Potential First Property... Should I Move Forward With It?

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John Leavelle · Answer

@Michael Pitsos

I believe it is always wise to be conservative with Analysis.  Hope for the best but plan for the worst.  It’s much more rewarding when you plan to have Vacancies, some repairs, or CapEx.  Then none of them occur.  Rather than the opposite happening.  Not planning for these expenses and then they all hit you at once.

It’s good to see you are still showing positive cash flow.  Have you established any investing criteria yet?  Such as Target price range of properties, minimum cash flow per unit, Rent to Purchase ratio, minimum CCR, etc.  If you have not you should.  It will help guide you through your analysis of properties.  That way you are less likely to go a stray and make a bad decision.

There is  another reason you want to keep PM in your analysis when you plan to self manage.  If you plan to increase your portfolio of properties you may want to have a PM Service the property for you.  If you didn’t include that cost in your original analysis you would be hard pressed to include it later.

John Leavelle · Answer

Howdy @Michael Pitsos

Your expenses are too low for my taste.  Even for a “like new” property.  I would be much more conservative than that.

I never withhold less than 8.34% (one month rent) for Vacancy.  If you do not have any vacancies, no problem.  The money is still in your bank.  However, if vacancies do occur you are at least covered for one month.

5% is okay for Maintenance/Repairs.

1% for CapEx is crazy!  Yes, everything is nice and new.  However, that doesn’t mean things will last forever.  You will eventually have some major repair or replacement needed.  If you don’t save for it how are you going to pay for it.  At a minimum you should have 5%.

You should always include PM in your analysis.  Even if you plan to self manage.  Most will charge 10%.  Again, if you are self managing this money is already in your bank.  If you choose not to pay yourself that is up to you.

I Rehab all my properties to “like new” condition.  I still withhold sufficient reserves for the reasons I indicated.

Michael Pitsos · Answer

John although I haven’t made a single deal yet, I do have a general idea of what I’m looking for at the moment. I’d like to find a deal that gets a 12% or greater CoC return. I’d also like my deals to already have some equity going in. I don’t want to buy a house for what it’s worth. Maybe pay 85% of market value on it.

I didn’t think about later on down the road on the PM. You are right. The goal for me is to be financially free. Ensuring PM is accounted for is a good idea. I can tell you like to lean conservatively on the analysis to ensure you aren’t getting a bad deal. Prior to our conversation I was leaning towards what I thought was close to accurate or even aggressive instead of planning for the worst and hoping for the best.

Thanks for teaching me! I did end up backing out of this deal today. This deal didn’t have enough equity built into it and I would have to hold the property for 3 years before I could make a positive total annualized return.  I could’ve settled and I think I still would’ve made money but I want/need my first deal to be good/great as to help kickstart my REI journey and by my second and third property as well.

Michael Pitsos · Answer

Hi John! I greatly appreciate the reply. I love the idea of the 8.34% vacancy rate. I think I’ll adopt that. I upped the CapEx to 5%. Yeah I was thinking 1% just due to everything being new. I also added in the 10% management fee. Makes sense to “pay” yourself I guess. You’re buying an investment property not a job. I guess I was thinking the cash flow, appreciation, pay down on the loan and tax benefits would be my “pay”.

Good news is after all that I’m still looking at about a 4.34% CoC return the first year and $108 in cash flow after adding in these expenses. So not negative at least!

Potential First Property... Should I Move Forward With It?

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