Am I doing this right? First time to learn not actual deal.

13 Replies

I am just trying my hand at analyzing homes for buy and hold. Please any corrections, alterations, comments, or curses would be appreciated and will help me moving forward. Thank you for any help. 

https://www.coloproperty.com/listing/details/300015670

Home in Grand Junction, CO found while looking for a friend at possible homes for their family. Just figured it was as good of a place to start as any.


Here is what I was looking at for the breakdown.

Purchase price - 153,000.00

Financing - 122,400.00 at 4.5% for 30 years = 620.00 per month

20% Down payment (HELOC) - 30,600.00 at 5% for 10 years = 325.00 per month

Rent (Quick look) - 1,200.00 per month

Taxes - (On the website it says 630.00 but on the county website it has a formula with [Tax assessment value x Assessment rate (currently 7.96%) x Mill levy (last year was .088) which turns out to be 153,000 x .0796 x .088 = 1071.73 per year.] 1071.73 / 12 months = 89.31

Insurance - (Quick Google search for average) 106.00 per month

Vacancy Allowance - (Reading BP says factor 5%-15% so I am going with 10%) 120.00 per month

Repair Allowance - (Reading BP says factor 5%-15% so I am going with 10%) 120.00 per month

Capital Expenditures - (Reading BP says factor 5%-15% so I am going with 10%) 120.00 per month

Property Management - (Usually around 8%-12% so I am going with 10%) 120.00 per month

In this I am assuming that the tenant pays all utilities and yard maintenance so that isn't factored in.


So.... 89.31+106.00+120.00+120.00+120.00+120.00= 675.31 Total

So all that added up is....620.00+325.00+675.31= 1620.31 per month

420.31 over the 1200.00 rent
I know the deal won't work on this one I am just looking at my math to make sure I am factoring everything and just trying to start practicing.

Thank you again.

Your analysis looks solid to me.

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Thank you Brian. I really appreciate even just the affirmation that I am doing it right. 

Hey @Joshua Johnson , nice job at being so thorough! Many new investors don't take a hard enough look and end up with a property that doesn't cash flow, so it's awesome that you're doing this much due diligence upfront.

I reside in GJ and have many local rentals, and I'd say that your rent estimate is spot on at $1,200.

Your insurance quote seems a bit high, most of my landlord policies equate to ~$40-$50 / month. You can certainly talk to your agent and they'll give you a specific and non-obligatory quote on any property you're interested in.

The rental market in GJ is pretty great right now with vacancy ranging from about 3-5%, so I'd say your estimate of 10% is a bit too conservative. Honestly I never even have a vacancy on any of my properties, they are always turned over immediately between tenants.

IMO repairs and capital expenditures are very dependent upon the age of the house and it's current condition. A house built in the 70's will certainly need some upcoming repairs if they haven't been taken care of already (roof, water heater, furnace, etc), but I believe that carving $240 out of your monthly cash flow is going to make it hard to cash flow on any deal...looking at this house on Hall it seems to be pretty much move-in ready. Perhaps just budget to replace one large item per year? Just a suggestion though, nothing wrong with being conservative.

10% for property management is pretty common here in GJ. If you have multiple units managed by them sometimes they'll cut you a better deal. 

Yep, generally tenants pay utilities on SFH, and be sure to let them know what you expect on yard maintenance (and have those expectations written in your lease). And then be prepared to be disappointed, because most tenants don't have a care in the world about keeping your yard in good shape. ;)

Hope this insight helps!

Wow @Sheena Blankenagel Thank You. That is so helpful. That is exactly the feedback I needed to hear. Thank you. 

The insurance estimate I put in was just a quick search for average prices in CO. I just wanted a ballpark and your information is better than a google search so I will take your numbers in future hypothetical numbers for the area. Same for the vacancy rate too.

The cashflow issue is also something I am not too worried about. My wife and I are doing really good and I just want to build something for the future. If I don't see anything from the property for the next 8 years but don't have to pay too much over what it makes already I would be ecstatic. I think that is why I went so high on my numbers. You know, Hope for the Best Plan for the Worst.

Thank you so much for your insights. They really do help me to figure out how to analyze possible deals. Thank you.

@Joshua Johnson This isn't a critique of your analysis but maybe your approach.  You're hitting all of the right categories from my quick scan but you're basically trying to do 100% financing.  It's really, really, REALLY hard to find deals that will pencil out with 100% financing.  When I look at least I always try to use 25% down as a "standard" so that all of my analysis when it comes to cash-on-cash return, etc. is apples-to-apples.  If I subsequently choose to put more down or maybe wiggle and find a way to put less down, it doesn't misleadingly skew the deal.  I guess my major point in bringing this up is that 99% of the deals that you look at (practice on) won't pencil out with financing 100%.  That doesn't mean that they are all 'bad' deals, just that you're (in this example) factoring in a $325/month cost that others aren't.  

However, that's not the problem.  The problem is actually that you MIGHT stumble across a deal that WILL work with 100% financing in a solid market like Grand Junction.  I'm going to overgeneralize here...but if you do you probably have a home that needs work, is older, is it a horrible neighborhood, etc.  When you end up in "problem areas" you really have to start revisiting assumptions on vacancy, repairs, etc.  It's just a different world where those standard-issue percentages just don't quite work out.

Anyway, hope that helps...maybe...a little...

The math is correct. Most of investments turn out to be not a great investment property.

The age of home(the newer the better), self managing or higher down payment are variables you have control. These days both coasts run into negative cash flow. No worry, owner is speculating homes will appreciate more and are bullish on the equity. Areas that do not have appreciations one needs to be very careful where he parks his fixed assets.  Those rely on locals (service, realtors etc) without actually supervising often complain about the condition and poor service. Many I know unload them at loss (you will not see disasterious experiences posting here). Good luck.

@Andrew Johnson That is a side of things I didn't really consider. Thank you. You have given me a lot to think about when it comes to using my HELOC as a down payment and the added expense that creates.

I believe you've missed calculating closing costs into your analysis.

@Eric Bate You are absolutely correct. I talked with a friend and he pointed that out as well. I appreciate you looking out for that. Thank you. 

You are on track, the reality is that if you do not base your numbers on 100% financing you will never see positive cash flow. The reason for this is very simple....most investors ignore the reality that cash has a value and must always earn it's keep. Equity in a property lowers cash flow it does not increase cash flow based on the fact that you must consider it's opportunity value.

Your approach of purchasing based on 100% financing is solid however your lack of concern over positive cash flow is investment suicide. When you hit the inevitable bumps in the road, when you are worn down by the hard work and stress not having cash flow will either bankrupt you or turn you off investing entirely. Not making money is wearing and discouraging. Being forced to sell during a market down turn will end your plans. Investing to "build something for the future" is not a realistic approach to investing by itself.  

@Thomas S. I can see where you are coming from with your thoughts on cash flow. You make a good point with "when you are worn down by the hard work and stress not having cash flow will either bankrupt you or turn you off investing entirely." I agree if I wasn't in the type of position I am in right now. 

Right now my wife and I make enough to comfortably live off and still put a bit away for savings and some for investing. I work at a job that I will get a retirement after working another 8 years and my goals are to be ready for that retirement date. I am planning for the future so right now as long as I don't have to spend money on the endeavor it should serve my purpose if the majority can be paid off in 8 years. I personally wish to just continue with my current lifestyle after being able to quit my job. That is why I am accounting for so much chaos. I can weather a low time in the market because I don't plan on selling unless it will be a windfall.

Granted after saying all this I will look at other options and try to find deals that I will be able to make a positive cash flow. If I can get a positive cash flow it will be put immediately back into the property or into another deal until it is after the 8 years. Really right now I just want to start and the 100% financing is the way I am able to do that.

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