[Calc Review] Help me analyze this deal

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*This link comes directly from our calculators, based on information input by the member who posted.

This is my first time to purchase an off market deal that I believe is below market value. It also is currently renting at below value at $1850 a month which I could start renting at $2000 without doing any improvements. I believe with a little updating with paint I could get at least $2100. It's in an area that is being revitalized that I believe will continue to appreciate nicely.

@Jeff Ostrander The analysis looks okay. Is garbage included in water and sewer? PM with fees usually is 10 % or greater. Why aren"t you using a 30 year amortization schedule? Cash flow will be better. The object of having tenants is for the tenants to pay your mortgage. 

Thanks @Tim Herman . The garbage is included with the water bill. I have been putting 20 year loans for the calculations just for the purpose that I would like to retire in that time frame. Cashflow may be of more importance right now though to acquire more properties. 

I ran the calculation with 30 year loan and moved management to 10% and it gave me a monthly cashflow of $427. As of right now, we plan to manage it ourselves but I like to keep that expense on there in case we decide not to. 

Do the expenses and cap-ex seem reasonable? It's an older property but well maintained. My concern is that I'm not estimating appropriately due to it being a 4-plex. Will that increase or decrease the amount I need to set aside for those two?

@Jeff Ostrander if you want to know what your true capex is, download the spreadsheet in the files section by @ sam tato called  cap ex. I use 23% for my calculations. I use 8% vacancy, 5% repairs and 10% cap ex. You are at 21%. It is all one big pot anyway. Some expenses can come from any category. An example is you repaint after a vacancy. It could come from repairs,vacancy or capex.

Like @Tim Herman , I also use 23% for vacancy, repairs, and CapEx. Regarding the rest of your analysis, @Jeff Ostrander :

  1. Why do you think you can add $30k of value with only $4k of renovation? This is a residential property and you won't raise it's value by improving the NOI (through higher rents).
  2. Closing costs might be a little low. U.S. average is 2X that.
  3. Water/sewer looks high. I usually see $30-40/unit/month. Have you confirmed with the local water department?
  4. If you want to have this paid off in 20 years for retirement, a good approach is to get a 30-year loan and pay it down like a 20. The additional interest rate in nominal and you get some good flexibility, should you need it. 
  5. No matter if you do 20 or 30 year, I bet you can do better than 4.5%.
  6. What about house electric, like hallway lights?
  7. Lawn care? Probably no snow removal in Arkansas, right?

@Jaysen Medhurst Thanks for the response! I’m getting this deal off market and I believe I’m getting it for a decent amount less than what I believe I could sell it for and it’s in really good shape, granted a little dated. 1bd quads have sold for $150k and there are two 2bds in this quad. 

Water costs have gone up here lately and an experience friend says about $60 a unit for water/sewer/garbage. 

The misc expense is the lawn maintenance. Pretty small yard and the guy I currently use Is pretty reasonable. No need for snow removal. 

Hey Jeff.  Whenever I read reports like these, I'm always much more interested in where the numbers came from, vs. what they are.  Depending on the zip code, $88/month for property taxes might either be realistic or not.  Same with any expense.  Knowing the background behind the numbers goes a long way toward helping dispassionate 3rd parties (like us BP forum dwellers) analyze a deal.

1) The biggest thing that stands out is when you mentioned you plan to manage the property yourselves.  The duties of a typical property manager include collecting rent, arranging maintenance, enforcing apartment rules, dealing with 3 am plumbing calls, conducting inspections, completing repairs, paying bills, advertising vacant units, screening tenants, etc.  You'd essentially be on-call 24/7, all in order to save $200 per month (i.e. 10% of $2,000).  If that sounds like a fair trade, then cool.  If not, it's definitely good that you've budgeted for a PM already.  But the reason PMs can do all those things for such little money is because a) they have systems in place to do them efficiently, which most investors don't have, and b) they amortize the cost of those systems across a large number of client properties, so they're able to do it at a profit.

2) If this property cash flows at a 20-year amortization, I see no reason not to do so, but if amortizing it at 30 years helps you afford a high-quality property manager, then by all means make the switch.  Again, working with a PM who is proactive and looks for ways to save you money might be worth the extra 2-4% you'd pay.

3) The other thing is the repair costs, which @Jaysen Medhurst mentioned already.  Do you have data from the county recorder on what improvement permits have been issued for this property, and when they were issued?  This information can tell you (for example) when a permit for a new roof was issued, when a permit for foundation repair was granted, etc.  Big-ticket repairs like that would likely need a permit, so if those permits were issued recently then you can rest easy.  If there are no recent records, then either the work was not done at all, or it was done in a non-permitted fashion.  One good way to gauge the seller's candor and honesty is to ask them what work was done recently and cross-index it with what you find with the recorder.

4) I'd also +1 the closing costs line item.  I know you said this is an off-market deal.  So if you're dealing directly with the seller, you'd avoid some of the fees listed here, but not all of them.  I still think you'd want an attorney to look at the closing docs, a title company to guarantee clean title, a full property inspection (including lead-based paint inspection), homeowners' insurance (first year is often paid at closing), any lenders' fees (including appraisal fees if the lender requires one), etc.  You may want to go 2x or even 3x your current budget, and then if you're wrong you can pocket the difference.

5) Also, your stated ARV is $160,000, but your loan amount is for only $102,000. A typical 70% LTV on your ARV would be $112k, so it seems like you're leaving $10k in the property. Is this intentional, in order to minimize your P&I for cash-flow purposes? If you pulled this money out, it could help you put a down payment on your next deal, right?

Best of luck with this deal @Jeff Ostrander !