All Forum Posts by: Ben Wilkins

@Peter Amico - you did a pretty good first analysis. Your maintenance, CapEx, PM, etc all look like good assumptions. Don't forget about vacancy rate - you'll have to get a conservative estimate for the area, but 8% is usually a fair guess. Include this as an "expense"

Financing - for commercial (anything larger than 4 units), most lenders will want 25% down. 

You are calculating Cap Rate correctly. You are also evaluating a purchase price based on desired Cap Rate - that's the same way that I usually come up with an offer (after I have more information and better numbers than what Loopnet states). So far, your academic exercise is pretty good.

What type of cap rate: That depends on the area. Some states are at cap rates of 8%, while others struggle to find a 5%. I haven't looked at the market where this property is located, so I can't give an educated answer other than "it varies based on location".

MFR's can cash flow very well. I usually try to find a property that has room to grow, either by finding a way to increase rent or decrease expenses. If you can find a better property manager, or if you can split the water / garbage, you can increase your cash flow. Since the property looks like it has deferred maintenance, you could probably make living conditions better and increase rent (I didn't look closely enough to say either way).

What are you missing: biggest expense is Vacancy. Don't forget to account for that!

Good initial analysis - keep it up!

@Mitchlyn D. - the way I look at it: how often will you find a house where your mortgage payment is only $80.79 per month? (My math showed -$122 for cash flow, but close enough). 

After a year, you'll add another $500 per month to your cash flow (assuming you rent the house for super cheap) - even if you don't raise the rent in the other units, you will be able to turn this into a positive cash flow in a year.

Kudos on considering vacancy, maintenance, and CapEx. Don't forget property management though!

My advice: Make an offer of $200k (example number) and then add in a renovation loan for $50k to improve the properties (again, just an example number). This will raise your mortgage payment, but will allow you to (a) fix up the house, and (b) increase rent. Yes, your mortgage will be roughly $200 more a month, but again: where will you get a mortgage for $322 per month?

Keep us posted!

@Scot Sorenson - ok, let's break this down.

Income: + $1900 per month

PM: - $100
PITI: - $1246
Utilities: - $90

Now let's look at your question about how much goes toward maintenance and a safety net. Let's also look at your statement "if nothing goes wrong". With those four little words, you already admit to the fact that something can go wrong (and probably will).

So your "percentage expenses" come out as such:

Maintenance (10%): - $190
CapEx (10%): - $190
Vacancy (8%): - $152

Total Expenses: $1968 per month

Total cash flow: (- $68) per month, and that's if the conservative average number of bad things happen. Investors set aside 10% for CapEx no because that's a magic number, but because that's a safe number to save for when the furnace, roof, water heater, etc needs replaced. 10% will cover a bit of stuff, but what happens if two things break at once? The point of setting aside CapEx is so that you don't burn up all of your profit from the previous three years just to replace the furnace - at that point, you're (at best) breaking even, or (at worst) going negative. If you saved up for CapEx expenditures, you may spend more than that savings but you at least have a large chunk set aside just for that.

So in answer: your costs in five years will overtake the profits because five years from now, your "profit" will be all spent on replacing large-ticket items or paying for vacancies. For me, I would rather have my profit reinvested in another property while still having a nice chunk set aside for those emergencies.

I hope that clears up what we were saying!

@Scot Sorenson - you hit the right idea when you ask "how much should I be putting aside for repairs or things that may come up", and @Thomas S. brought it home.

Generally speaking, I tend to put aside 10% of income for maintenance, 10% for CapEx, 8% for vacancies. In your case, that would come out to $532 per month - and that doesn't even include taxes or insurance.

With the upgrades that you made, I would do one of two things:

Sell the property, and hopefully make some profit above what you sold the property for. Take the proceeds, and roll them into another investment property to use the tax benefits. (1031 echange = happy investor when selling)

Find a tenant who wants to lease-to-own. That puts them in charge of maintaining the property, removes your PM, and sells the property for you. This isn't ideal, but it is an option to sell the property, collect on interest, help someone out who might not be able to get financing, etc. Just be sure to screen who you lease to!

@Tarron B. - for initial analysis, I use RentJungle or RentOMeter to check local rent rates. This is easier and quicker than going to a broker or agent.

For expenses, you can check the local township website for water, sewer, and trash rates. Once you learn an area, you can get a feel for what a good estimate is. For example, for my area I usually estimate $3000 annual for water for a duplex. Is this the exact number? No, but it's pretty close based on history and experience.

Never believe that all of the deals on these websites are scraps.... just a lot of them are. Even still, I still do exactly what you're doing: practice analyzing these deals.

A wise blogger (I don't remember who haha) once typed: (Almost) every property has a price at which it is worth investing. The entire purpose of analyzing is to calculate what it is worth for you to invest.

Sure, there are a few tax delinquent properties and other odd circumstances that can make a property never worth investing, but for the most part I have found the above statement to be true.

Think about it this way: a property cash flow is affected by rent rates (income), utility expenses, percentage expenses, and financing payments. Any of these numbers can be played with in order to make a property look good on paper.

So how can you affect each one?

Income: You can raise rent or add coin-op, parking, etc.

Utility Expenses: You can have the tenants pay or you can improve the property. The first is maybe possible, the second will cost money and is dependent on the property.

Percentage expenses: This is where most people mess up. They say "oh, I can decrease my maintenance, or my CapEx, or my vacancies, or my property management - any of these will increase my cash flow!" Wrong. While it is actually a correct statement, you're setting yourself up for failure if you have a long vacancy, or if your furnace gets flooded and the roof blows off in a storm. Set aside savings for CapEx and vacancies, or all of your previous two years' profits will pay for the repairs. As a side note - even if you're managing, isn't your time worth something? What if you decide to stop managing? Always set aside PM, even if you're paying yourself.

Financing payments: This is the easiest true value that you can adjust (along with income). The purchase price, the terms that you get, and the amount of down payment all affect this value. As such, it is the easiest to manipulate in order to increase cash flow. Because of that, it is the one that I generally target first when analyzing a property: find what purchase price makes an investment worth it for you. Like I said: (almost) every property has a price that will make a good investment.

While that's more information than you technically asked for, I hope that it helps. I want to encourage you to keep analyzing properties that are listed on websites, and try to find a price that will make them good investments. The numbers might not always make sense to the seller, but one may get you a property (and it's good practice). Keep up the good work!

@Samuel Bavido has the right idea - you adjust your purchase price in order to make the deal worth it to you as an investment. Never skimp on CapEx, maintenance, and vacancies in order to make this look good on paper. I could make a doghouse with a leaky roof look good on paper.

@Daniel Kim - since you said this is a lower income area, I would start at 10% CapEx, 10% maintenance, and 8% vacancies. Without seeing the property to know if any large items need replaced soon (water heaters, roof, siding, etc), I can't say if I would increase the CapEx. Either way, 10% is a good number to start with.

@Hunter Thompson

Repair costs: if you don't have previous experience, try to find a local general contractor who will walk through the property with you. They can give you a good estimate on what needs done and how much it will cost.

A second option is to purchase The Book on Estimating Rehab Costs, which is sold here on BP or on Amazon. It has a lot of information such as flooring cost per square foot depending on material, siding, roofing, cabinets, etc. Everything is broken down in that book - it is a fantastic tool for doing your own estimates.

ARV: Get on Trulia and look for comparable properties (comps) that were sold recently. You'll be looking for something that is similar size, similar area, and is in the same state of repair as what your investment will look once you are done with rehab. Find several comps, and average out your ARV from what those sold for.

@Daniel Kim - take a look at RentJungle.com or RentOMeter.com and see what other units are renting for in the area. That should give you a quick look at what the average is for a one bedroom, two bedroom, etc.

All tenants being on month to month isn't a con - you get the liberty of putting your own lease in place (which I strongly suggest doing). If they shy away from a full 1 year lease, then look at six month or even three month... anything is better than nothing.

Landlord pays for all water? What is the $3000 electric bill? Just the super's unit and common areas? If water is the only bill that you pay, it isn't too bad.

Who exactly is the "super"? The property manager?

For your cash flow, don't forget to set aside for maintenance, CapEx, vacancy. It's better to show a lower cash flow and save for these items, rather than not save for them and get in trouble if something breaks or a longer vacancy happens.

@Paulo Silva - look at a rent website such as RentJungle.com and see what types of apartments are available in the area.

Also look at unemployment rates, new job rates, recent sales of rental buildings - these can give you an idea of the rental market in the specific area.

If you are within driving distance, drive to a local REIA meeting in Scranton - other investors will be there and can give you an idea of the market as well.

@Jennifer Jones - imagine the cash flow if you got rid of the $410 per month in utilities. While the property cash flows as-is, there is a very good value-add that you can do by splitting the utilities and improve the cash flow. If you roll the utility split into a renovation loan, you could add an extra $20k into your mortgage and improve your cash flow.

I tried to be a little ridiculous when coming up with adjectives for the utility bill, but I'm doing that because I never enjoy paying for utilities if I can get out of it. Especially for a five unit.