Am I overcomplicating my analysis?
Aurora · Member since 2021 · 44 posts · 24 votes
Hey BiggerPockets Community,
I am having some issues with overcomplicating my analysis' right now. If the numbers look "too good" I feel like I may have not accounted for something or am overvaluing a certain aspect of the property. This then gets me stuck analyzing the same property trying to figure out where I went wrong.
Any thoughts on how to mitigate that feeling and become confident in my numbers? Does it come with experience?
Any feedback would be appreciated!
@Ryan DiCanio this is not uncommon and is even more prevalent if you are newer to the investment world. You've received some solid advice so far: Evaluate the area, get up and "take a lap" then come back to your deal, evaluate the "class" of the property, etc. I echo all of those statements.
I'm not sure how many deals you have done, but one way I got over the analysis paralysis was by DOING A DEAL. There is a healthy piece of investment education that you have to learn on the go. Until you put your analysis into action, you are simply working on theory. Once you get a few deals under your belt, you have some evidence and a proof of concept, or a disproven theory.
You most certainly need to do your homework. I would start by defining your buy box, farm area, and non-negotiables on the subject property: size home, size of renovation, neighborhood, bed/bath, garage/no garage, etc. I'm making a sweeping assumption that you have defined all of that and that you know what financing route you will take (traditional, private, cash). If you need help there, let me know, I'm happy to share more about how I work this process.
Once you have those clear parameters and you find a deal that checks the boxes. LOCK IT DOWN and move through the process. You've done your homework at that point and you didn't do it for nothing. Take the confidence and put it into play. You can analyze all day, but until you have results to compare, there is no clear answer. Best of luck, my friend!
Hey Ryan,
Analysis Paralysis is a real thing! I usually walk away from the analysis, grab a water, take a walk, etc., then come back to it and start from scratch. Just make sure your considering vacancy costs, taxes, property management fees (if applicable), CapEx, comps, and does it meet the 1% rule. This isn't the full picture but hopefully it helps you consider something you didn't before!
@Ryan DiCanio - it depends on what too good means to you. Maybe those numbers are super awesome but the property is a D class property. I would suggest you apply that a filter to your analysis as well. If you have an A or B property under analysis, take a break, take another look, and call it a day.
- Dan
@Dan Armich could explain what you mean by a “D Class” property? I am unaware of that concept.
Make sure you’re vetting location first and property second! You don’t want great numbers on paper that can’t be realized due to negative population growth and zero demand!
@Ryan DiCanio this is not uncommon and is even more prevalent if you are newer to the investment world. You've received some solid advice so far: Evaluate the area, get up and "take a lap" then come back to your deal, evaluate the "class" of the property, etc. I echo all of those statements.
I'm not sure how many deals you have done, but one way I got over the analysis paralysis was by DOING A DEAL. There is a healthy piece of investment education that you have to learn on the go. Until you put your analysis into action, you are simply working on theory. Once you get a few deals under your belt, you have some evidence and a proof of concept, or a disproven theory.
You most certainly need to do your homework. I would start by defining your buy box, farm area, and non-negotiables on the subject property: size home, size of renovation, neighborhood, bed/bath, garage/no garage, etc. I'm making a sweeping assumption that you have defined all of that and that you know what financing route you will take (traditional, private, cash). If you need help there, let me know, I'm happy to share more about how I work this process.
Once you have those clear parameters and you find a deal that checks the boxes. LOCK IT DOWN and move through the process. You've done your homework at that point and you didn't do it for nothing. Take the confidence and put it into play. You can analyze all day, but until you have results to compare, there is no clear answer. Best of luck, my friend!
@ Ryan DiCanio A D class property truly varies based on where you live, your market, and a litany of other factors but it mostly boils down to the idea of grades like in school. You have A, B, C, D and F. An 'A' property is one that is in either a nicer, or a newer neighborhood, probably near a nice school, has clean roads, and nice amenities that serve the public nearby. For instance if you were to look say in Iowa, specifically in Altoona Iowa, if you were to look in the south eastern region of that town, that's where all the newer construction, or relatively new construction is, the people are nice enough they have stable jobs and the lawns look nice and manicured. However those criteria of what define an A in Altoona will vary from what defines an A in say... Tallahassee, or New York City.
B class generally going to be the set of suburbs or properties that came before the A, might be a bit lower income, may or may not be smaller lot sizes, but either way they are generally older properties with a slightly lower income bracket, and this trend will continue on down to C, and D. So to answer your question and applying it to Iowa, D class properties may be ones that are 'on the wrong side of the tracks' so to speak, there may be more obvious flaws that are immediate upon seeing the property such as drive way issues, roofing issues or potentially some sort of water damage. Whatever the case may be, a D class property is not always in the best of shape and may or may not be in a tougher part of town more often than not.
Hope this helps!
@Collin Lee Johnson this helps a ton! Thank you for clarifying this for me. It's funny the day that I asked what property class meant, I read about in "The House Hacking Strategy" book! But again thanks for the further clarification.
@Ryan DiCanio
What numbers are you using for vacancy, repairs, Capex and PM fees? That's usually 30% of rent for me. Then you have to pay taxes, insurance, utilities, and the mortgage. Once all that's been deducted you're left with cash flow.
Andrew
@Andrew Kougl so when I run my analysis, I first run the property for after I am done house hacking it. I have vacancy and repairs at 4% and Capex at 6%. Only utility I accounted for was water because it is not submetered. Then if it cash flows nicely then, I look into the numbers of when I am house hacking.
Thoughts on improvement of my analysis?
@Ryan DiCanio
When you say "after house hacking", is this a live in flip? Are you BRRRR'ing it? And because it's freshly renovated you have lower repair reserves? Is the reason you don't have a PM expense because you were a live in landlord and so you anticipate doing that role longterm despite you not living in the property? Trying to guess as to what type of properties you are acquiring, but without further details like condition of the property it is hard to know if your estimates are sufficient.
@Andrew Kougl so my plan as of right now (but obviously could change throughout my education process) is to house hack again after this house hack. I would keep the my first property for the cash flow while living in the next property (that is why I don’t have a PM expense). Looking for residential multi family homes.
Hope this helps!
@Ryan DiCanio, I think your numbers for repair and Capex are good, but ultimately they are a little under conservative for me, I typically run my Vacancy at 8% to account for about a month absence, worst case scenario. Repairs I do 10% and Capex I also do 10%, it ultimately boils down to the risk levels that you are comfortable with. For instance I am a little bit more fickle with my finances and as a result I sleep more soundly at night knowing that there is a bigger cushion to protect me, but if you have a nicer property with newer appliances I would say that maybe you don't need to budget quite so much for repairs or capex, but again it's your comfort level. Overall I would say 10% is good just because it is such an extreme that it's a good ceiling value to use on a property, and it's nice because on the flip side many properties won't really be needing repairs or small maintenance that often so you could still run that and then have a nice budget put away to deal with those things so it's like you have just given yourself free money in some sense after you have dealt with minor issues by taking from such a large reserve.
Ultimately what makes numbers 'good' is very subjective but you should budget and plan for what you're comfortable with, even when you're house hacking your vacancy may not be 4% just because you are renting out half the place, it may well be 8% heck it could be 16% but you should try to plan to get an average that is reflective of the year in a bad year just to be very safe. But again, I am fickle with my finances haha.
@Ryan DiCanio Right, totally get that. But are you house hacking a dump from day 1 or is it a fully updated multifamily? The way you acquire the property will dictate how much you should have in reserves.
Remember, you are buying multifamily, only people who own multifamily are investors, 99% of the time. Why do investors sell a cash flowing asset with no deferred maintenance in a good area? The answer is they don't, 99% of the time. In my experience the properties I've bought needed something either immediately or within the first 6 months. Make sure to get inspections and go in with the proper reserves and expectations and you'll be fine.
To get back to the D neighborhood, call up PM's or ask other investors in the area. Generally the realtor.com/trulia crime map is a good starting point. Since you are house hacking you likely know the area so this may be moot but just thought I'd mention it.
Been doing this for decades and still second guess myself. So far it seems to be working as I don’t recall making a bad investment
Always good to be VERY careful IMO but don’t let it stop you from investing
@Collin Lee Johnson so a follow up question to you would be: Could being too conservative allow you to miss out on some good cash flowing properties?
From a perspective of someone looking to buy their first investment property, a big piece of advice I keep hearing is just to get your foot in the door. Now obviously I don’t want to invest in a terrible property that won’t cash flow for me, but I also feel like if my numbers are almost too “secure” it could bar my entry into the business. Thoughts?
@Andrew Kougl no not looking to house hack any “dumps” per say. Only updates I have seen so far may be to either cabinets, bathroom tile, and maybe update appliances (but again, still need to educate myself on the returns if I do so).
Yes trulia is a site I have been using to look up the area in regard to crime rate, thank you for that.
@Michael Plante thanks for sharing that! So in my above thread, for someone looking to get into their first house hack or just investment property in general; could being too conservative with your numbers be holding you back on getting in the game?
@Michael Plante thanks for sharing that! So in my above thread, for someone looking to get into their first house hack or just investment property in general; could being too conservative with your numbers be holding you back on getting in the game?
sorry I don’t understand when you say being too conservative?
I am a scared investor/business owner. Unless it’s is an almost fail proof situation I don’t do it
May have lost out on deals over the years but I don’t like a lot of stress and worry
@Michael Plante the only reason I say “too conservative” is that a lot of advice I’ve been hearing to newcomers in the real estate investing business is to get your foot in the door. So I was saying as everyone has their own subjective numbers in regard to capex, vacancy, etc. Could have numbers that are “too conservative” be a weight holding you back from ever getting in the game?
@Michael Plante the only reason I say “too conservative” is that a lot of advice I’ve been hearing to newcomers in the real estate investing business is to get your foot in the door. So I was saying as everyone has their own subjective numbers in regard to capex, vacancy, etc. Could have numbers that are “too conservative” be a weight holding you back from ever getting in the game?
I won’t do a deal unless I can make a good chunk of money
Feel free to message me.
My advice to people is (which sometimes people listen to) buy a place you would live with numbers that work. It’s all about the long run baby! Buy now and in 5 years I bet your damn happy you did in 10 years I know you will be.
@Eric Bilderback I love that advice, thank you Eric! I have a saying that is similar: "A year from now, you are going to be happy that you started today"
Right on. Hey man we’re here for you pull the damn trigger it is time! Give two years you will be happy 9/10 times.
@Ryan DiCanio
I’ve read several responses and yes all of them are right but correct me if I’m wrong I think you’re speaking more about that gut feeling that you’re missing some thing and the fear of moving forward. I know that my wife and I analyze hundreds upon hundreds of deals for a year while we renovated our personal home I’ll live in flip, and before we purchased our next investment property. I don’t really understand the analysis paralysis because I’ve never gone through it but I can’t say that I have felt fear and thought that something looked too good to be true. Honestly maybe you just got to it first or maybe no one in your area will invest in the property you have it could be a number of different reasons why it seems too good to be true but most of the time if you’ve analyzed plenty of deals and you were accounted for all maintenance cat bags Property Managment realtor fees closing fees etc. then I say move forward. I had that feeling mildly on my first couple properties wondering why no one else purchased it is it gonna sell etc. etc. but I trusted my process and I moved forward and push through the fear and ended up coming out on the positive side. I now can run a deal in under five minutes. I say if it looks too good to be true then chances are there’s plenty of room left in that deal that even if you make mistakes you’re still going to come out on top so just move forward and jump into it you’re gonna make mistakes you might lose money you might not but the only way you learn is through experience. Jump in and start investing man that way you can build her confidence in yourself and start changing your life for the better!
@Justin Sullivan you hit the nail right on the head with what I was trying to articulate!
And I agree with you 100%, I feel as the more analysis that I do on multiple properties, the more comfortable I will get the process and the more confident I will become.
There’s a saying that I believe in which is: “Work ethic and knowledge mitigates fear.” So essentially the more you do something and the more knowledgeable you become of that topic, the less fear you have of jumping into an opportunity.