All Forum Posts by: Jeff Petsche

When factoring the variable landlord-paid expenses, what percentages of GSI are "typically" used (rule of thumb) for the following:

Vacancy (I've been told conservative is 10% and if deal still works at 10% then you should be okay)

Repairs and Maintenance

CAP EX

Property Management (I know the range is 8-10%)

Thank you

@Satish Kumar Kommineni Everybody has different goals for what they want as a return on investment, so asking for advice is never a bad thing, but the responses you get might be based on the responders own investment strategy/criteria and not yours, so always take that into consideration.

For Example: Some investors might be okay with a 5% CAP RATE and 8% ROI, where others won't touch anything unless it's a 8% CAP RATE and 12%+ ROI.

With that said, I ran the numbers you provided through my software analyzer and here is what I came up with. (NOTE: I used the actual numbers you provided and I personally would have factored in 8% to 10% vacancy on deals I analyze. I'll show you the difference when changing the vacancy number. Also, your total operating expenses (including vacancy) came out to 37%. I like to use a minimum of 40% (includes 10% vacancy) and many investors use the 50/50 rule. I'd rather be conservative and if the deal still works, then I'm happier if my expenses are lower than analyzed)

Based on Numbers You Provided

CAP RATE: 7.2%

COC (Cash-on-Cash): 11.6%

Debt Coverage Ratio: 1.67

Return on Gross Equity: 13%

Based on 10% Vacancy and 40% Expense Estimate

CAP RATE: 5.7%

COC: 5%

Debt Coverage Ratio: 1.25

Return on Gross Equity: 5.6%

Based on 10% Vacancy and 30% Expense Estimate

CAP RATE: 6.8%

COC: 10.1%

Debt Coverage Ratio: 1.49

Return on Gross Equity: 11.3%

I was taught a quick offer calculation strategy where you look at NOI X 10 as the value price, and offer 10% under that number. Example: If NOI is calculated at $7,500/annual, I would offer $67,500 ($7,500 X 10=$75,000-10% ($7,500)=$67,500.

Based the above information and even using my conservative numbers, I would move forward with additional due diligence and see if there is an ADD VALUE play here that I might be missing. Could I raise my NOI through cutting expenses, raising rents to market rent (if they are under performing), can I negotiate a better deal with the PM company, etc.

Again, every REI takes a different approach, and this is just one way my partner and I are looking at deals.

@Maya Dib I've been wondering the same thing and many say RUN RUN RUN and don't look back. hahahaha

Others think there is great opportunity if you can look past the NOW Detroit and look at what they are doing to rebuild their infrastructure.

I think Detroit is a gamble and has never been on my radar, but I'm thinking since it's not on a lot of investors radar that it might we worth taking a second look and some real due diligence.

Don't think I helped much, but that's all I got for now.

@Pat Jackson Sounds like you have multiple things to consider on this property and it really depends on what your strategy is for other deals that come your way. I personally don't want to tie up my cash on one house, unless it's short term and I can REFI quickly and get it back to go onto the next opportunity.

If you have the ability to leverage other money to purchase/rehab and then REFI, I'd go for that route over using your own cash. However, if you have the cash, have no other options and it looks like a great deal, I'd figure it out and make it work.

If it was my deal, I'd go for the following approach FIRST and if I couldn't make it work, go to plan B:

Hard money loan at 90% of acquisition and 100% of REHAB. 10% of my own money for down payment + CC.

REFI with a local bank/credit union that doesn't require seasoning at 80% of ARV.

In this scenario, if the ARV is $80,000, you should be able to get a bank to loan you $64,000 (80% of $80,000). That $64,000 would pay back the hard money lender ($20,000 acquisition, the $25,000 rehab, the hard money fees/interest), still cover the REFI closing costs and you walk with cash in your pocket and have a performing asset that cash flows and in the end you have none of your own money into the deal.

Am I missing something?

I know a guy in Minnesota who did this exact strategy with a duplex.

He purchased it for $50,000 and put $15,000 into REHAB. The ARV was $100,000. He purchased the property for cash with hard money, which covered 90% of acquisition and 100% of REHAB. He had a REFI set up to go with a local bank. Once closed he immediately did the REFI at 80% LTV on the ARV. The property was appraised at $101,000.

He basically got $80,800, which paid back the hard money lender's $60,000 + $1,800 in HM fees + 2 months of HM interest at 11% ($1,100)=$62,900. Approx. $2,100 in closing costs for the REFI. Paid himself back his 10% down ($5,000) and still walked with approx. $10,800 in his pocket.

$80,800 (80% REFI)

-$60,000 (HM Loan)

-$1,800 (HM Fees)

-$1,100 (HM Interest)

-$2,100 (REFI Fees)

-$5,000 (Personal Pay Back of 10% Down Payment)

___________

$10,800 Surplus

Performing asset with around $375/monthly cash flow.

@Jay Dean I am confused on what your strategy is with this property? Are you looking at it as a buy/hold rental property for only 1 year? If so, I don't agree with that strategy. Buy/Hold exit strategy should be a much longer hold period before selling, and even if I sell, I'm not cashing out. I'm doing a 10-31 exchange into another property to defer my capital gains tax obligation.

One thing that stands out is, your operating expenses seem WAY TOO HIGH for only a $10,512 GSI (Gross Schedule Income). Your expenses are showing 79% of GSI. That's crazy!

Did you include your debt services into your operating expense number? If so, you should separate the two. Your operating expenses should not include debt service.

Operating Expenses: Property Taxes, Insurance, Property Management, R&M (Repairs and Maintenance), Service Contracts, CAP EX and any other expenses to operate the property.

Debt Services: Your Principal and Interest on the loan

The formula should look like this:

GSI (Gross Scheduled Income/Rent)

-Vacancy (I use 10% to be conservative. Average is probably 6-8%. If I analyze a deal at 10% vacancy and it still pencils, then I'm pretty confident I'll be covered)

+ Other Income

= Adjusted Gross Income

- Operating Expenses

=NOI (Net Operating Income)

-Debt Services (loan: Principal and Interest Only)

=Cash Flow (Before Taxes)

I use a software program to analyze a deal and it will give me all the numbers I need, except the IRR (Internal Rate of Return), but it gives me the CAP Rate, The Cash-on-Cash Return and Debt Coverage Ratio.

What's the purchase price on this property? I can run it through my analyzer and give you the numbers if you want.

Based on your personal experiences within the following markets, how would you rank them in terms of economic growth, school districts, cash flow and appreciation? Primarily for SFR and up to 4-Plexes.

I know that every city/market has it's pluses and minuses, but I'm just asking for a broad stroke assessment as to the areas. I know every deal and situation will be different.

Indianapolis, IN

Memphis, TN

Oklahoma City, OK

Atlanta, GA

Columbus, OH

St. Louis, MO

Kansas City, KS

Pittsburgh, PA

Odgen , UT

Detroit, MI

@Jasper Saberi Thank you for the information and I'll look up Tony. Best of luck to you and your REI journey.

Hello BP Community

I'm looking for feedback on the buy-hold market in the Pittsburgh, PA area.

Criteria: SFR (3/1 or 3/2) or Duplex in B+/C neighborhoods, good school district or near a major college. Can you get 1%+ in this market?

First option is an add value property to REHAB, RENT and then REFI, but we are not opposed to a Turn Key property that fits the criteria and has a tenant in place with PM company ready to go.

Any information would be helpful and much appreciated.

Thank you for your time if you comment.  

Thank you for the comment @Larry Fried.

I also believe that investing OOS can be very successful if you have the right team on the ground and I agree that visiting the location(s) is good in the beginning.

The great thing about that is my girlfriend who will be involved in the journey has TONS of air miles because of her business travel, so I'll never pay for air fare to the locations I'll be visiting. And even if I did, it's the cost of running a business statewide.

My partner and I are not opposed to the TK opportunity if the right property makes sense for us. But our first approach is going with the ADD VALUE model through my agent contacts on the ground finding off market properties that are distressed and below market value, REHAD the property, put in a renter and REFI.

We are open to either model if it makes sense.

@Bradley De comarmond Thank you for your comment. Great advice and unlike some who invest in RE, this is going to be my FULL-TIME focus (aside from my retail/wholesale business locally), so getting on a plane and visiting the markets of interest is a must for my model and a business expense in making the right choice when buying.

Also, because I have a partner involved who has a 9-5 job, but will be a 50/50 partner, he has already agreed that my time is valuable and should be compensated for finding the deals, analyzing the deals, etc. so I'll be adding in a 5% acquisition fee off the purchase price in our original numbers as compensation for my time.

Florida was on my radar, but my partner and I are no longer looking at that market. We are not considering Boom-Bust states like CA, FL, AZ or NV..well, Vegas is back on our radar because the Raiders and the new NHL team (the Knights) are coming into town. So, we are taking a second look.

I like the idea of setting up a trip when their is a REIA meeting going on and making the contacts with boots on the ground.

Again, great advice and thank you.