair value", so your ARV should at least equals your (purchase price + Repair Cost).

    Usually your ARV should exceed (cost+repair) because you are taking on the risk of a repair/rehab project as well as investing your own time, so I would pay $175k at most (Usually I go lower) so that you get some upfront equity. Remember, you make money when you buy :)

    Cap Rate and GRM are generally used on commercial buildings and are irrelevant when you talk about residential real estate below 5 units. 

    GRM is a rough estimate only, so don't worry about it. Even if we consider the Cap Rate, how do you like your 5.13% Cap Rate? I know you are probably looking at the COC, but if you want to sell your investment, and if the Cap Rate is a valid measure, then it's too low and that's what an investor would use (again, if it's valid) to figure out how good is this deal.

    Residential real estate is affected by the location and crime, so if your duplex is 10% Cap Rate and in a high crime area, good luck selling or even attracting good tenants. My point is, don't look at Cap Rate, just look at cashflow, crime rate, location, potential appreciation, etc.

    Finally, I suggest that you dispatch a good inspector to give you a full report about the condition. You can submit an offer with inspection contingency. 

    2Reply
  • Derek Kirkwood
    Palmdale, CA · Member since 2017 · 83 posts · 39 votes
    8y

    The math for cash-on-cash return here is wrong. You are dividing NOI by Total cash invested. You haven't paid the mortgage payment yet! CoC is cash flow before taxes divided by total cash invested.

    Using your NOI of 790 subtract mortgage P&I of 755 = $35 monthly cash flow which is $420 annually. So $420/$58650 = 0.7% cash-on-cash.... less than 1%!

    Once you factor in vacancy as others have suggested you might be negative cash flowing.

    1Reply
  • Michael M.
    OP
    Rental Property Investor · Tustin, CA · Member since 2015 · 67 posts · 19 votes
    8y

    @Sam Alomari Typically do you have a small vacancy factor for SFH (ie: 5%)? Also in regards to ARV / repairs, I just try to be as conservative as I can with this; my assumption is the 5k in repairs will go to paint touch up and minor repairs throughout the building, but I'll definetly consider what you suggested.

    @Derek Kirkwood I actually already took into account the P&I under the expenses column. The NOI is the difference between the projected monthly rent and total monthly expenses.

    0Reply
  • Derek Kirkwood
    Palmdale, CA · Member since 2017 · 83 posts · 39 votes
    8y

    I think you have the property tax as a positive number in your expense column, where it should be negative.  If I add up all of your expenses you have listed in the first post and add P&I:

    291.67+126+144+126+150+755.48 = 1593.15

    Subtract that from gross rent: 1800-1593.15 = 206.85

    Cash-on-cash: 206.85/58,650 = 3.5% with no vacancy allowance

    Net Operating Income does not include debt service.  While you might need a mortgage to own a property, you do not need a mortgage to operate a property. The purpose of NOI is to know the income a property produces independent of the owners financing or tax situation.

    https://www.propertymetrics.com/blog/2014/03/05/net-operating-income/

    0Reply
  • Account Closed
    Accountant · Phoenix, AZ · Member since 2016 · 31 posts · 8 votes
    8y

    Have you looked at vacancies in the area? I was born in Springfield and I know for some years it has had a declining population. 

    0Reply
  • Kevin HoagPro Member
    Insurance Agent · Cleveland, OH · Member since 2013 · 206 posts · 98 votes
    8y

    @Michael M. your budget for Insurance does appear to be high to me for Insurance in Ohio. If you would like to get an actual quote to help your numbers just send me a PM. The pricing for insurance depends on a lot of factors so the price can vary greatly and sometimes catch investors off guard. Age of home, Construction type, number of units, Zip code, your credit score and there are many more factors. 

    One expense I dont think anyone mentioned was landscaping. You are going to have to pay your PM company to cut the grass or a tenant who will want a discount in rent.

    Have you looked at many investment homes in that area to compare? Also how did you come across this property for sale. Besides the numbers for this one deal is the area a good area to build a portfolio of rentals? Is there a steady supply of homes for sale in the area?

    [email protected]216-401-4412
    0Reply
  • Sam Alomari
    Rental Property Investor · Alexandria, VA · Member since 2016 · 75 posts · 58 votes
    8y
    Originally posted by @Michael M.:

    @Sam Alomari Typically do you have a small vacancy factor for SFH (ie: 5%)? Also in regards to ARV / repairs, I just try to be as conservative as I can with this; my assumption is the 5k in repairs will go to paint touch up and minor repairs throughout the building, but I'll definetly consider what you suggested.

     @Michael Mourey, Vacancy depends on your investment market, location, property grade, neighborhood class, your rent amount, etc. In my market, I like to account for 8%.

    Your assumption to the 5k repairs also varies based on your property location, age, sqft, grade, finish, labor cost, terget tenants, etc. I suggest that you check with a contractor in your area and let them estimate the average cost for such minor repairs.

    0Reply
  • Adrie Moses-bailey
    Miami, FL · Member since 2017 · 51 posts · 14 votes
    8y
    Originally posted by @Michael M.:

    Hi All, So I think I found a duplex to invest in Clark County, Ohio (My first investment...and out of state to add to it!).

    Just wanted to get everyone's thoughts and opinions prior to writing the offer. Please let me know if you think I'm missing something. I'm a little nervous (out of state investing part) yet excited (because it'll be potentially my first investment). All advise is appreciated!

    Thanks!

    I have the following so one of us needs to recheck our numbers. Your financed amount is a little suspicious, how are you putting 25% down on 200,800 and financing only 138,750 when 200,800*.75 = 150,600?

    Cost assumptions
    Purchase price "" 200,800
    Downpayment "" $ 50,200
    Improvements/repairs "" $ 5,000
    Closing costs "" $ 7,400
    Total costs"" $ 213,200
    Cash Out lay "" $ 62,600.00
    After repair Value "" $185,000
    70% Rule max purchase price "" 124,500 
    Financing Assumptions
    Downpayment""25.0%
    Finance Amount"" $ 150,600
    Downpayment amount""$50,200
    interest rate""5.13%
    Mortgage(years)""30
    Mortgage Payment"" $ 820
    Yearly DS $ 9,840 

    Pro FormaError Factor
    --10%3%
    ScenarioMonthlyBaseWorstBreak Even
    PGI $ 1,800 $ 21,600 $ 19,440 $ 21,034
    (Vacancy) $ 72 $ (864) $ (950) $ (887)
    EGI $ 1,728 $ 20,736 $ 18,490 $ 20,147
    Miscellaneous 00 $ - $ -
    Income  $ 20,736 $ 18,490 $ 20,147
    Expenses
    Property Taxes $ 291 $ 3,492 $ 3,841 $ 3,584
    Water and sewer $ - $ - $ - $ -
    Property manager $ 144 $ 1,728.00 $ 1,901 $ 1,773
    Maintenance and repairs $ 126 $ 1,512.00 $ 1,663 $ 1,552
    Insurance $ 150.00 $ 1,800.00 $ 1,980 $ 1,847
    Lease back $ - $ - $ - $ -
    HOA fees $ - $ - $ - $ -
    Electrical $ - $ - $ - $ -
    Fuel $ - $ - $ - $ -
    Capital expenditures126 $ 1,512.00 $ 1,663 $ 1,552
    PITI0000
    Total Expenses $ 837 $ 10,044 $ 11,048 $ 10,307
    NOI $ 891 $ 10,692 $ 7,441 $ 9,840
    Debt Service $ 820 $ 9,840 $ 9,840 $ 9,840
    Net Income $ 71 $ 852 $ (2,399) $ -
    Cap rate05.32%3.71%4.90%
    Cash on cash return01.36%-3.83%0.00%
    Price needed for Target return   
    Target COC return16.71% 
    Required purchase Price TargetBreakeven 
    -$94,885$289,487 

    My math could be wrong but according to my model with all things unchanged you would have to purchase this place at 94K to make that return. Your monthly expenses  are 48.44%(837) + Debt service at 47.55%($820) leaving Net income of 4.11% to take to the bank or $71 

    1Reply
  • Adrie Moses-bailey
    Miami, FL · Member since 2017 · 51 posts · 14 votes
    8y
    Originally posted by @Derek Kirkwood:

    I think you have the property tax as a positive number in your expense column, where it should be negative.  If I add up all of your expenses you have listed in the first post and add P&I:

    291.67+126+144+126+150+755.48 = 1593.15

    Subtract that from gross rent: 1800-1593.15 = 206.85

    Cash-on-cash: 206.85/58,650 = 3.5% with no vacancy allowance

    Net Operating Income does not include debt service.  While you might need a mortgage to own a property, you do not need a mortgage to operate a property. The purpose of NOI is to know the income a property produces independent of the owners financing or tax situation.

    https://www.propertymetrics.com/blog/2014/03/05/net-operating-income/

    I think you are right, if I calculate his numbers with this as a negative return is like 1% but its 12% with it counted as a positive. I think the DS calculation may be wrong as well

    1Reply
  • Adrie Moses-bailey
    Miami, FL · Member since 2017 · 51 posts · 14 votes
    8y
    Originally posted by @Michael M.:

    @Sam Alomari Typically do you have a small vacancy factor for SFH (ie: 5%)? Also in regards to ARV / repairs, I just try to be as conservative as I can with this; my assumption is the 5k in repairs will go to paint touch up and minor repairs throughout the building, but I'll definetly consider what you suggested.

    @Derek Kirkwood I actually already took into account the P&I under the expenses column. The NOI is the difference between the projected monthly rent and total monthly expenses.

    Debt service is not an operating expense, its a financing expense. Operating expenses are only those incurred in the generation of revenue. NOI matters because it applies to everyone while NI (Net income) is personal since every investor can have their own financing structure. Sorry just remembered this point.

    0Reply
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