[Calc Review] Help me analyze this deal

8 Replies

@Jason Lacourt You left out insurance and Capex (at least 5-10%). Your vacancy also may be a little low at only 5%, unless this is in a really high demand area. And it is unlikely you won't have to make any repairs when you purchase.

Hey @Jason Lacourt , a few thoughts:

1) Not sure if you saw this in the property description, but this property is being sold together with this other property, because the 2 properties share a driveway.  This other property is $200,000 and quadruple the price-per-square-foot.  The interior looks to be in similarly acceptable condition, but it's only a duplex.

2) Water and sewer is 12% of your expenses?  Is that common in Canton?

3) Your combined up-front + ongoing repairs budget seems low (3.5% up-front + 5% ongoing).  The properties both look decent from the inside, but listing photos can be deceiving.  There may be issues with the roof, foundation, etc. which aren't visible from these photos.  There's always something that needs to be updated, even if it's just fixtures on the kitchen and bathroom cabinets.  It'll add up.

Also, tenants have a lower pride of ownership than owner-occupants, so your wear-and-tear will be higher.  Both of these are reasons to set aside extra money from your monthly budget.  Then if you've over-estimated, you can be pleasantly surprised.

4) I'd +1 @Dennis M. 's comment about the rent.  I had a look at Rentometer.com and found the following average for a 2-bedroom:

Note the average is $550/month.  If you're buying both properties (which you'd need to unless you're sufficiently talented at negotiating with the seller), you'd receive a total of $3,300 for the two properties.

Also note the ups and downs of the rent market in your area, from the graph on the lower-left.  Take that into account when setting expiration dates on your leases.

5) I don't see a budget for homeowners' insurance.  I'm seeing a combined budget of $75/month from the Realtor.com listings.

6) I don't see a CapEx budget either. This is for major repairs, such as a sudden leak in your roof or a water heater that conks out in the middle of winter.

7) I don't see a budget for a property manager.  Are you planning to self-manage?  If so, make sure you're fully aware of the workload you're taking on.  And in doing so, you'd only be saving about 10% of your monthly gross income, or $330.  Calculate how many hours of work you're taking on, and divide that $330 amount by the number of hours to determine your hourly wages as the de-facto property manager, and see how it compares with your current salary.  Then ask if your time is worth more or less than that.

8) I don't see any increase in yearly income, expenses, or property value.  You may be hanging on to the property for awhile, but if there's any chance you'll sell it at some point, it's good to know what you'll net at that point.

9) Your property taxes are at 8%.  That's incredibly high.  I found Canton's county tax assessor website and estimated the taxes for both:

Looks like a combined total of about $6,400=$6,500 (estimated).

10) I'd also +1 Danielle's comment about the vacancy rate.  Although I didn't increase it in the revised report below, I think you should.  10% would be my conservative estimate, but your mileage may vary.  And this site appears to show a much lower vacancy rate than even 5%.  More research is definitely warranted here.

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I've re-calculated the report based on my findings above, here it is.  If it were me, this deal wouldn't make much sense.  But talk to a local realtor and/or property manager about the numbers in the report, and see if they sound accurate or not.  Everything depends on the accuracy of your projections, and if those are screwed up, everything which follows from those numbers will be misleading.

Originally posted by @Danielle Wolter :

@Jason Lacourt You left out insurance and Capex (at least 5-10%). Your vacancy also may be a little low at only 5%, unless this is in a really high demand area. And it is unlikely you won't have to make any repairs when you purchase.

You’re absolutely right! I need some more studying to do. Thanks for the response :) more so just testing around and becoming comfortable with these forums and what sort of things I need to be considering when finding a deal. 

 

@Richie Thomas

Wow! To begin, thank you so much for the thoughtful response! It’s much appreciated. I’m still painfully ignorant in some regards about this process so reading what you had mentioned was awesome. 

1) I saw that. I wasn’t sure about the possibility of negotiating them separately as I had absolutely no interest in the other one. 

2) No, not honestly sure what is common. I should look into that more. 

3) Yup, you’re absolutely right. There was quite a bit of bias while completing the report. 

4-10) I graduated high school in the spring of this year and my ignorance surrounding property ownership as a whole is coming out. Pretty determined to make this happen (as far as getting my first rental) but have just been studying and searching for deals in the meantime. You’ve certainly proven this one to be out of question but I’ll continue using the calculator and searching around for properties. 


Thanks again for all the knowledge you included in that response! It’s much appreciated. Happy holidays my friend :) 



@Jason Lacourt not a problem, and welcome to BiggerPockets.  I'm less than a year into the real estate game myself, so please take what I say with a grain of salt.  I'm still looking for my first deal and I only know what I've learned from books, podcasts, etc., which isn't the same as first-hand lessons from the real world.  Good luck and keep us posted as you level up.

Also @Jason Lacourt , just because this deal *might* not work as a rental, doesn't mean it's out of the question.  One of my biggest take-aways from the BiggerPockets community is to replace "I can't make this deal work" with "How can I make this deal work?" in my vocabulary.

A surprising number of properties can be made to work at the right price, with the right creative financing, or with the right income strategy.  If the deal doesn't make sense at the current purchase price, at what price would it work?  If this property won't work as a straight-up rental, would it work as a short-term rental (i.e. Airbnb)?  If it won't work as any kind of rental, would it work as a fix-and-flip?

I've found that my learning and comfort with deal analysis have increased exponentially since I start looking at deals from the above perspective.  It also increases the number of options I perceive, which makes me feel more confident and in control of my investing future.