How do I know if it's a good opportunity?

Question

Hi everyone, I am just beginning my real estate journey at 25. I have listened to a bunch of BP podcasts and am currently reading How to Invest In Real Estate by Josh Dorkin and Brandon Turner, I am very green! I'm interested in checking out a multi-family unit with the intent to live in one and rent out the other, how can I be confident that the investment I'm making is not an insane one?

This is a current property I have in mind

https://www.zillow.com/homedetails/1637-N-Richmond-St-Chicago-IL-60647/2061617763_zpid/?

This is a current property I have in mind

https://www.zillow.com/homedetails/1637-N-Richmond-St-Chicago-IL-60647/2061617763_zpid/?

Ruchit Patel · Answer

Can you specify, what are you trying to do?

Flip or house hack or passive cash flow or something else?

Paul De Luca · Answer

@Joseph De Lorimier

Pre-qualify the property by running a cash flow analysis.

Gross income minus vacancy/credit loss minus operating expenses = net operating income

Net operating income minus your debt service (mortgage) = cash flow

You'll want to define your minimum cash flow requirement and/or cash on cash return so you can evaluate properties using the same standards.

If it looks good on paper or on the spreadsheet, schedule a showing. If you want to pursue the property further, submit an offer and if accepted get an inspection done.

Mikhail Heber · Answer

@Joseph De Lorimier. Numbers are key here. I agree with @Tim Herman that the rental calculators are good for this. It's also important to know what kind of financing and at what percent. Quick look at rental comps in the area show 1700-2200/unit? If so, it looks like it would be hard to cashflow as monthly income of total property 4400 - 2200 (50% rule estimate for expenses including capex) - 2600 (using zillow mortgage calculator for principal and interest) = -$400 currently. This is very quick napkin math though, if you know the exact expenses such as utilities, mortgage costs, taxes, pmi vs no pmi, rental comps/what you think you are going to rent it at, it will change dramatically. LMK if you have any questions. Good Luck!

Tim Herman · Answer

@Joseph De Lorimier it is all about the numbers. Have you run it through BPs calculator. 5 free uses. income minus expenses plus reserves for future expenses. Analyze as if you are not there and analyze househacking and see if it lowers your cost of living.