@Andrew Albert , looks like you're house hacking (good idea). Is this a 3 or 4-unit property? Does the analysis represent your income/expenses with you living there or after you've moved out and it's a pure investment property?
Regarding you expenses:
- Missing CapEx, 15% total combined w/ Repairs.
- Vacancy might be a bit low (I figure 8%), but this is super local.
- Water/sewer looks high. $40/unit/month is usually good. Check with the town for the last year's worth of bills.
- Management will likely be at least 10%.
- What about lawn care and snow removal?
- 3.8% interest rate might be a bit optimistic. Have you confirmed with your lender?
- $17k initial repairs looks low considering one of the kitchens has to be finished.
I don't know your market, but I would want a lower price. Your all-in price is right at the ARV. You should be pushing for some kind of discount to compensate for the work and effort you'll have to put in to finish the project and clear out the property.
@Jaysen Medhurst Thanks for responding! A ton of great feedback here and thank you for being diligent.
A few thoughts:
- This is a 3 unit property, traditional Worcester style with 5 room units. Units list as 2br1ba but can be converted to 3brs with pocket doors for the front room.
- The analysis represents once the property is a pure investment property after about a year. Incorporating the 1st year while living there is pretty tough with this calculator and not representative of the vast majority of our ownership.
- Fair on the CapEx. The only major items to replace i figured are included in the rehab but will bump up the Repair/Maintenance/Capex to 15% as you suggest for the long term analysis. Good call.
- I was thinking the same at first re: vacancy but this is a very desirable area of town and my agent has suggested the 6% figure - I'll bump it up to 8% to be more conservative.
- Completely agree on the water/sewer but over the last few months of analyzing properties - more and more are in this range on a monthly basis. I suppose having in-unit laundry is a big factor to consider and is perhaps why those other properties were so high. Is your $40/unit/month estimate considering in-unit laundry?
- We'll be doing management ourselves but I know we should be planning for that expense anyway. Believe it or not, we've had a couple quotes in the area from PM's that are 5-6% depending on the level of our passivity.
- We are planning to take care of the very limited lawn care while snow removal would be the tenants responsibility per the lease. Is that reasonable do you think?
- A few quotes from lenders have yielded rates this low in the area but I suppose it can change day-to-day.
- Ah and the 17k is pretty low but we are *leaning* on the Father in Law to help out a bit here :-) while doing a lot of the work ourselves. So it is mostly materials of which the cabinets and island come with the house (just need to be installed... hi Dad!). Not to mention MA having programs to drastically reduce the cost of replacing heating systems. I'll bump it up to 20k for some buffer.
I would love a lower price! The market is tough out here with property values rising quickly. 320k is about 20 under asking. Rents are rising as well so I think given the area, the potential for the units to be leveraged as 3BR, with some improvements we could bring the rents higher than $1200 avg/unit with 5room 3BR1BA rentals going for as high as $1500 in close proximity. $3600 total per month being pretty conservative.
I'll run another calc. Do you think these numbers are too tight even if they are better looking than the majority of the local market? Goal being $100/month/door.
Adjustments not looking quite at rosy... Bumped up rent a bit to be more closely aligned with market rents in close proximity.
I can’t see the adjustments but you can hopefully do better than a 6 cap in Worcester
- Regarding the water/sewer, I'm not sure if you have seen, but you can lookup the most current quarters water and sewer bill off the Worcester website.
- Regarding the snow and lawn removal, please see this below that I found regarding the laws.
- "The owner shall maintain all means of egress at all times in a safe, operable condition and shall keep all exterior stairways, fire escapes, egress balconies and bridges free of snow and ice, provided, however, in those instances where a dwelling has an independent means of egress, not shared with other occupants, and a written letting agreement so states, the occupant is responsible for maintaining free of snow and ice, the means of egress under his or her exclusive use and control"
Hey @Andrew Albert
Mind if I ask what area of Worcester this is in? I think you're right on par for the rents.
- My $40/month is a conservative estimate based on analyzing hundreds of properties. I see actual costs closer to $30, but like to build in buffers in my expenses.
- I'd be a little worried about PMs only charging 5-6% for a 3-unit (if you have 100 units, that's a different story). Have you seen the rest of their fee schedule?
- Beyond what @Phil K. pointed out, I think it's a bad idea to have MFR tenants responsible for lawn care / snow removal. Tragedy of the commons for one, but also what happens if the tenant who shovels the walk is in FL during the next snow storm and another tenant slips and falls?
- Make an offer that makes sense based on your analysis. There's a saying I've heard from old-school investors, "If you're not cringing when you make the offer, you offered too much."
- Have you checked with the city about converting the units to 3-bed? There are codes around what constitutes a bedroom (closet, window, proper egress, etc.).
- If you only think you're going to hit $100/month/unit AFTER your upgrades, etc., that's too tight for me. I aim for deals that cash flow $150-200/month/unit and have a CoC ROI of mid teens or better.
- Thanks for contributing @Phil K. This particular opportunity was in upper Grafton. Thanks for confirming the rents. I have found a site for water/sewer but only shows open balances (https://unipaygold.unibank.com/default.aspx) do you have a better resource to get a sense of cost estimates? This one isn't as reliable when properties have vacancies for a few months before listing... always looking for better tools. And appreciate the regulation plug, i read it as... if a SFH, and outlined in lease, can have snow removal tenant responsible. SMF - not so much, with the "not shared with other occupants" - is that true? What do you estimate for snow removal?
- Thanks for following up @Jaysen Medhurst . Understood on the estimate and appreciate adding the buffer. I have seen the rest of their fee schedule - essentially 100% pass through cost on maintenance etc. We decided not to use a PM on this first investment so didn't pursue further but if that worries you, i suppose it should worry me. And fair point on the tenants being responsible for snow removal, I'll be reconsidering that on future analyses. Nice thing about that property was that the pocket doors and closets were already there so conversion to 3br i don't would have been an issue. I'd love to find opportunities with more cash flow (particular since I posted this all I've done is add expenses!) - it's been challenging. Not sure if i'm looking in the wrong places or if my calcs are off.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing