Is this a deal worth pursuing?

9 Replies

Hello,

My name is Drew and I'm interested in BiggerPockets and have listened to couple webinars and a hand full of podcasts. Im really interested in investing in the Dayton, Ohio area specifically the 45403 area. I've analyzed a couple dozen properties in the area. Here are my numbers on one of the deals in the market I'm interested in. Can you guys give me any feedback on my analysis?

Here is a deal that I put together. The numbers on the excel sheet are calculated at the full asking price with 3 months of vacancy factored in. 

Work needed:

$15,000

Purchase price:

$20,000 - $27,000

Thanks for your help and your time.

Here is a better image of the numbers

units 1 gross potential rent 8,400
rent per unit 700   other income (affected by Vacancy) 0
vacancy 3 months   gross potential income 8,400
property management fee 10%   vancancy 2,100
    other income (not affected by vacancy) 0
cap rate     effective gross income 6,300
purchase price 35,900   operating expenses    
entry cap rate 0.051754875     insurance 400
      property taxes 1,222
market cap rate 6.00%     maintenance 2,520
valuation 30966.66667     utilities 300
equity 0     rent control fees
      property management fee 0
down pay 7,500   total operating expenses   4,442
monthly mortgage 225 15 years @ 5% Net operating income (NOI) 1,858
         
annual profit -842      
monthly profit -70.16666667      

does that say negative $70/m?

Yes it does. The numbers run here are purchasing the property at asking price, with 3 months of vacancy, and 40% of operating expenses going into business savings. In this example the -$842 a year would have to be deducted from the operating expenses. 

That doesn't make much sense to me. Here's a few questions I had

  1. What is your ROI? If it's not positive don't bother with the house.
  2. 25% vacancy seems pretty high. Why so conservative?
  3. How did you come up with repair costs?
  4. Is the house worth asking price + repairs? I'm guessing not since it's been sitting for a long time.

Personally I would do a 30 year mortgage to increase cashflow, but that's a personal preference.

This is a very conservative analysis. I’ve taken 40% off the gross rental income. At $700/month rent that’s $8400 that’s $3,360. This 40% accounts for vacancy, taxes, miscellaneous repairs. This is a conservative approach.

A 15 year mortgage is used in this example to own the property free and clear sooner.

For ROI well let’s say The all in budget is $45,000. That would 8.9% ROI with the 40% taken out.

Is the house worth 45k? All things considered, I think 8.9% is pretty low for Dayton.

I use the 2% rule for Properties within Dayton city limits. If it rents for $700 then I want to be all in for $35k. Based on the area I would push for an all in purchase plus renovations of $40k. Also your rents seem a little low.

Paul

Howdy @Drew Scott

Your analysis is confusing.  You need to list items in a more simplified manor.

Purchase Information

Rehab Costs

ARV

Income

Expenses

Cash Flow

NOI

COCROI

Questions:

1.  Are you saying you have 25% for Vacancy?  Why?  Bad neighborhood?

2.  40% of gross rent or operation expenses into business savings????  When analyzing property cash flow you need to keep each item on a separate line.  Spell out exactly what you expect the cost for each is.  I am not sure what you are trying to do here!

3. Why did you not include Property Management or CapEx? These should always be included. If you are trying to be conservative, then, you need to include them.

4.  Why would you want an investment property that has negative cash flow?  15 years or 30 years for a mortgage is a personal decision.  Are you investing in Rental properties for Cash Flow or not?

5. You did not include any information regarding what the Fair Market Value/ARV would be after repairs. What is it? Are you paying too much for the property?

Based on you post/analysis this is not a goo deal to me.

@Drew Scott For whatever it's worth I'd say look at deals through the lens of 25% down on a 30 year fixed rate mortgage.  That way you're keeping the variables "equal" when you look at returns.  Not that it's material at all on a $35K property (reasons below) but here are my thoughts...

1.) Do you have someone lined up to give you a ~$28K mortgage?  Most banks have mortgage minimums of $50K or $75K.  If you can't get a loan and/or don't have $36K in the bank, everything else is moot.

2.) I'm not 100% sure why you'd be paying $300 per month in utilities. It looks like an SFR so is there something in the Dayton or Ohio law that makes the owner pay 100% of utilities? Maybe there is, I'm certainly no expert on Dayton or Ohio!

3.) If you think there will be perpetual 25% vacancy, don't buy the property. Full-stop. End of discussion. This isn't a high-end house where you need someone to pay $6K per month in rent that's likely relocating for work. That's a narrow, narrow focus. This is a low-end 1950's small SFR rental. The rental populace should be large.

4.) It's always hard to cash-flow with a 15 year mortgage.  It's great that you pay down the note quicker.  It's great that you pay less interest over the life of the loan.  But it's going to hurt cash-flow.  Now if you have a commercial portfolio loan that necessitates a 20 year amortization, I get it.  However, if you can get a 30 year fixed-rate mortgage in this "cheap money" time, I'd take it.

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