Help me analyze this deal

44 Replies

You do not have an expense for management (I assume you are self managing)  Also you do not have electric, water, or gas bills factored in.  Is the property sub-metered?

Yes sir the property will be self managed. I struggle with the percentage to use for Capex and Vacancy. Those two numbers change the overall cash on cash return by quite a bit. Making a possibly good investment become a bad investment. I want to understand and be as accurate as possible. Electric water gas will be covered by the tenant. The HVac needs to be redone in the whole building. I am a new investor but wanting to fully understand every aspect of being a landlord and analyzing properties.

Your capex will depend on the age of major things on the property like HVAC and roof, vacancy will depend on the market.  In CA 10% would be considered extremely high, but it might not be in your area

I would recommend always including your property management fees in your analysis even if you do plan to self manage. Someday you might make the choice to stop and you don't want your deals to be dependent on you managing to make them work. If it were me, I'd prefer to have these numbers already factored in and then just "pay myself" each month.

I'd put 8-10% in for management and see how your cash flow looks.

Thank you Daniel and Aaron for the insightful responses. I have been analyzing properties like crazy and talking with investors and real estate agents about our market. Illinois has had 40K working age people leave the state. What do you think will happen to the values of single and multi family properties?  

 With P&I, taxes, utilities, insurance, rehab costs and roughly 30-35% (10 vacancy,10 management,10 capex and 2-5 for repairs) variable expenses. Are you guys finding a 10-12% cash on cash return? 

Looks like your typical marginal deal to me . 

@Bryce Sablotny it depends on the area for the returns you get, I'm not from IL but don't see myself ever investing there, they have higher taxes especially for a Midwest state plus all the maintenance costs that come with a cold climate.  Also I am concerned about them becoming just another part of the rust belt that does pretty well in good times but hits tougher times during a recession.  I'm sure others would disagree with me about the location, and they may have a point because I've never been there.

Illinois has high taxes and a history of corrupt politicians with no signs of it getting better. I tend to agree with the rust belt. I think we will see the single family home values lower over the next few years and multifamily properties either maintain or increase in value because they are high in demand. Does the possibility of medical marijuana (in 2020) give us hope at all for our economy to recoup? 

People keep leaving and the state pension fund for IL is among the worst in the country. Your taxes are only going one way

@Bryce Sablotny I don't think Marijuana would have a big impact on housing prices, but most people moving somewhere strictly for marijuana purposes would probably move to CA, NV, CO, or WA before IL

I can agree with the fact that all those other states have much more to offer, however, I think we will have a large supply of housing available for much less cost. Illinois is a tough market no doubt. We will have to see what happens over the next few years. Thank you all very much for the responses. My biggest concern coming in was the percentages to use for variable landlord expenses. I didn’t want to shoot too high or too low so I wanted to get some insight on the figures you all use. 

New to BP and REI so please take the following as more of a question then a statement.

Purchase price + repairs is going to exceed the ARV. Based on that alone I fail to see this as a good deal initially. Am I missing a diff perspective?

Based solely on the numbers, not knowing location or exact condition of the property, It is tough to say yes or no. I would suggest staring by asking you a few questions. What is your goal/plan for the property? What is your exit strategy( as @erikbaumer mentioned, Arv is less than your cost)? Is a 20yr mortgage the best fit for your goals?  Is 60k an actual repair number from a contractor or an estimate you have from your walk through. 

I have in the past wondered the same thing. My reason for getting into multifamily real estate is for cash flow. I used the full asking price as my purchase price. We put in 2 offers which were much lower than the asking price before ever seeing the units. However, after walking through all 4 units we realized the rehab costs would be too high. This 4 plex needed a new hvac system and roughly 10K minimum in repairs per unit. The seller was not wanting to come down much from her 175K so we decided to walk from the deal. 

Originally posted by @Bryce Sablotny :

Thank you Daniel and Aaron for the insightful responses. I have been analyzing properties like crazy and talking with investors and real estate agents about our market. Illinois has had 40K working age people leave the state. What do you think will happen to the values of single and multi family properties?  

 With P&I, taxes, utilities, insurance, rehab costs and roughly 30-35% (10 vacancy,10 management,10 capex and 2-5 for repairs) variable expenses. Are you guys finding a 10-12% cash on cash return? 

 
Well I can't say anything about the IL market because I honestly have no idea, but based on what you just said with people leaving the state it doesn't seem promising. Maybe there's a silver lining though... if people are trying to get out then there may be some motivated sellers out there. If you can hustle and find yourself one of these people then you could have a smokin deal. 

You'll find 10-12% cash on cash return eventually if you analyze enough properties... the deals are out there! Don't be afraid to manipulate the asking price in your analysis to make the deal work for YOU. Every property has a perfect number, you just have to find it.

Originally posted by @Brad Jordan :

Based solely on the numbers, not knowing location or exact condition of the property, It is tough to say yes or no. I would suggest staring by asking you a few questions. What is your goal/plan for the property? What is your exit strategy( as @erikbaumer mentioned, Arv is less than your cost)? Is a 20yr mortgage the best fit for your goals?  Is 60k an actual repair number from a contractor or an estimate you have from your walk through. 

 My goal and plan is to find a deal that is smokin hot, red hot and find out if being a landlord is something I want to do long term. Once I get through a few months I will have a good idea of what I like and don’t like. Depending on the performance of the property with rent, tenants, vacancy and additional rehab costs I will determine if I will keep the property long term or turn to sell. 1031 exchanges really intrigue me so my plan is to utilize them when it makes sense. 

I am unsure if a 20 or 30 year mortgage would fit my goal better. I have been looking into all the financing options I have available to me. Trying to understand the pros and cons of each. What would you suggest? 

Our family business does flooring, cabinets and paint so we have pretty accurate numbers down. The HVac needs replaced so that virtually took us out of the deal. 

Originally posted by @Bryce Sablotny :
Originally posted by @Brad Jordan:

Based solely on the numbers, not knowing location or exact condition of the property, It is tough to say yes or no. I would suggest staring by asking you a few questions. What is your goal/plan for the property? What is your exit strategy( as @erikbaumer mentioned, Arv is less than your cost)? Is a 20yr mortgage the best fit for your goals?  Is 60k an actual repair number from a contractor or an estimate you have from your walk through. 

 My goal and plan is to find a deal that is smokin hot, red hot and find out if being a landlord is something I want to do long term. Once I get through a few months I will have a good idea of what I like and don’t like. Depending on the performance of the property with rent, tenants, vacancy and additional rehab costs I will determine if I will keep the property long term or turn to sell. 1031 exchanges really intrigue me so my plan is to utilize them when it makes sense. 

I am unsure if a 20 or 30 year mortgage would fit my goal better. I have been looking into all the financing options I have available to me. Trying to understand the pros and cons of each. What would you suggest? 

Our family business does flooring, cabinets and paint so we have pretty accurate numbers down. The HVac needs replaced so that virtually took us out of the deal. 

Originally posted by @Daniel Caraway :
Originally posted by @Bryce Sablotny:

Thank you Daniel and Aaron for the insightful responses. I have been analyzing properties like crazy and talking with investors and real estate agents about our market. Illinois has had 40K working age people leave the state. What do you think will happen to the values of single and multi family properties?  

 With P&I, taxes, utilities, insurance, rehab costs and roughly 30-35% (10 vacancy,10 management,10 capex and 2-5 for repairs) variable expenses. Are you guys finding a 10-12% cash on cash return? 

 
Well I can't say anything about the IL market because I honestly have no idea, but based on what you just said with people leaving the state it doesn't seem promising. Maybe there's a silver lining though... if people are trying to get out then there may be some motivated sellers out there. If you can hustle and find yourself one of these people then you could have a smokin deal. 

You'll find 10-12% cash on cash return eventually if you analyze enough properties... the deals are out there! Don't be afraid to manipulate the asking price in your analysis to make the deal work for YOU. Every property has a perfect number, you just have to find it.

I have put in 7 offers on different properties so far that have been "homerun" offers. I know the sweet spot is supposed to be 10-12% cash on cash return based on BP podcasts and talking with a few other investors. My biggest issue was the variable expenses. I was unsure of what would be accurate figures to punch in for vacancy, capex, repairs, and management. I will stay persistent. I'm working on an off market deal now. NOI is 35k. Purchase price is 360k on a 6 plex. Minimal rehab costs. Roof new 2014, all pretty new a/c units, only 1 furnace isn't newer. The cash on cash return is too low though. I'll keep on the search. I'll be attending my first real estate club meet up this week.

Howdy @Bryce Sablotny

Your numbers are not adding up.

$175K Purchase price 

$35K Down payment 

$120K Loan Amount 

Where is the remaining $20K?

This is an investment property.  You normally need a 25% Down payment.  Be sure you can get a loan with only 20% Down.

Are you sure of the ARV? And Rehab estimate? Do you really want to pay $17K over the Value?

Again, it goes back to your goals. If you are looking for cash flow, 30 yr might be the best option. If you are looking to put that money directly to debt pay down of that specific property, I would consider the 15 or 20 year. Personally, I like the flexibility of a 30 year. When times tighten up, you aren’t forced to pay the higher payment. When times are good, you have the ability to increase your principal. There are trade off to both. 

In my market and my experience, smoking hot deals aren’t being found. They are being created. I think establishing what type of investor you want to be would help you. As a buy and hold investor, a good deal is different from a good deal on a flip and vice versa. This holds true when comparing all styles of real estate investing. 

A few months isn’t exactly a good indicator on future moves. If I decided to base my future style on  the beginning few months of my first rental, I would have never bought another one. The tenant I inherited was a NIGHTMARE. Instead, I jumped into my first property with the mindset that I want to be a buy and hold investor no matter the ups and downs. I took every obstacle as a learning experience and continued on and made sure I didn’t make the same mistakes when putting in a new tenant. You will learn a ton by just committing and doing a deal. Never stop listening and learning. There will be different hurdles with every deal but experience will make the hurdles seem smaller. I wish you the best and would love to hear when you find your first deal!

Brad Jordan 

Originally posted by @John Leavelle :

Howdy @Bryce Sablotny

Your numbers are not adding up.

$175K Purchase price 

$35K Down payment 

$120K Loan Amount 

Where is the remaining $20K?

This is an investment property.  You normally need a 25% Down payment.  Be sure you can get a loan with only 20% Down.

Are you sure of the ARV? And Rehab estimate? Do you really want to pay $17K over the Value?

I am not sure of the ARV. Originally, we offered 157K on the property that was my homerun number. When the counter offer came back at 172.5K we refigured and thought 165K would be the highest we would go. Once we walked through the whole property and found out we would need to change the Hvac system and need a minimum rehab cost of 10-15K per unit we backed out. I want to get opinions on how to figure some of the expenses and if I was missing any crucial info. I will figure 25% down until I determine which bank we use.

Originally posted by @Brad Jordan :

Again, it goes back to your goals. If you are looking for cash flow, 30 yr might be the best option. If you are looking to put that money directly to debt pay down of that specific property, I would consider the 15 or 20 year. Personally, I like the flexibility of a 30 year. When times tighten up, you aren’t forced to pay the higher payment. When times are good, you have the ability to increase your principal. There are trade off to both. 

In my market and my experience, smoking hot deals aren’t being found. They are being created. I think establishing what type of investor you want to be would help you. As a buy and hold investor, a good deal is different from a good deal on a flip and vice versa. This holds true when comparing all styles of real estate investing. 

A few months isn’t exactly a good indicator on future moves. If I decided to base my future style on  the beginning few months of my first rental, I would have never bought another one. The tenant I inherited was a NIGHTMARE. Instead, I jumped into my first property with the mindset that I want to be a buy and hold investor no matter the ups and downs. I took every obstacle as a learning experience and continued on and made sure I didn’t make the same mistakes when putting in a new tenant. You will learn a ton by just committing and doing a deal. Never stop listening and learning. There will be different hurdles with every deal but experience will make the hurdles seem smaller. I wish you the best and would love to hear when you find your first deal!

Brad Jordan 

A 30 yr makes sense for lowering your payment and reducing pressure if things go south. I need to figure what that 10 year gap between the two loans will cost me in interest. Do you find that to be a factor at all when deciding between the two loan periods? 

I do keep hearing on BP about some markets being tough and you have to "create a deal". I have been reading books and listening to BP for about 5-6 months now. I am constantly searching for leads and talking with my contractor and real estate agent. We are heavy on the search. My original plan was to flip houses but I do not trust the Illinois market right now with single family homes. I have changed gears into Multifamily and have been researching and gathering info for only 2 months. 

I am ready to commit and do a deal. Sometimes I feel like I want a deal so bad I get too attached. Now I know this is the opposite of how you want to approach the process. I have learned so much already in the search for properties and throughout negotiations on this particular property. This was my first full go attempt to purchase a property. I would be glad to inform you about my first deal (I'm sure you will be interest in the numbers). Thank you very much for your insight.

Bryce

@Bryce Sablotny

Good morning, sir! Hope you're well.

It say's the total cost of the project (price + closing costs + repairs) is $237,500 and your after rehab value is $220,000.

I definitely wouldn't recommend starting off with negative equity in your project.

You'll want to buy homes in the 105-115k range (or lower of course) for a deal like this one, if you can.

If it needs that kind of work, the deals you're looking for are out there. You may need to search a little harder for a little longer, but they're "find-able". We're buying homes all over Chicagoland right now. Trust me, they're there!

I'm not sure this is the best deal for you, or anyone, sir.

Just my two cents.

Hope this helps!!

Bryce:

The advice people here are giving you are spot on. Let me just add my two cents on one issue. ALWAYS ALWAYS ALWAYS include the property management expense in your calculations even if you plan on self managing. Here's what happens: Let's assume a 10 cap and the property management fee is $10K per year. The self-managing seller says to himself, hey, I will not pay myself a property management fee and thereby increase the NOI by $10,000. That will increase the value of my property by $100,000. The next year when he comes along, a California investor looks at the numbers, buys the hogwash of self-management and overpays for the property by $100K. WOuld you for go $10,000 of income today if you knew it meant you were getting $100,000 next year? ANd that, is the power of the cap rate.

Good luck.

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