Hey BP Community,
So I am in the phase of analyzing properties and understanding the market around me further. Last night while looking at everything, I ran across this piece that was just posted yesterday and would like some advice:
After running the numbers, it showed an appr $350/mo cash flow and 23% CoCROI. There were a few things assumed on this, which make me question how good the numbers look - assumptions being that I could negotiate to a purchase price of $90k and that each unit would get $700/mo for a 1br/1ba.
That said, here are the questions that I have (I understand that some of this will come more naturally with better understanding of the local market, but as I build that knowledge, I'd love to see what people here have to say):
- Are these assumptions too aggressive? Am I setting myself up for failure by not always putting in worst case scenario?
- Because this looks good on paper, what are the things that I should have prepared prior to making a deal in order to strike while the iron is hot? Assuming I come across properties like this when I'm ready, I want to be able to capitalize as soon as they hit the market and present an offer ASAP. (Also, meeting with lenders, agents, and other stakeholders is on my To Do list for Feb)
- Is Realtor.com and the other websites a realistic place to find deals as they hit the market? Or will I be in too large of a pool of people....and get eaten alive as someone who is new to this?
Thank you all for any comments that help my learning process. While I know that there will be a steep learning curve when I get started (my timeline is mid-year), I'd like to mitigate the mistakes I make, to ensure that I don't get frustrated too bad in the beginning!
@Corey Depuy you may be able to pull $700 each for those but I probably wouldn't use that when underwriting as that would be towards the top of the rents for a 1BR there. I'd probably use $650. Also I would be conservative with expense estimates usually around at least 35% of rents for vacancy, capex, maintenance, management, although that will be building specific depending on age/condition of the major expense items. It's always better to be more conservative. I'd make sure you get with a lender first so you know you are good to go when something does pop up because the market is crazy nowadays there usually isn't much time when something worthwhile pops up. You can still get deals on the MLS but it's a lot tougher now compared to a few years ago. Just have to be more patient now and make sure you aren't buying something that doesn't make sense numbers wise just to buy something. Also, this particular property is contingent now but none of the utilities were split on this building so that is also something to keep in mind when running numbers. You as the landlord would have to pay all utilities so would have to account for that.
@Jeremy Taggart Thanks for the insight man. While it seems I went aggressive with purchase price and rent, I did keep on the 35%+ side for the management (5%), maintenance (10%), capex (10%), and PM (10%)….even though I would probably self manage my first handful of units and see how it goes (not a fan of that placement fee). I appreciate the feedback - you confirmed what I was thinking myself, guess I need to trust myself a bit more.
I plan on getting with a lender as a formality, but I have confidence there. 800+ credit score and 6-figure income. I just haven't yet, because I'm in no rush to buy and want to learn first.
And I've noticed that investment properties seem to go quickly - even though overall population for the area is on a slight decline. I think the consensus there is that the older population is dying off faster than the younger generations are moving in....but that dynamic is still creating a stronger rental market in the area. I'd be curious to hear your thoughts from a supply/demand perspective and the idea that deals are going quick because of larger pool of hungry investors (or is it more of a macro-economics things)?
I didn't notice the utility clause anywhere. Is that something that was in the listing (and I missed it) or is that information that only agents would have access to?
Updated 12 months ago
*revision - 5% on vacancy
Looks good to me assuming it's in good condition and property taxes aren't super high.
Just make sure your math checks out.
@Peter Rodriguez Yeah, everything looks good on paper and math checks out, I just need to make sure I'm being realistic with my numbers. I think I figured $3,000 for taxes - again, this is something that will come easier the more I get acquainted with the market.
But you can see it went contingent the first day...so it seems I was actually able to spot something. That's the first step, I guess! Haha
@Corey Depuy agreed on the whole population thing. Lots of younger people moving in but so many older people dying that it makes the overall population growth negative.
Really the number of out of state investors getting into the market here the past 3 years or so is driving up the prices of the multi units in particular. Even more local investors getting into the game too because everyone has a HELOC now with home prices going up and are looking to utilize that money. Or people scared of a stock market crash and liquidating some stocks to put into real estate.
Yeah I had to reach out to the agent to find out about the shared utilities. Rarely will they list it on the listing anywhere.
@Jeremy Taggart All of that makes perfect sense. Appreciate the insight and feedback.
@Corey Depuy It sucks to miss out on a deal like that, but hey you learned something right? You should call the listing agent and tell them to let you know if the deal falls through. And tell the agent to let you know as soon as something similar hits the market. Good luck!
@Jason A. I don't feel like I missed out, because I've given myself the first half of this year to learn, and plan to start making offers with a goal of connecting one property H2 2020. You're right though, I learned a bit of what I should be looking for, since that's probably been one of the bigger struggles with starting. All of the processes afterwards I'm very comfortable with (just need to get them in place for when the time comes) - market knowledge is where I have some ground to make up!
Appreciate the comments and advice. Seems that follow-up and follow-through are key in this business.
I think the most important thing to do to make sure you are ready to act quickly when a good deal arises is to be extremely confident in your numbers. Continue analyzing deals and bouncing the numbers off of agents, PM's, investors, etc. That way when you are ready to go, you will have your number and be ready to strike.
I always think it is smart to be overly conservative with the numbers, but as the market has gotten a bit tighter, I have seen many people miss out on possible deals because they are being too conservative. Again, I think it is important to speak with experienced investors and agents so you can be accurate as opposes to overly conservative and not miss out on potential deals because your numbers are off.
Best of luck in your REI journey!
@Max Feinberg Agreed. At what point does the market tighten so much that the local "deal" isn't even that much of a deal anymore? Does it get to a point where people put themselves in a bind because they just feel the need to keep the gears turning in their particular area, but the market isn't allowing those investments to be profitable?
I guess that's what separates the wise investors from the novices - knowing when increase/decrease your growth mode.