[Calc Review] Help me analyze this deal (my first one)

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This property has been on the market for almost a year. People keep backing out because a bank won't loan on it, and the house has a foundation wall that is in need of major repair / replacement. I can do this work cheap because of my employer, and access to equipment. I have looked myself and brought our guys to confirm budget on the wall repair.

I have been looking and analyzing deals for a few months, and the numbers seem to work pretty well on this even though it needs a ton of updating. I have a unique situation as my dad has money he wants to loan for me to invest, and wants to help me get the ball rolling on my path to FI. 


This is in a decent, well kept area and is located 5 min from where I work, and 10 min from my current home. I plan to self manage, but ran the numbers as I were hiring out the management. It's currently on the market for 79k, but no one wants to touch it due to the foundation, so I think I have some opportunity to send a lowball offer (55k).

Any thoughts are appreciated. 

Thanks!

Joe

triplex, I might make the vacancy higher than 4%:  92$ x 12 = 1104 (covers about 2 months of cash flow).  Id try to 3-4 months covered  just for the analytical side, can always lower reserves ... other than that are tenants paying all utilities? gas, sewer, water, electric, garage?    foundation could be hit or miss , maybe upload a photo if you've walked the house 

Howdy @Joe Malucci

Is your dad financing the whole deal?   I.e. $113,500 cash needed at closing. Will he charge any interest?  Does he expect the entire amount to eventually be repaid?  I say this because you show $7,000 cash remaining in the deal after the Refinance.  I believe that amount will be much more depending on what Holding costs you have accounted for.

Is that the current rent rates?  Or what you expect them to be?  If they are current is there room to increase after the Rehab is complete?

$55,000 is more than I would offer. If that is your Maximum Allowable Offer you need to start lower. You need room to negotiate to the MAO.

The Refinance loan assumptions are misleading the analysis.  This is an investment property.  Most lenders will require at least a 25% Down payment.  That makes the amount $105,000.  Unless you have already been quoted these terms you will need to double check the dp and Interest Rate.  Now you have $12,000 Cash remaining in the deal.

Why are you showing PMI as an expense? As long as you put a minimum of 20% Down payment there should be no PMI.

I agree with increasing the amount for Vacancy reserves (for analysis and budgeting purposes).  I always use at least 8.34% (one month rent). If it ends up being less for the year, great, you made more money that year.  If keep it at 4% and have a vacancy for a full month, then, you lose.

All this being said.  This still can be a decent deal.

First of all, thanks for the response you guys are great. I think I agree with increasing the vacancy.. And Yes, tenants in our area typically pay for everything but water.

I replied to John within the quote below, not sure how well it shows up for everyone.



Originally posted by @John Leavelle :

Howdy @Joe Malucci

Is your dad financing the whole deal?   I.e. $113,500 cash needed at closing. Will he charge any interest?  Does he expect the entire amount to eventually be repaid?  I say this because you show $7,000 cash remaining in the deal after the Refinance.  I believe that amount will be much more depending on what Holding costs you have accounted for.

He is financing most of the deal. I have $20k I am putting into the deal, and the plan is to put a mortgage on the property when it's complete and pull our money out. He does not want any interest for the first deal but will get interest on the next future deal. He's happy just to see me succeed with this.

Is that the current rent rates?  Or what you expect them to be?  If they are current is there room to increase after the Rehab is complete?

$55,000 is more than I would offer. If that is your Maximum Allowable Offer you need to start lower. You need room to negotiate to the MAO.

I have a co-worker coaching me along with this. He has 34 units in the area, and thinks I can get slightly more for rent than what I calculate. I'm trying to keep everything conservative. Building is vacant at the moment so these are all estimates. Agree on the offer price.

The Refinance loan assumptions are misleading the analysis.  This is an investment property.  Most lenders will require at least a 25% Down payment.  That makes the amount $105,000.  Unless you have already been quoted these terms you will need to double check the dp and Interest Rate.  Now you have $12,000 Cash remaining in the deal.

So If I own the building outright, and want to get a mortgage on it you are saying they want money down  as well? I was thinking I could get a mortgage for up to 70% of the appraised value?

Why are you showing PMI as an expense? As long as you put a minimum of 20% Down payment there should be no PMI.

Correct, this is my mistake. I have been doing so many calcs I missed this one here.

I agree with increasing the amount for Vacancy reserves (for analysis and budgeting purposes).  I always use at least 8.34% (one month rent). If it ends up being less for the year, great, you made more money that year.  If keep it at 4% and have a vacancy for a full month, then, you lose.

Solid advice and I agree.

All this being said.  This still can be a decent deal.

I am also budgeting all the repairs to be completed by others. I'm a project manager / estimator for a large construction company, so I'm pretty decent with those values. That being said I will likely do a lot of the repairs myself, as I'm more hands on than I probably should be. The rehab cost may be more, but like I said I'm trying to be ultra conservative with everything.


Thanks again,

Joe

@Joe Malucci

Regarding the Cash-out Refinance. No. I miss spoke. I'm meant to say you must maintain that much equity in the property. The lender will provide a loan amount that is 70% - 80% LTV based on a current appraisal. In your case I used 75% ($105,000) and you are now saying 70% ($98,000) based on your ARV ($140,000). The amount used in your report is more than both of these ($110,000 or 78.6%).

Your dad is financing most of the deal with no interest.  Nice to hear.  However, the question was does he expect to receive back all the cash he loans you.  Even though it’s your dad you need to be clear about what is expected.  The reason I stress this point is your costs are going to be more than you think they are.  Let me explain further:

You have an ARV of $140,000. You now are saying the Refinance LTV is 70% or $98,000. Your All-in Costs must fit within that amount or you end up leaving additional cash in the deal in the form of equity. How much additional cash is yet to be determined. I previously suggested $12,000 with a $105,000 loan amount. That number increases to $19,000 based on the 70% LTV ($98,000). You are contributing $20,000. That means you only get $1,000 of your own cash back after dad gets his. How do you intend to repeat the process with only $1,000?

We have not even covered Holding costs. These can include existing mortgage payments, insurance, taxes, utilities, HOA fees, etc that occurs during the Rehab period and up until the property is fully rented. After it is fully rented these costs are covered by your tenants. I routinely pay $6,000 to $8,000 in Holding Costs. You will not have any loan payments, but, the other expenses do add up quickly. This is why I said I would not even offer $55,000 for the property. I want all my cost to fit within that $98,000. Or close to it.

Figured I would update this post. Ended up offering 50k for the property, as I knew some of my rehab cost was inflated anyway. 
couple days later my realtor got back to me and someone offered 79k for the property, which is the listed asking price. Either they are going to leave it a dump and try to rent it out, or put way too much in it. They can have it for that either way. 

Just happy I crossed into the action zone, and actually made my first offer. Learned a bit, and made a good contact of a local attorney for future deals. 

On to the next one.

Joe