Milwaukee Deal Analysis HELP!

6 Replies

Hello!

First time poster and newbie REI. My husband and I have been trying to get into REI for almost a year now. While the market is a bit nuts now (thanks @MarcusAuerbach for your excellent market updates!), even if the market was great, I can't make a deal work on paper unless the property sells for under $100,000. My husband and I rehab'ed our own house mostly ourselves, so we have some knowledge on pricing for things like CapEx, but maybe I'm overestimating? We're mostly looking at older homes (duplexes-quadplexes), as that is what the inventory in MKE mostly consists of, in Bayview, St. Francis, West Allis, and areas around (not in) Wauwatosa (Washington Heights, Coopers Park, Story Hill, etc.). I'm hoping for some advice on where I'm going wrong with my analysis. Taxes and CapEx seem be killing my deals. I can't do anything about taxes, so I can only assume I'm estimating too much for CapEx. I would appreciate any help I can get!! I've listed below a sample of my CapEx analysis for a duplex. My CapEx is also assuming that everything is new which makes me think that it's actually an underestimation. I'm also estimating 10% for repairs since the homes are older and 7% vacancy (which I still need to verify with property managers- if anyone knows a better number here, I'm open to feedback). My husband and I plan to do the property management ourselves, but I am including an 11% PM fee just in case things change in the future. Thanks in advance for your help!!

Sara Zielke

Sample CapEx Analysis for MKE Duplex. Home ages range from ~1900-1940

CapEx Quantity Replacement Cost Total replacement cost life span Cost per Year Cost per Month
Roof (most homes here older and have more than 1 peak in roof- not simple gable roof) 1 12,000 12,000 25 $ 480.00 $ 40.00
Water Heater(s) 2 1,200 2,400 10 $ 240.00 $ 20.00
Appliances: Washer 1 500 500 10 $ 50.00 $ 4.17
Appliances: Dryer 1 400 400 10 $ 40.00 $ 3.33
Appliances: Stove/range 2 500 1,000 10 $ 100.00 $ 8.33
Appliances: Fridge 2 600 1,200 10 $ 120.00 $ 10.00
Appliances: Dishwasher 2 400 800 10 $ 80.00 $ 6.67
Driveway/Parking lot 1 5,000 5,000 30 $ 166.67 $ 13.89
HVAC 2 4,000 8,000 20 $ 400.00 $ 33.33
Flooring 1 6,000 6,000 6 $ 1,000.00 $ 83.33
Plumbing 1 5,000 5,000 30 $ 166.67 $ 13.89
Windows 1 5,000 5,000 30 $ 166.67 $ 13.89
Paint 1 4,000 4,000 5 $ 800.00 $ 66.67
Cabinets/counters 2 4,000 8,000 20 $ 400.00 $ 33.33
Structure/foundation 1 10,000 10,000 30 $ 333.33 $ 27.78
Garage door 1 1,500 1,500 10 $ 150.00 $ 12.50
Landscaping 1 1,500 1,500 10 $ 150.00 $ 12.50
Cap Ex Total $ 4,843.33 $ 403.61

There are others on here with farm more knowledge than me, but the first thing that pops out to me is your roofing cost. Assuming a 1500sqft building footprint, I’d say you could do a roof for $10k and probably a bit less than that depending on who you hire. There are folks in Milwaukee that would do a roof for $5000, but you may be compromising on some aspect (price, speed or quality). 

You could also do water heaters for $800 including labor I’d say. I’m not sure this will move the needle enough, but it’s something to consider. 

Many of your other numbers seem pretty close. At least as far is my experience takes me. 

Let’s see what others have to say. Could be a lively discussion!

@Sara Zielke - great to hear feedback about my market update videos!

First of all, you are thinking in the right direction. Once you start thinking about capex you start to realize that cheap deals will not work, because as good as the cashlow is, capex exceeds cashlow over time. So it comes down to dial in your financial model to a point where you can make it work on paper. The main parameters are purchase price, ARV and rent. You can render any deal that has been good negative on paper, all you have to do is to turn on every dial you have - expenses up a little, income down a notch and it looks like a desaster.

When I bought my first rental in 2008 I was not sure how things would work out, but after a year I started to feel like I had been to pessimistic in many of my assumptions. It takes experience.

The math is only as good as your assumptions and that is the part that most newbies don't get: they are so worried about getting their monthly water bill estaimate right, but completely disregard capex. And you can't do that in general either, you have to do this property specific. 

If you buy a house with a newer roof, you won't have to deal with it for another 25 years, but you have to make sure that you buy in an area, where in 25 years you have so much equity in your property that you can easily take some of it and do a complete rehab all over again.

Agree with @Dave Carpenter that your roof estimates are high by ~30% or so.

Other items where I see you being on the high side for capex:

1. Driveway/parking lot/garage door: this one depends deal to deal, most of my properties (in MKE) don't have any parking.

2. Washer/Dryer: again, deal to deal dependent, but a lot of areas of MKE this is not an expectation for the landlord to provide.

3. Flooring:  If you are spending $6k on flooring in a duplex, you're going with good quality LVP, and you should estimate longer than a 6 year lifespan.

Overall, you seem to be assuming worst-case scenario for almost everything - plumbing, foundation, windows, etc.  Its likely you'll be able to find a place that has some of those components that don't need to be touched for quite a few years.

A conservative approach when analyzing a deal is one thing, but if you model only the downside, you can make almost any deal look bad.

What is your intended holding period?  If you intend to hold for 3 or 5 or even 7 years, then you are probably overestimating your likely capital expenditures by a significant amount.  If you truly intend to hold the property indefinitely, then location is paramount as you need equity to outgrow capex expenses.  As Marcus points out above, this is why cheap deals seldom pan out over an extended holding period.  

Out here in California (Bay Area), we have mild winters and summers and have experienced explosive economic and demographic growth such that predicting capex reserves is less significant than it is in the alternating snowy and humid Midwest.  Are the Milwaukee neighborhoods you are looking to developing rapidly relative to the rest of the city, if so, why? if not, is there a case for future growth?  Etc.             

Thank you so much for the quick responses! @Darius Ogloza , we are planning on buy/hold for the majority of the properties that we intend to buy. Once we reach the max conventional loans that we can obtain,  we will look at our options to see if we should sell off a property to finance larger investments; if we'll move to hard money investing; or if have enough of our own money to continue to invest without a bank.  @Marcus Auerbach , I think you are right in that us being newbies and not having experience behind us, we have gotten into a bit of deal "analysis paralysis". We are trying to cross all of our T's and dot our I's, but maybe we are being too conservative. So it sounds like you are suggesting that we more or less 'self-insure' using property equity over time for items that don't need to be replaced in the near term rather than adding those items into the capex model? The roof, for example, are you saying that if the plan is to hold the property for a long period of time, then we shouldn't bother putting aside money for the roof if it's young in age? @Alex Statza and @Dave Carpenter , thanks so much for the insight regarding costs. I will look to adjust our model accordingly. 

@Sara Zielke real estate has 4 sources of wealth and cash flow is typically the smallest of them (even though certainly the most important one); if you hinge your entire investment just on cash flow you are missing out on the major points. Principle pay down, appreciation (forced and natural) and tax write offs carry much more weight long term. Plus, as you have found, the math does not work with cash flow only. Play around with the buy and hold calculator to get a sense for what works, use 1,000,000 property (portfolio) value and 10k monthly rental income, look at the 10 year and 30 year results. Feel free to reach out if you have further questions!