Complete Guide To Underwriting Deals in the Cleveland Market
Every Real Estate Market is different across the country. This blog will show you how to underwrite a property in the Greater Cleveland Area.
Step 1: Have A Calculator
Have a spreadsheet or rental property tool to create a rental property proforma. We use the Bigger Pockets Rental Calculator. We like using this tool as it calculates the most important metrics every investor should know for an investment property. These metrics are Cash on Cash return, 5-year annualized return, NOI, Cap Rate, and a chart that shows how your property will perform over time and the total cash needed.
Step 2: Plug and Chug The 18 Items
Next, you must enter the 18 factors that make or break your investment property.
Factor 1: Purchase Price.
What will you be buying the property for? In our first round of analysis, we put in the current listing/asking price.
Factor 2: Closing Costs.
We assume 1.5% of the purchase price for our closing costs.
Factor 3: Interest Rate.
What are active interest rates? An active agent should know ruffly what the interest rate would be. But for an exact rate, reach out to a loan officer.
Factor 4: Points
We assume there will at least be 1 point. Suppose the purchase price is $100,000. It is fair to assume the lender will have about $1,000 in fees, called "points."
Factor 5: Loan Term
For all of our analysis, we assume a 30-year term.
Factor 6: Gross Monthly Income
Determining gross income is typically the most challenging part. How much can you get in rent for this property? An excellent real estate agent who is an active investor is one of your best sources. Active investors & agents should know market rents off the top of their heads. However, a few great tools you can also use are bigger pockets Rent Estimator and Rentometer.
If you use a great agent, the agent will have access to the best tool. A tool only Realtors have access to, which is called Rental Beasts. Rental beast allows Realtors to pull comparables for other rentals in the area. For example, are you looking to underwrite a two-bedroom, one-bathroom 1,450 sqft in the 44109 zip code? A realtor can look on the market to see all rental properties that were recently rented or are actively for rent, two-bedroom, one bathroom, around 1,450 sqft in the 44109 zip code. Not only can they see what is actually for rent, but they can also see what was for rent and what got rented out.
Factor 7: Property Taxes
This one is straightforward. You can find the actual property tax on the county auditors' site. In the Cleveland area, you are most likely looking at Cuyahoga or Lorain county properties. Their auditor's sites are below.
Factor 8: Insurance
Insurance can fluctuate as the market shifts. The investment insurance market is different from what it was three years ago. Much goes into insurance, including the age of mechanicals (roofs, furnaces, AC, electrical panels, water heaters, and windows). As a rough estimate, we assume an insurance cost of $1,200 annually to $1,600. Depending on the purchase price of the property. If it is $150,000 or less, we use $1,200 annually. If it is $151,000 to $200,000, we assume $1,400. For any other price point, we will send the property address to our insurance broker to have them give us a quick quote.
Factor 9: Repairs & Maintenance.
We assume 5% of the gross income. Reviewing our profit and loss statements shows that our properties are around 3% of gross income. But to be conservative, we underwrite our deals at 5%
Factor 10: Vacancy
We assume 5% of the gross income. Reviewing our profit and loss statements shows that our properties are more than 2% of gross income. But to be conservative, we underwrite our deals at 5%
Factor 11: Capital Expenditures
We assume 5% of the gross income. Now, this is the item that can vary the most. If you have all new mechanicals, you can underwrite at a lesser amount. However, if all of your mechanicals are older, that should be reflected in the property purchase price, and two, you will likely have to underwrite closer to 7% or 8% of the purchase price.
Factor 12: Management Fee
We assume 10% of the gross rental income.
Factor 13: Electricity
Tenants are responsible for.
Factor 14: Gas
Tenants are responsible for.
Factor 15: Water & Sewer
$50 a month per unit.
Factor 16: HOA Fees
The majority of the time, you will not have an HOA fee. If there is an HOA fee, the cost will be stated in the property listing.
Factor 17: Trash
If there is a trash fee, we have the tenants for it.
Factor 18 Other:
We always put in a landscaping fee of $800 annually. Historically, our landscaping fee is about $750, but to underwrite conservatively, we assume $800. Side note: even in Cleveland, where we can get a lot of snow, we do not pay for snow removal. All of our tenants are responsible for their snow removal.
There you have it. This is how our conservatory underwrites deals in the Cleveland market.
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