Advice on First Deal Numbers/Analysis

20 Replies

Hey everyone,

I am considering putting in my first offer on my first property wanted to get everyone's thoughts.  This is a duplex in a very desired area of South Jersey with easy train access to Philadelphia.  The duplex is a class B-/B property in a B+/A- area.  

All feedback is welcomed.  If some of my numbers are not realistic, please do not hesitate to let me know.  I appreciate your honesty in advance.

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OFFER SPECIFICS

  • Listing price = $230,000
  • Potential Offer = $175,000
  • Expected renovation costs = $50,000
  • ARV = $300,000 (this is a conservative estimate and could be closer to $325,000 depending on rehab level)

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INCOME

  • 3 Bedrooms = $1,800/month (includes water and sewer in rent)
  • 2 Bedrooms = $1,400/month (same utilities included)
  • (1) 2 Car Garage = $0 (My agent says I could rent this for $150-250/month but I wanted to be conservative and exclude it)

TOTAL INCOME = $3,200/month or $38,400/year

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EXPENSES

  • Taxes = $808/month
  • Insurance = $110/month
  • Utilities = $0 (built into rent but I am still exploring doing RUBS for water, sewer, and heat)
  • Landscaping = $0 (built into rent)
  • Capex (6.25%) = $200/month (I usually use 7-8% but lowered this because of the high rehab)
  • Repairs (6.25%) = $200/month (same reasoning as capex)
  • Vacancy (6%) = $192/month
  • PM (8%) = $256/month (we will be self-managing)

TOTAL EXPENSES = approx. $1800/month

NOI = $1400

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MORTGAGE

  • Lender will finance 70% of the purchase price, 100% of the rehab.  
  • Finance Amount = $172,500 
  • Downpayment = $52,500 
  • Total Mortgage = $225,000
  • Mortgage Payment = $1,034 (assuming 25-year amortization and a 5.25% interest as the property will be held by an LLC)

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CASH FLOW

  • Approx. $366/month or $4,392/year with PM 
  • Approx. $622/month or $7,464 without PM

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CoCROI

  • Approx. 7.5% with PM cost included 
  • Approx. 12.8% without PM cost included 

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Total ROI

  • Approx. 13% with PM
  • Approx. 18% without PM

If you made it this far, I appreciate your time and welcome all of your comments, suggestions, and feedback.  




Updated 5 months ago

So, I spoke with another lender today who is offering very attractive terms for LLCs. It now turns out that my best approach is to BRRRR this deal. The lender will finance 75% of the purchase price ($135,000) at a rate hovering 5%. I will pay the rehab with all cash. So, my total cash outlay in the deal would be $103,000 ($45k down payment, $50k rehab, approx. $8k in closing costs). As soon as the rehab is finished, I will be able to refi (no seasoning period or prepayment penalty) with a 25% down payment and a similar interest rate. So, if the ARV is $310,000, the financed amount would be $232,500. So, if I am doing my math correctly, $232,500-$135,000=$97,500. So, I will be able to pull out all of the original down payment, rehab costs, and some of the original closing costs. Now, I would be in the deal for $5,500 of original closing costs and the amount of new closing costs for the refi with 25% of built-in equity. Even better, the property would still cash flow slightly (approx. $100/month) with PM accounted for. What are everyone's thoughts?

Ian, Good stuff here. 

I am curious as to the lending terms ... is this a portfolio loan, do they require a gc or can you do the work yourself, etc? 

The only change that I would make is that you state that utilities and landscaping are included in rent, then they are your expenses and you need to account for them.

I would break out the utilities and have them listed under your operating expenses. I know you have built them into your rent, however it would be beneficial to you if they were accounted for. Looks like a good deal.. good luck!

I like it. I agree on what's been posted above in regards to the utility expense. Good job on thoroughly listing the items. 

@Stephen Kappre  Yes, I would be financing this through a portfolio lender and hiring a GC to do most of the work.  

@Jason DiClemente Thanks for the suggestion.  I will adjust the numbers.  Based on your review of the numbers, would you make the offer?

@Joshua Davies Appreciate it, Josh.  I know it's not the absolute best deal but the property is in a very desired area and will hold its value and continue to appreciate.  Everyone starts somewhere.  The work that needs to be done is substantial (more than I thought I would take on for my 1st deal) but that is why I think I will be able to acquire it for a cheaper price.

@Ian Livaich when it comes to deals, if it cash flows I'm interested. All depends on your personal goals. Good luck with it, let me know how it turns out!

@Ian Livaich based on the numbers, it's a good return on your investment. As it is, I dont know if it fits my investment goals because I would look at it as a BRRRR to recoup my down payment to go to the next one. It would look much better with the garage producing a little income. You have the same problem that I run into with NJ properties, high property taxes!

@Jason DiClemente The taxes in Camden County are especially brutal.  It's a major reason as to why I am offering 20-30% below the asking price even on distressed properties.  While I have found that duplexes have better cash flow than SFRs in this area due to the taxes, I may look towards 3-4 unit properties to combat the taxes further -- 1 unit pays for taxes, another for expenses, and then another is straight cash flow.  

To your point, I am also considering BRRRRing this property because of the high ARV. I would be able to recoup my down payment and then some. However, the mortgage payment may bring the deal into negative cash flow though depending on what the terms are.

Looks like a solid deal! Keep us posted!

@Ian Livaich - I appreciate the clean posts. I'm not sure I follow some of your expenses that have the note "built into rent". The only time an expense should be zero is when the tenant pays for it above and beyond rent, otherwise it is still an expense and cuts into your cash flow and as you know, the rest of your #s. 

Also, I highly recommend RUBS. Easy & extremely affordable. 

Ian

My 2¢:

  • If you are keeping it as a rental for long term, the ARV is not that relevant (you are not going to sell it and you can't predict the FMV years from now) – you want the cashflow and ROI to be right.
  • Also, you should offer based on your criteria and numbers, not “20-30% below asking price”. If your numbers/calculations are not working, doesn’t matter the asking price.
  • I’m assuming “includes water and sewer in rent“ means you are having the expense for water and sewer. If you are renovating this, look into installing separate meters. If not, you need to factor that into your expenses.
  • There is no such thing as “built into rent” – if you have the expense, you need to list it and factor it into your calculations – you are missing utilities and landscaping
  • You will have closing costs
  • You have a mistake in your mortgage calculation: 225K @ 5.25% for 25 years = $1.348/month, not 1,034. With that, your cash flow is negative.
  • If only 172.5 is financed and you have to come up with 60K (52DP+closing), then the mortgage payment is $1,034. Annual cash flow $127. 
  •     

@Jay Helms Thanks for pointing that out. This is exactly why I wanted to post my numbers for my first deal -- to catch things like this. I adjusted my numbers in my spreadsheet to budget for landscaping and utilities that I cannot capture from RUBS. Obviously, the cash flow and ROI will be lower but what do you think overall?

Also, I have been looking into RUBS.  Many landlords in my target area seem to pay for water/sewer so that is my only hesitation.  Did you hire another company to implement it for you or did to figure a formula out for yourself based on number of occupants per unit or square footage?  Do your tenants complain system?  How are you enforcing that tenants pay this additional rent?  Do you include in your leases the failure to pay the additional rent for utilities amounts to grounds for eviction?  

@Costin I. Thanks for all of the feedback. I included the ARV because I might BRRR this property if it makes sense -- it really depends on the interest rates. Good catch on the water/sewer. I adjusted my numbers in my spreadsheet accordingly. I think I will be using the RUBS system, so the hope is that I won't have to pay for most of the utilities.

For the financing, I forgot to include closing costs on this post but had 8k budgeted in my analysis (the lender is charging 2 points).  Another good catch with the mortgage calculation.  That is another error on my part.  The finance amount is indeed $172,500 and not $225,000.

@Ian Livaich - first off, make sure the state in which your rental property resides supports RUBS via state statute. There is a formula to use based on # of occupants and # of bathrooms. Our property manger handles this for us and in the beginning made all tenants sign a lease addendum stating that "3 months from this date you'll be responsible for your portion of the water/sewer bill". Next month tenants were given a sample bill and then we started billing. And yes, failure to pay is grounds for eviction. 

We talked to a few companies about implementing for us but most of them are not interested in anything <100 units/per property. 

Good stuff @Ian Livaich ! Clean post, easy to follow.  Without knowing the condition of the property, i am assuming its vacant if you plan to spend $50k on a rehab right away. If not you may run into problems getting the existing tenants out and in time in order to complete the rehab within the construction loan term (typically 12 months).

Regarding your Mortgage section, is the mortgage payment based on the total loan amount of $225k? When you do your refi into a 25 year term, do you plan on getting a mortgage for only what is owed on the existing mortgage? If so, this would mean your down payment stays invested in this property. If its me, i would prefer to pull some cash back out during the refi to reinvest. With your numbers, you're all in for about $277k (mortgage + down payment), if it appraises for $300k after renovations are complete, they will only be able to cover the original mortgage at $225k (75% appraised value) which means you wont be able to pull out any of your down payment. If you're fine with keeping the ~$50k invested, which based on your ROI numbers, you are, then it seems like a good deal.

@Justin Eaton You are correct -- the property is vacant.  

I made an error on the total loan amount on my post but it was correct on my spreadsheet.  The finance amount would be $172,500.  

However, I reached out to a portfolio lender today who is offering great terms.  I would only need to put 25% down and could secure an interest rate below 5%.  So, if I offered $180k, my finance amount would be $135,000.  We are planning on BRRRing this property, so if it is appraised at $310,000 (which is supported by the comps), we would be able to pull out almost all of our cash (down payment, rehab, closing costs) and have 25% of built-in equity in the property.  

@Jay Helms I called the the Board of Public Utilities (BPU) in NJ and they told me that the BPU has never addressed RUBS and it is considered a landlord/tenant issue.  I think RUBS is the way to go to incentivize tenants to conserve water and to save on further expenses.    

Unless I'm missing something or misunderstanding, I think you may be forgetting to factor in the $50,000 rehab cost into the financing. Unless you're using cash for renovations? See below..

Purchase price: $180,000

Down payment 25%: $45,000

Finance 75% of purchase price: $135,000

Finance 100% of renovation: $50,000 

Total financed before refi: $185,000

Total all in before refi (total financed+down payment): $230,000

Cash out refi at 75% LTV of $310,000 ARV: $232,000

So you could still pull your down payment back out and essentially be into it for close to nothing, with 25% equity - if all goes as planned. Looks good to me. 

Regardless if the renovation is financed or not, the all in price would be the same at $230,000. 

@Justin Eaton Nope, you are not missing something Justin.  I forgot to include in my previous reply that the lender I spoke with today does not include the rehab in the financing.  So, I would be paying for the rehab with cash.  The numbers would be as follows:

  • Down payment (25%): $45,000
  • Total financed before refi: $135,000 
  • Total cash in the deal: $103,000 (45k down payment, 50k rehab, approx. 8k closing costs)
  • Cash out refi of $310,000 ARV (75% LTV): $232,500

So, unless I am mistaken, I would be able to pull out the down payment, rehab costs, and some of the closing costs.  Then, the remainder of closing costs (approx $5.5k) and new closing costs for a refi would be the only cash I have in the deal with 25% of built-in equity.  

Hopefully I got those numbers correct.

Great post! I’m looking in South Jersey for multi-family units as well.

I’d love to bounce some ideas off of you in the future. Good luck with the process.

Let me know if I can help with reviewing any numbers in the future !

Vacancy at 6% seems a little low.  I try to set the vacancy percentage to what will come close to covering all rent on the year for one month. 

Also, you should definitely account for garage rent. To me, that's the benefit to detached garages. 

Ian, even if you refi at 75% of LTV (and make sure of the conditions for that and that you qualify) and get a loan of $232,500, you will still have to bring some money (~10K) to the table and you'll have negative (!) cash flow of (4K+).

You'll also have depreciation, but you'll not be able to use it and it will accumulate only as you do not have passive income.

Unless you plan to offset income tax from another source (and be clear in what conditions that applies), I don't see how this deal is a good one.

Also, if you finance the rehab cost, you will have interest in your holding costs (plus the portion of taxes, insurance and utilities for the duration) - is that factored in your rehab cost? 

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