Posted about 6 years ago

My First Investment Property, Part 1: Understand the Numbers

Hello BP! As I’ve gotten more involved in the forums lately, I’ve noticed that most members here are like me: part-time (or aspiring) investors looking for a way to boost their incomes or set themselves up for nicer retirements than their 401k’s or pensions (because those will still be there when we Gen. Y’ers are ready to retire) will allow. With that in mind, I decided that a step by step explanation of my first multi-family purchase could be helpful for a lot of members. There are three more segments to come: Identify the Property, Get to Closing, and Actually Make Money. 

I hope you can all learn something from my experience!

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So you’ve saved some money, joined Bigger Pockets, read a lot, asked some questions in the forums, and you think you want to get started as a part-time investor with a buy-and-hold strategy on a small multifamily. What now?

First, you must understand the numbers.

The most important thing you need to know about investing in small multi-families is that the math is simple. You can crunch a deal into one of the calculators here, but if you still feel the need to post “should I buy this?” in the forums, you don’t really understand the purchase you are considering. Before I found Bigger Pockets, I created my own template in Google Drive to analyze properties, and I still use it to this day. All it does is automatically do the math described below for a given purchase price. To decide if a property is worth looking into, there are really only four basic things you need to know.

A. What is your acquisition cost?

If you are going to leverage your property at 75% LTV (usually the requirement), then divide the purchase price by 4, that is your down payment. Add about 10% for closing costs, and that’s your acquisition cost. If you know there will be renovations involved, you can choose to add those to your acquisition cost (I do). If you can rent the units without renovating them, and use the profit to renovate later, then do not add them to your acquisition cost.

B. What will you get for rent?

When you are just browsing for properties, there are a few good tools to estimate the expected rent. Check rentometer.com for your area, and see what’s listed on Craigslist, Postlets, Zillow, and Trulia. Markets vary so much that any figure I give you here would be meaningless to you, but it’s not hard to find the estimations. Plan to get slightly lower than the market average in your area, just to be safe. You might miss out on some decent opportunities, but nothing we’re getting on the MLS is going to be a steal, so you can pass up the okay deal for the better deal.

C. What are your regular expenses?

Mortgage: You can easily find out how much the mortgage payment will be by searching on google for a calculator. I like mortgagecalculator.org for no reason except it was the first to work on my phone when I googled "mortgage calculator," but there are a bunch that will work.  Your borrowed amount will be 75% of the purchase price using conventional financing.

Taxes and insurance: In the beginning stages, you can estimate those. Since markets vary so much, you’ll have to do some research of yours to get decent estimates.

Services: Do you have to pay for landscaping, snow removal, sewer use, water, or a garbage collection outside of taxes? Is there a septic tank that will have to be serviced regularly, or lights in common areas that you will be paying the electric bill for?  At least some of that will apply in almost any market.  Make sure to include those expenses in your analysis.

D. What should you budget for “unexpected” expenses?

Of course, you should expect to have to replace the roof every 20-30 years, the water heaters every 10, the furnace. . . etc. You should expect vacancy, renovation of units, and new appliances once in a while. Most experts will tell you that all-tolled, you should put away about 2.5% of the purchase price per year. For the sake of simplicity, let’s just stop there.

Now that you understand where the numbers come from, the analysis is easy. It comes down to 8th grade algebra, but you already know all the variables (the mathematical variables, anyway). The one number I care most about when I’m looking at acquiring a new investment property is the cash-on-cash return on investment. To get there, I divide the monthly cash flow by the acquisition cost.

Monthly cash-flow = Rent - Regular Expenses - Savings for future expenses (B - C - D/12).

Cash on Cash ROI = (Monthly cash flow x 12) / Acquisition Cost

Principal paydown, market appreciation, and tax depreciation can also factor into your real ROI, but since they will (theoretically) affect every multifamily investment in the same way, we can ignore them when doing an initial analysis.

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If that was all new to you, it was a lot to process for one day! Leave questions and comments below.

I’ll be back soon with the next step: Identify the Property.


Comments (25)

  1. thank you for the lesson, it's priceless.


  2. That was a really good post @Kevin Siedlecki. I'm going to bookmark this so I can really take better notes when I get home. Thank you for this. It makes sense to us newbies. :)


  3. Hi Kevin,

    This was a great and informative post. Plain, simple and direct.  I am gather article, that I am calling foundation articles.  Articles I will you to build my business off of.  This is for sure one of them.Looking forward to reading the others.  I also applaud you for the answers to the questions to the in the post.  That is more "stuff" to put in my pockets Thanks again!


  4. @Ayodeji Kuponiyi- take a deeper look at your numbers there. The analysis you have is "rule of thumb" stuff. You need to break down the numbers, using this post as a guide, to get out of rules of thumb and into the start of real-world analysis. Find out the taxes, insurance cost, age of appliances, major updates recently performed or needed  The 50% rule is just an average, and doesn't mean much when it comes to an individual property. Good luck!


  5. Awesome post! Thank you.


    1. Glad you enjoyed it!

  6. @Kevin Siedlecki thank you so much for posting this! Great post. Question, on the acquisition part, why divide the purchase price by 4? What makes 4 so special? Lastly, what is your prefer CoCR? 10% and higher? 


    1. Good question. Sorry that wasn't clear enough. You divide the purchase price by 4 because 1/4 is 25%. We were working from the assumption that the bank is requiring a 75% LTV, which means you are putting 25% down, or 1/4 of the purchase price. 10% Cash on cash is my ballpark goal for the initial analysis described here. If it looks like it will beat 10%, I'll look into it further.

      1. @Kevin Siedlecki thank you for explaining. I really like your approach. Its simple & straight-forward. The triplex I'm looking at rents for $950, $820 and $595 respectively with an additional $133.33 per month from 2 of the 4 garages. Total monthly rent is $2365 and it doesn't meet 1% rule. They're asking $254K. The total comes to $2498.33 * 50%(50% rule) = $1249.17*12= $14,990.04 as the NOI. $14,990.04/$254K = 5.9% as the Cap Rate. 

        Based on the numbers, this property may not be ideal for some but if I got the triplex lowered for $190K ($199K is the estimated value based in comps) and add value and increased the rent for each unit to $950? The 4 car garage can rent for $50-$100 per month. Is it worth it or should I look for something that has a cap rates "between 7%-10-%?


  7. It's like christmas, part 2 & 3 are already there.


    1. Ha! Glad you are finding them helpful! Part 4 will be up Friday.


  8. This blog just made me feel so much better! Thanks Kevin, can't wait for part 2


  9. Good basic start.  Thanks for the post.


  10. Thanks for this blog. Reinforces what I'm learning and puts it in Barney steps. Love it! Sub'd for more investment goodness!


    1. Glad you're enjoying it!

  11. Do you find that D) 2.5% of purchase price per years is a good estimate?

    It seems high to me but I am just getting started.


    1. I haven't owned anything long enough to be an authority on that number, but I'd rather be surprised by having extra money than by not having enough!


  12. Giving credit where credit is due.  The post above is by @Kevin Amolschhttp://www.biggerpockets.com/blogs/5411/blog_posts...


  13. A great companion post about many of the things to consider besides the raw numbers: http://www.biggerpockets.com/blogs/5411/blog_posts... 


  14. I appreciate your post and your advice Kevin...

    I will look a bit closer into it and use .5 instead of .3 or .4 just to be safe.

    I would use FHA to safe a little money but I do not want to live at the property.

    Thank you


  15. Thanks @Helen Kolton!

    You are correct in the basic assumptions of counting on 30-40% of your gross rent to go to expenses (that's what a bank will count toward a mortgage, if you are lucky.  A safer estimate is 50% for everything but the mortgage) but that's just bird's eye view assumption. 

    That's what I mean by understanding the numbers.  If you make decisions based on those 30-40% assumptions, you could get yourself in trouble. Hopefully after reading this post you can get a better look at what's behind those assumptions, and see how they apply to your own purchases.  For example, taxes are very different in Colorado and Connecticut, and that will have a big impact on those assumptions.  

    7-10% is a safe estimate for closing costs.  The cheaper the property, the higher that percentage, since things like title search, appraisal, and attorney fees don't change much for properties at different price points.

    As for the cost of those things, I just rely on my attorney for all of that.  I have an attorney I trust, and I really believe that the extra money is well worth it.  You want to run your investments like a business.  Ask yourself, would a major corporation buy a property without a lawyer?


  16. Really great post and very helpful.  I am looking for a multi now.  

    Please correct me if I am wrong but that how I break my preliminary numbers:

    I take the rents multiply them by 12 and then multiply by .3 or .4 (expenses).  That is how I come up with my cap rate (depending on the cost of the proeprty).  I was thinking to start with FHA loan first but I want to avoid PMI.  I think you need to put down 5% to avoid PMI for life.

    I thought closing costs are about 7% of the purchase price.

    How do you know if you are paying too much for the title search?  On my last SFR last year, If my mortgage broker would not noticed that my title company was overcharging me I would of never noticed.

    Thank you for your help.


  17. Thanks for commenting, @Curtis Eickenloff and @Tristan C..  Glad you enjoyed it!  Part 2 will be up tomorrow.


  18. Thanks!! I rely enjoyed and learned things from this article.


  19. Good post. Thanks for taking the time to put this together.