My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
@Amy Mc I am new like you and I am looking to invest in Fresno as well and run into the same problem. What I've found is that the rents typically don't surpass the current mortgages and other expenses which makes it really hard (but not impossible). My strategy is to find something I can house hack whether it be a 2-4 unit or big enough sfh. After this I'll see if I can find any better deals if it's still proving to be too hard I will look for another area with better margins.
In Fresno it just seems as a whole unless you have a newer apt building the rents at some point stopped rising but the home prices did not. A lot of the deals I analyze are a 400k 4 plex that have rents at $500-600/month for each unit as if they haven't raised rents since they purchased years ago for 100k.
Anyways without continuing to go on and on a lot of rents are lower than they can be but not always by much. There are ways to find better deals but the number 1 thing is to keep analyzing as much as possible!
All so true. What I do like about Fresno is that it's super friendly about ADUs and JDUs. So, if you can only get into a SFR, and you can then convert the garage and add an ADU or JDU, turning it into a triplex, the numbers seem to be pretty good. Depends on the cost of the renovations/ADU hookups, etc. But, at least you're dealing with a local government that actually wants people to build them.
Fresno is one of the places I'm looking at investing next year, and this would be my plan. Waiting to see if the prices come down in the next year. The demand for housing appears to stay high, but time will tell.
@Amy Mc I am new like you and I am looking to invest in Fresno as well and run into the same problem. What I've found is that the rents typically don't surpass the current mortgages and other expenses which makes it really hard (but not impossible). My strategy is to find something I can house hack whether it be a 2-4 unit or big enough sfh. After this I'll see if I can find any better deals if it's still proving to be too hard I will look for another area with better margins.
In Fresno it just seems as a whole unless you have a newer apt building the rents at some point stopped rising but the home prices did not. A lot of the deals I analyze are a 400k 4 plex that have rents at $500-600/month for each unit as if they haven't raised rents since they purchased years ago for 100k.
Anyways without continuing to go on and on a lot of rents are lower than they can be but not always by much. There are ways to find better deals but the number 1 thing is to keep analyzing as much as possible!
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
You might not be analyzing it correctly.
Cash flow = Net operating income - Debt Service. Not price.
Cap rate = Net operating income/Price.
Change the Price any way you want and the cash flow won't be affected per se. Adjust rent or expenses or Debt (rate/downpayment) then your cash flow will move.
@Amy Mc I am new like you and I am looking to invest in Fresno as well and run into the same problem. What I've found is that the rents typically don't surpass the current mortgages and other expenses which makes it really hard (but not impossible). My strategy is to find something I can house hack whether it be a 2-4 unit or big enough sfh. After this I'll see if I can find any better deals if it's still proving to be too hard I will look for another area with better margins.
In Fresno it just seems as a whole unless you have a newer apt building the rents at some point stopped rising but the home prices did not. A lot of the deals I analyze are a 400k 4 plex that have rents at $500-600/month for each unit as if they haven't raised rents since they purchased years ago for 100k.
Anyways without continuing to go on and on a lot of rents are lower than they can be but not always by much. There are ways to find better deals but the number 1 thing is to keep analyzing as much as possible!
All so true. What I do like about Fresno is that it's super friendly about ADUs and JDUs. So, if you can only get into a SFR, and you can then convert the garage and add an ADU or JDU, turning it into a triplex, the numbers seem to be pretty good. Depends on the cost of the renovations/ADU hookups, etc. But, at least you're dealing with a local government that actually wants people to build them.
Fresno is one of the places I'm looking at investing next year, and this would be my plan. Waiting to see if the prices come down in the next year. The demand for housing appears to stay high, but time will tell.
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
Yep, lots of enormous lots - which at first I thought - yikes, lots of fencing to repair, huge landscaping to deal with, possibly lots of sidewalk to be liable for, etc. But, then the ADU laws changed at it's potentially worth it.
There are also a lot of properties in Fresno with alley access. That would be ideal, in my opinion. A SFR with a detached garage big enough to convert, and alley access for an ADU in the back with separate entrance. Access to the separate units can be tricky, but I have seen a few properties I thought could work out nicely.
Right now the ADU laws are in effect until 2025 or through 2025, I think. Then, local jurisdictions can reassess if they want to change them to be more restrictive. So, ideally, it would be a property where you could afford to at least do a conversion or ADU. Both would be sweet.
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
Yep, lots of enormous lots - which at first I thought - yikes, lots of fencing to repair, huge landscaping to deal with, possibly lots of sidewalk to be liable for, etc. But, then the ADU laws changed at it's potentially worth it.
There are also a lot of properties in Fresno with alley access. That would be ideal, in my opinion. A SFR with a detached garage big enough to convert, and alley access for an ADU in the back with separate entrance. Access to the separate units can be tricky, but I have seen a few properties I thought could work out nicely.
Right now the ADU laws are in effect until 2025 or through 2025, I think. Then, local jurisdictions can reassess if they want to change them to be more restrictive. So, ideally, it would be a property where you could afford to at least do a conversion or ADU. Both would be sweet.
The lots are big because the land is cheap in comparison to other large Ca cities. The ADU, therefore, does not have the same value add as it would where land has greater value.
It takes more than enough land and good access to be wipe for adding an ADU. you want to maximize the return. the maximum return is achieved when leveraging high land value.
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
My view is your numbers are far too aggressive in the maintenance/cap ex area. Let’s do some math with just a water heater installed by a licensed plumber. Cost $1200 / 12 year lifespan / 12 months = $8.33/month. You allocated $100/month for maintenance/cap ex but a low cost item like a water heater consumes over 8%.
I would use over 3x your allocation. Roofs, kitchens, hardscape, plumbing, electrical, foundations, bathrooms, cost a lot more than water heaters. Kitchen $15k / 25 years / 12 = $50/month. The kitchen would consume 50% of your allocation.
In the last just over 1 month I have spent $8k on roofs, $5k on fences, $3k on water heaters (3 failures but one Had the water heater under warranty), $2k for a gazebo. Stripping one roof, the fences, and the gazebo used cheap labor. Cheap labor often requires more oversight.
A tenant turnover that has taken good care of the unit is nearly $1k (patch pin holes and touch up paint, steam clean carpet, seal grout/granite, toilet flaps, clean drains, misc). The sky is the limit on an abused unit. 5% vacancy implies a turnover every 20 months. $1k/20 = $50 or half of your allocation. Even if you could turn the unit in $500, it would be a quarter of your allocation.
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
Yep, lots of enormous lots - which at first I thought - yikes, lots of fencing to repair, huge landscaping to deal with, possibly lots of sidewalk to be liable for, etc. But, then the ADU laws changed at it's potentially worth it.
There are also a lot of properties in Fresno with alley access. That would be ideal, in my opinion. A SFR with a detached garage big enough to convert, and alley access for an ADU in the back with separate entrance. Access to the separate units can be tricky, but I have seen a few properties I thought could work out nicely.
Right now the ADU laws are in effect until 2025 or through 2025, I think. Then, local jurisdictions can reassess if they want to change them to be more restrictive. So, ideally, it would be a property where you could afford to at least do a conversion or ADU. Both would be sweet.
The lots are big because the land is cheap in comparison to other large Ca cities. The ADU, therefore, does not have the same value add as it would where land has greater value.
It takes more than enough land and good access to be wipe for adding an ADU. you want to maximize the return. the maximum return is achieved when leveraging high land value.
Good luck
I think you're brilliant and always love reading your posts. But, we may disagree on this one. Maybe we're looking at this from different points of view, though. Maybe you're thinking in terms of flipping. I'm looking at this situation at a buy and hold with a cash flow perspective. For this purpose, land value doesn't matter at all, in my opinion. It's all about, will the rents that come in result in a profit. Fresno is friendly to ADUs because there is a need for more housing. When housing is scarce, rents are decent - the value of land has nothing to do with it. In my opinion.
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
Yep, lots of enormous lots - which at first I thought - yikes, lots of fencing to repair, huge landscaping to deal with, possibly lots of sidewalk to be liable for, etc. But, then the ADU laws changed at it's potentially worth it.
There are also a lot of properties in Fresno with alley access. That would be ideal, in my opinion. A SFR with a detached garage big enough to convert, and alley access for an ADU in the back with separate entrance. Access to the separate units can be tricky, but I have seen a few properties I thought could work out nicely.
Right now the ADU laws are in effect until 2025 or through 2025, I think. Then, local jurisdictions can reassess if they want to change them to be more restrictive. So, ideally, it would be a property where you could afford to at least do a conversion or ADU. Both would be sweet.
The lots are big because the land is cheap in comparison to other large Ca cities. The ADU, therefore, does not have the same value add as it would where land has greater value.
It takes more than enough land and good access to be wipe for adding an ADU. you want to maximize the return. the maximum return is achieved when leveraging high land value.
Good luck
I think you're brilliant and always love reading your posts. But, we may disagree on this one. Maybe we're looking at this from different points of view, though. Maybe you're thinking in terms of flipping. I'm looking at this situation at a buy and hold with a cash flow perspective. For this purpose, land value doesn't matter at all, in my opinion. It's all about, will the rents that come in result in a profit. Fresno is friendly to ADUs because there is a need for more housing. When housing is scarce, rents are decent - the value of land has nothing to do with it. In my opinion.
You are going to make my head swell...
I always look at the value add but let's ignore the value associated with the ADU.
The cost of adding an ADU is similar in Fresno as San Jose. 2 examples:
- 2 BR, 1.5 Ba, 750' ADU: avoid impact fees
- 3 Br, 2 Ba, 1200' ADU: maximize the ADU size
What do you think the rent difference is for these ADUs in Fresno compared to San Jose? Double in San Jose? What do you think the cost difference of adding these ADUs in Fresno compared to San Jose? 25% more costly in San Jose for the 750’? 35% (Due to higher impact fees) more for the 1200’?
I admit the percentages are my off the cuff estimates with zero research but I suspect they are accurate enough to convey my rationale to support my comment.
@Sue K. You know what the adu thing is a good point and I didn't even think of that! There are much bigger lot sizes than SF so that is a great point! Also explains why a lot of the 2-4 units I see are separate buildings! Thanks for that point you just gave me a great new data set to include in my analysis!
Yep, lots of enormous lots - which at first I thought - yikes, lots of fencing to repair, huge landscaping to deal with, possibly lots of sidewalk to be liable for, etc. But, then the ADU laws changed at it's potentially worth it.
There are also a lot of properties in Fresno with alley access. That would be ideal, in my opinion. A SFR with a detached garage big enough to convert, and alley access for an ADU in the back with separate entrance. Access to the separate units can be tricky, but I have seen a few properties I thought could work out nicely.
Right now the ADU laws are in effect until 2025 or through 2025, I think. Then, local jurisdictions can reassess if they want to change them to be more restrictive. So, ideally, it would be a property where you could afford to at least do a conversion or ADU. Both would be sweet.
The lots are big because the land is cheap in comparison to other large Ca cities. The ADU, therefore, does not have the same value add as it would where land has greater value.
It takes more than enough land and good access to be wipe for adding an ADU. you want to maximize the return. the maximum return is achieved when leveraging high land value.
Good luck
I think you're brilliant and always love reading your posts. But, we may disagree on this one. Maybe we're looking at this from different points of view, though. Maybe you're thinking in terms of flipping. I'm looking at this situation at a buy and hold with a cash flow perspective. For this purpose, land value doesn't matter at all, in my opinion. It's all about, will the rents that come in result in a profit. Fresno is friendly to ADUs because there is a need for more housing. When housing is scarce, rents are decent - the value of land has nothing to do with it. In my opinion.
You are going to make my head swell...
I always look at the value add but let's ignore the value associated with the ADU.
The cost of adding an ADU is similar in Fresno as San Jose. 2 examples:
- 2 BR, 1.5 Ba, 750' ADU: avoid impact fees
- 3 Br, 2 Ba, 1200' ADU: maximize the ADU size
What do you think the rent difference is for these ADUs in Fresno compared to San Jose? Double in San Jose? What do you think the cost difference of adding these ADUs in Fresno compared to San Jose? 25% more costly in San Jose for the 750’? 35% (Due to higher impact fees) more for the 1200’?
I admit the percentages are my off the cuff estimates with zero research but I suspect they are accurate enough to convey my rationale to support my comment.
Well, you're starting from the perspective that buying in San Jose is a choice for everyone. So, let's pretend that you couldn't afford to buy in San Jose, but you could afford to buy in Fresno. Could you turn a better profit on your SFH in Fresno if you added an ADU? And could you turn an even better profit if you also could add a third unit, a JDU?
So, even if the cost of adding an ADU/JDU would be the same in Fresno or San Jose, the cost of land is much, much higher in San Jose to begin with - to the point of being completely prohibitive to many investors.
So, not having that as an option, a place like Fresno, with enormous lots that are fairly affordable, with the ability to add an ADU/JDU in the future, might not be a bad investment. And, maybe the cost of the land offsets the lower rents, evening things out as far as profits as a percentage of return on investment, etc.
Maybe I'm missing something here. I am tired.
One of the reasons I'm looking at Fresno to invest my inheritance, which I'll get next year at this point in probate hell - is that there is good healthcare there, including Kaiser. I'm a senior and even though I'm happy in my subsidized senior housing, I also want my rental property to be a back-up plan, in case we lose funding for my subsidized housing. And if that happens, I want to be able to move into my rental - and - have decent healthcare, which Fresno has.
Fresno is not the Bay Area, which I love. But, unless I'm way off on my calculations, which is entirely possible, it's looking like a decent option for me.
Thanks so much for your reply. I apologize for the delayed response. Once the workweek starts, it seems I cant seem to come up for air!! I am hoping to respond to everyones valuable advice one at a time!
I agree, househacking would make a lot of sense for me. It does seem that finding a duplex would be ideal. The challenge is that my work really necessitates that I live very close to the office so I am a bit limited in location options if I were to live in my first home purchase...there aren't many duplexes that I know of in the area I'd be looking (north of herndon near 99). So I would need to househack with a single family home. I go back and forth between finding a property that would be strictly a rental investment vs. finding a property that I'd be able to househack.
@Amy Mc I am new like you and I am looking to invest in Fresno as well and run into the same problem. What I've found is that the rents typically don't surpass the current mortgages and other expenses which makes it really hard (but not impossible). My strategy is to find something I can house hack whether it be a 2-4 unit or big enough sfh. After this I'll see if I can find any better deals if it's still proving to be too hard I will look for another area with better margins.
In Fresno it just seems as a whole unless you have a newer apt building the rents at some point stopped rising but the home prices did not. A lot of the deals I analyze are a 400k 4 plex that have rents at $500-600/month for each unit as if they haven't raised rents since they purchased years ago for 100k.
Anyways without continuing to go on and on a lot of rents are lower than they can be but not always by much. There are ways to find better deals but the number 1 thing is to keep analyzing as much as possible!
Thanks so much for your advice. I've calculated my net cash flow per month to be $160/mo, by subtracting net income $1000/mo minus total monthly expenses. But are you saying that this perhaps incorrect somehow? I apologize that I may not be following along with the concept you are trying to help me understand.
Related to adjusting price to alter cash flow, I was just thinking that if I purchase the home for a lower price, my principal/interest will be lower because I will be financing less. Although, I do understand your point that interst rate and down payment will certainly also alter the principal/interest payment.
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
You might not be analyzing it correctly.
Cash flow = Net operating income - Debt Service. Not price.
Cap rate = Net operating income/Price.
Change the Price any way you want and the cash flow won't be affected per se. Adjust rent or expenses or Debt (rate/downpayment) then your cash flow will move.
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
My view is your numbers are far too aggressive in the maintenance/cap ex area. Let’s do some math with just a water heater installed by a licensed plumber. Cost $1200 / 12 year lifespan / 12 months = $8.33/month. You allocated $100/month for maintenance/cap ex but a low cost item like a water heater consumes over 8%.
I would use over 3x your allocation. Roofs, kitchens, hardscape, plumbing, electrical, foundations, bathrooms, cost a lot more than water heaters. Kitchen $15k / 25 years / 12 = $50/month. The kitchen would consume 50% of your allocation.
In the last just over 1 month I have spent $8k on roofs, $5k on fences, $3k on water heaters (3 failures but one Had the water heater under warranty), $2k for a gazebo. Stripping one roof, the fences, and the gazebo used cheap labor. Cheap labor often requires more oversight.
A tenant turnover that has taken good care of the unit is nearly $1k (patch pin holes and touch up paint, steam clean carpet, seal grout/granite, toilet flaps, clean drains, misc). The sky is the limit on an abused unit. 5% vacancy implies a turnover every 20 months. $1k/20 = $50 or half of your allocation. Even if you could turn the unit in $500, it would be a quarter of your allocation.
Good luck
I have been using a rough estimate of 5% for repairs and 5% for cap ex. But from your examples I can see how this quickly becomes inadequate! Would you suggest that I should factor in 15% repairs (3x my 5%) and another 15% for capital expenditures? Or would 1.5x my 5% (ie 7.5%) be sufficient for repairs and another 1.5x my 5% (7.5%) for capital expenditures to equal 3x my estimate? On the BP webinars, I believe Brandon does mention that the percent he uses varies from 5 to 10% for repairs and 4 to 10% for capital expenditures, based on how old the home is. So perhaps my 5% was low for THIS home due to its age?
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
My view is your numbers are far too aggressive in the maintenance/cap ex area. Let’s do some math with just a water heater installed by a licensed plumber. Cost $1200 / 12 year lifespan / 12 months = $8.33/month. You allocated $100/month for maintenance/cap ex but a low cost item like a water heater consumes over 8%.
I would use over 3x your allocation. Roofs, kitchens, hardscape, plumbing, electrical, foundations, bathrooms, cost a lot more than water heaters. Kitchen $15k / 25 years / 12 = $50/month. The kitchen would consume 50% of your allocation.
In the last just over 1 month I have spent $8k on roofs, $5k on fences, $3k on water heaters (3 failures but one Had the water heater under warranty), $2k for a gazebo. Stripping one roof, the fences, and the gazebo used cheap labor. Cheap labor often requires more oversight.
A tenant turnover that has taken good care of the unit is nearly $1k (patch pin holes and touch up paint, steam clean carpet, seal grout/granite, toilet flaps, clean drains, misc). The sky is the limit on an abused unit. 5% vacancy implies a turnover every 20 months. $1k/20 = $50 or half of your allocation. Even if you could turn the unit in $500, it would be a quarter of your allocation.
Good luck
I have been using a rough estimate of 5% for repairs and 5% for cap ex. But from your examples I can see how this quickly becomes inadequate! Would you suggest that I should factor in 15% repairs (3x my 5%) and another 15% for capital expenditures? Or would 1.5x my 5% (ie 7.5%) be sufficient for repairs and another 1.5x my 5% (7.5%) for capital expenditures to equal 3x my estimate? On the BP webinars, I believe Brandon does mention that the percent he uses varies from 5 to 10% for repairs and 4 to 10% for capital expenditures, based on how old the home is. So perhaps my 5% was low for THIS home due to its age?
I am not a fan of using percent of rent for cap ex/maintenance. I will explain why. Let’s use a 3 br, 2 Ba, 1200’ house in San Francisco and compare it to the same house in Fresno. The rent will be maybe 3 times as much in the city of San Francisco than Fresno. However, many of the costs are similar. The hot water heater costs the same in San Francisco as Fresno. If the labor is 25% more in San Francisco and the material cost is the same, the hot water heater may be 20% more in San Fran, but the rent is significantly (300%) higher.
I used to have a spreadsheet on each property to estimate maintenance/cap ex items. I got the original from @Ben leybovich (sp?). I have not maintained these in quite few years but I found it to be a good exercise in helping me to obtain the knowledge to ballpark estimate maintenance/cap ex just on features. Many facets go into the Maintenance/cap ex costs: detached vs attached, size and type of hardscape, class of property, type of heating/cooling (Fresno requires HVAC), number of bathrooms, footage, type/size of yard, type of foundation, age, weather, the list goes on.
I would likely use at least $300 for maintenance/cap ex on 3/2, 1220’ with garage if the property looked well maintained. That property, I would use higher not only because of its current shape (needs painting, blinds, etc) but also because certain items look poorly done (the shower for example). When things look to be done poorly, they sometime are not done correctly.
You're probably running them correctly... the reality is very little, if anything, cash flows in CA. People will say there's cash flow, but so far no one's been able to show me any. It's just the reality of high-priced markets, which is most of the west coast. That's why so many people in CA invest in other states.
My name is Amy and I am located in Fresno, California. I'm a veterinarian with an interest in finding my first rental property investment!! I've been listening to the Bigger Pockets podcasts and webinars for about 3 months now. And if there is one thing I've learned, it's that I need to analyze lots and lots of deals.
So my question is...am I analyzing this deal correctly? It seems with all the deals I've practiced analyzing so far that I'd have to purchase these properties for WELL below listing price (to a point where it seems unrealistic to expect to be able to find a seller willing to negotiate so low...)
Here it is: 2702 East Willis Ave, Fresno CA 93726
$179,900= Listing price (I ran the numbers at this price and came up with a negative cash flow. So I tries to play with the numbers to try to find a price that would work...
$110,000= price that I calculated to provide me with $160 monthly cash flow
Income:
$1000/mo
Expenses:
Principal/interest $422
Property tax $188
Insurance $80
Vacancy $50
Repairs $50
Capital expenditures $50
TOTAL EXPENSES: $840
INCOME- EXPENSES = $1000-840= $160/month
Cash on cash return = 160 x 12/ 25000= 7.7%
To buy this property at $110,000 just seems almost impossible as homes around here have been going for listing price or above...so my question is a) is it possible? And b) am I running my numbers correctly?
Thank you so much for any feedback or advice you might have. I am so grateful for all the valuable learning resources on BP made available to people like me, eager to learn but certainly new to it all!
My view is your numbers are far too aggressive in the maintenance/cap ex area. Let’s do some math with just a water heater installed by a licensed plumber. Cost $1200 / 12 year lifespan / 12 months = $8.33/month. You allocated $100/month for maintenance/cap ex but a low cost item like a water heater consumes over 8%.
I would use over 3x your allocation. Roofs, kitchens, hardscape, plumbing, electrical, foundations, bathrooms, cost a lot more than water heaters. Kitchen $15k / 25 years / 12 = $50/month. The kitchen would consume 50% of your allocation.
In the last just over 1 month I have spent $8k on roofs, $5k on fences, $3k on water heaters (3 failures but one Had the water heater under warranty), $2k for a gazebo. Stripping one roof, the fences, and the gazebo used cheap labor. Cheap labor often requires more oversight.
A tenant turnover that has taken good care of the unit is nearly $1k (patch pin holes and touch up paint, steam clean carpet, seal grout/granite, toilet flaps, clean drains, misc). The sky is the limit on an abused unit. 5% vacancy implies a turnover every 20 months. $1k/20 = $50 or half of your allocation. Even if you could turn the unit in $500, it would be a quarter of your allocation.
Good luck
I have been using a rough estimate of 5% for repairs and 5% for cap ex. But from your examples I can see how this quickly becomes inadequate! Would you suggest that I should factor in 15% repairs (3x my 5%) and another 15% for capital expenditures? Or would 1.5x my 5% (ie 7.5%) be sufficient for repairs and another 1.5x my 5% (7.5%) for capital expenditures to equal 3x my estimate? On the BP webinars, I believe Brandon does mention that the percent he uses varies from 5 to 10% for repairs and 4 to 10% for capital expenditures, based on how old the home is. So perhaps my 5% was low for THIS home due to its age?
I am not a fan of using percent of rent for cap ex/maintenance. I will explain why. Let’s use a 3 br, 2 Ba, 1200’ house in San Francisco and compare it to the same house in Fresno. The rent will be maybe 3 times as much in the city of San Francisco than Fresno. However, many of the costs are similar. The hot water heater costs the same in San Francisco as Fresno. If the labor is 25% more in San Francisco and the material cost is the same, the hot water heater may be 20% more in San Fran, but the rent is significantly (300%) higher.
I used to have a spreadsheet on each property to estimate maintenance/cap ex items. I got the original from @Ben leybovich (sp?). I have not maintained these in quite few years but I found it to be a good exercise in helping me to obtain the knowledge to ballpark estimate maintenance/cap ex just on features. Many facets go into the Maintenance/cap ex costs: detached vs attached, size and type of hardscape, class of property, type of heating/cooling (Fresno requires HVAC), number of bathrooms, footage, type/size of yard, type of foundation, age, weather, the list goes on.
I would likely use at least $300 for maintenance/cap ex on 3/2, 1220’ with garage if the property looked well maintained. That property, I would use higher not only because of its current shape (needs painting, blinds, etc) but also because certain items look poorly done (the shower for example). When things look to be done poorly, they sometime are not done correctly.
You're probably running them correctly... the reality is very little, if anything, cash flows in CA. People will say there's cash flow, but so far no one's been able to show me any. It's just the reality of high-priced markets, which is most of the west coast. That's why so many people in CA invest in other states.
Nobody but nobody counts Turnover (inc one month lease up fee for those who use PM)costs as an expense except Dan the Man.
What this means is pretty much anything bought the last few years have achieved minimal cash flow. If you projected $100 -$200 in essence you have no flow at all.
I realize the account is closed but does he not reflect this cost? The pro formas that I respect have enough allocated in maintenance/cap ex to cover the costs to turn over the unit at tenant turnover.
My goal is to project expenses accurately. I try to allocate for all expected expenses. Tenant turnover is a known expense. Leaving it off would provide a less accurate expense estimate than including it. A less accurate expense projection would result in a less accurate return projection.
by the way, When we had an OOS LTR (we sold our last OOS RE quite a few years ago) the PM expense projection was an estimate of total PM costs including the tenant finding fee. Again the goal was an accurate return projection which requires an accurate expense projection.
All of our current LTR are self-managed, but in my pro forma I depict between 8% and 10% for PM (which I believe to be conservative in San Diego). I realize we do not have this expense, but we then have the associated work and if we ever choose to use a PM it is in the budget.
I was hoping to clarify a concept you mentioned....
My understanding was that the purpose of the 5% vacancy was to ensure you were saving money each month to prepare for lost rent due to vacancy alone. But in reading your response, hopefully I'm correctly understanding now that it's purpose is also to account for repairs that will be needed before the next tenant moves in, is this correct?
If I'm using 5% vacancy, that would be $50/month allocation for a property that brings in $1000/mo rent. So unit repairs of $1000/20yr equaling $50 would actually be 100% of my allocation, wouldn't it?
I just want to be sure I'm understanding. If I only spent $500/20= $25/month which would be half of my total allocation of $50/mo, is that right? You mentioned it being a QUARTER of my allocation, so I was a little unclear if I was misunderstanding.....
Thanks so much Dan! I really appreciate the example you've given me to illustrate your point. I can see now where a blanket "5% of the rent" becomes inadequate and inaccurate in estimating what it realistically will cost for various repairs (and this cost will not differ as substantially between homes with varying rents as the estimate varies, if/when I simply use 5% of rent to estimate these expenses.)
I was hoping to clarify a concept you mentioned....
My understanding was that the purpose of the 5% vacancy was to ensure you were saving money each month to prepare for lost rent due to vacancy alone. But in reading your response, hopefully I'm correctly understanding now that it's purpose is also to account for repairs that will be needed before the next tenant moves in, is this correct?
If I'm using 5% vacancy, that would be $50/month allocation for a property that brings in $1000/mo rent. So unit repairs of $1000/20yr equaling $50 would actually be 100% of my allocation, wouldn't it?
I just want to be sure I'm understanding. If I only spent $500/20= $25/month which would be half of my total allocation of $50/mo, is that right? You mentioned it being a QUARTER of my allocation, so I was a little unclear if I was misunderstanding.....
My Tenant turn over costs I allocate in my maintenance/cap ex allocation. For my projection, I treat them (maintenance and cap expense) the same. Sometimes, from an IRS perspective, the only difference is whether it is rented or off market at the time of the repairs (more than I want to get into here). I was treating your projections similarly.
I think projecting it into maintenance/cap ex makes sense, but the important part is this expense is projected somewhere. if you want to increase the vacancy projection to include the turn over costs, that could work but seems less than ideal. I look at vacancy as lost revenue, versus the turn over cost is an expense.
@Amy Mc I completely understand and have a somewhat similar situation due to work. I work in SF but want to move here but have to wait for a transfer which is literally taking years! Anyways just trying to weigh all options and still come here on my off days to get more familiar with the neighborhoods!
@Dan Heuschele I understand your point of not using percentages for maintenance/capex but I'm wondering with the amounts you allocate and at the current rents (a lot of places I see still renting $500-$700) are you able to find deals that work out and cash flow in Fresno? I search the MLS and look for 2-4 units which are typically not in the best areas and I'm trying to avoid that... The ones that are in better area seem extremely over priced hopefully pulling in $800-$1000 per unit but selling for $350-420k.
@Dan Heuschele I understand your point of not using percentages for maintenance/capex but I'm wondering with the amounts you allocate and at the current rents (a lot of places I see still renting $500-$700) are you able to find deals that work out and cash flow in Fresno? I search the MLS and look for 2-4 units which are typically not in the best areas and I'm trying to avoid that... The ones that are in better area seem extremely over priced hopefully pulling in $800-$1000 per unit but selling for $350-420k.
I do not invest in Fresno. I only know Fresno mostly by driving through it on the way to the Sierras (I try to go to the Sierras a lot). We invest in the Greater San Diego area. Finding investment properties with conventional high LTV residential loans (At least 75% LTV, preferably 80% LTV) with initial cash flow in my market is very challenging, but occasionally possible. By positive cash flow, I am not intending to say the initial positive cash flow is good for the amount invested (it is not). In most areas of San Diego, a property with a rent to cost ratio of 0.7% (at 80% LTV) has a good chance to have some positive initial cash flow. These are difficult to find, but do exist.
In the San Diego market the return is based almost exclusively on 3 items: value add, appreciation (rent and property), equity paydown. Note: initial cash flow is not listed. Equity paydown does add up but by itself has little chance of creating great wealth.
Did you see the recently released BP spreadsheet on returns by city (maybe 3 weeks now)? It has a flaw for CA in the property tax calculation. Its longest duration was 8 years. Where do you think coastal CA cities ranked for cash flow over the 8 years? Basically they were in the middle. Fix the property tax issue and they would have been higher. How are they ranked in the middle? Certainly they would have been near the bottom if done on initial cash flow. The rent appreciation is what got them to the middle. What do you think it would have looked like if instead of 8 years, they had used 15 or 20 year duration? I think the coastal CA cities would have bubbled to the top.
Case Shiller has the following 3 cities as the best US cities for buy n hold return for the century: 1) San Fran 2) LA 3) San Diego. I bet Orange county is up near the top also.
In San Diego, the experienced investors are primarily doing value adds. The best of them (not us) seem to be obtaining properties with under utilized zoning. The value add is to optimize the zoning (to either flip or buy n hold). Then there is the long established and proven Rehab (this has been our value add of choice) (either to flip or buy n hold, but we only buy n hold). The fairly new entry to the value add is to add an ADU (this is likely going to be our next (ad)venture) (flipping ADU additions in San Diego is not working out well so this is only for buy n hold at this time).
They get a solid initial return from the value add (our criteria is for each dollar spent on the value add we want at least one dollar profit, example a $30K value add needs to add at least $60K of value). Then a few years down the road, they have solid cash flow due to rent appreciation. Separate from this the property also has appreciated in value. Add the value add, cash flow from rent appreciation, the property appreciation, and the equity paydown and coastal So Cal buy n hold has historically produced outstanding return for the buy n hold RE investors (especially the ones doing value adds).
I suspect in Fresno it may be slightly easier (but still a challenge) to find a property with positive cash flow but it likely will not initially be great for the amount invested (it is likely to be poor for the amount invested). A couple/few years from now, it may have decent/good cash flow. 10 years from now, probably good cash flow.
If you combine this with a smart value add, you would be doing what the successful investors are doing in the poor initial cash flow markets (San Diego, LA, San Fran, OC, etc.).
@Dan Heuschele thanks for your input you've made good points not only to look at right now but 5-10 years as well! That is something I think about but I guess I am always stuck on the cash flow right now type of numbers. But when I look and these same places at the current rents were 80k and now selling for 300k+ it does make sense!