All Forum Posts by: Jack Macioce

What does your agent have to say?  Selling a duplex for around $200k, in my opinion, wouldn't sell like a hotcake, but that depends what trendy neighborhood of Pittsburgh you are referring too.  Need to market to someone who wants to house hack like you did.

Also, I think it's a matter of what your goals are as well.  Do you see this property helping you reach your goals?

@Josh Caldwell - when is the next meeting and what is the best way to join?  Thanks!

Hi @Anthony Angotti,  thanks for the response!

Currently, my projections are for a 20-year hold. I have also kept sales price at the seller's original asking price with the thought that if i would acquire for a lower price, the delta would represent Capex right out of the gate. I have included a Capex reserve of $1,500 a year, and projecting $1,200 in repairs and maintenance. Overall, my Opex is about 60% of rent. The electric is separately metered. There is only one gas meter servicing one hot water tank, which is utilized by all three units. Heat is electric baseboard heat. Landlord covers electric meter for common area, the gas meter, water, sewage and trash; however, expense recoveries are built into existing leases. I don't have my numbers in front of me, but I think the expense recoveries worked somewhere between 1,500-2,000 a year.

In regards to the outlets, they are three-prong outlets, but were identified as being ungrounded, which suggests that a ground not present.  In an old house I used to own, most of the outlets were ungrounded as well.  I did consider your idea about replacing the outlets with GFCI outlets, but don't know enough to know if that would be a good long-term fix.  The seller's have owned and rented the property for 10 years in the current conditions, so it is not a huge issue.

My ROI after tax is about 15%. That's why I asked about Butler area returns. I feel like I am in the ballpark.

I am currently analyzing a deal in Butler, PA.  It is a triplex within the City of Butler.  The units rent for $625/425/425 (two bedroom/studio/studio).  I wanted to get an idea about returns other investors are experiencing in and around this market, and possibly OPEXs as percentages of Gross Schedule Rent?  I'd like to know to make sure my analysis is accurate because of the following:

Two items of major concern:  (1) natural spring runs adjacent to the property, so water does infiltrate one corner (8x8) of the basement/crawlspace.  Seller's have installed a sump pump; however, I'm not sure that the space is every completely dry.  (2)  Wall outlets were flagged as ungrounded, which suggests that there is no ground wire, ground is not properly connected, and/or reverse polarity.  Fear is rewiring as that could be expensive.  Should outlets be grounded?  What are risks?

Seller's are not budging a whole lot on sales price (started at $90k, down to $86k).  Major systems, windows and roof, were all recently replaced within the last 5-8 years.  

I have to agree with @Jay Belcher.  I've lived in Mt. Washington for five years.  It is a great neighborhood, but there are "areas" within that neighborhood that are not good, or boarder another neighborhood that is not good.  Also, the further the property is from Grandview (street that runs along the edge overlooking the city), the less rent you can expect.  

@Brian H. CAPEX is considered a "below the line" item, or below NOI. It will affect your return.

Gross Scheduled Revenues

Less: Vacancy/Credit Loss

= Gross Operating Revenue

Less: Operating Expenses

= Net Operating Income

Less: Debt Service

Less: CAPEX

=CFBT (cash flow before taxes)

Less: Taxes

=CFAT (cash flow after taxes)

In preparing an analysis, I estimate CAPEX, whether I take a percentage of the sales price, cost per SF, or judgment based upon visual inspection coupled with discussions with owners, contractors, inspectors, etc.

The basic approach would be to divide your CAPEX by the number of years you plan to own the property (or months depending on your analysis). If I estimated CAPEX to be $10,000, and I planned to own the property for 10 years, then I would add $1,000 to the CAPEX line item on my proforma. I only use this approach if I expect to not incur any CAPEX right out of the gate. If you expect CAPEX in the future, this approach is nice because you included an annual (or monthly cost) in your proforma. You would need to reserve this cash, however, for future use. If my simple example above, you would take $1,000 out of your revenues and hold them until you need to use them. Be careful though because you are only spreading the cost over your hold period. In year 2, the roof may start to leak and you need to $9,000 to replace the roof. In year 2, you only reserved 2,000. You would then need to come out of pocket to cover the difference, thus put more money into your investment.

If, however, you would need to improve the property at the time of purchase, then you would typically include it with your "cash to close" number. For example, if you expected to spend $20k on a down payment and closing costs, and expected $10k of CAPEX, then your cash to close would be $30k.

Regardless of your approach, you should have a reasonable estimate of CAPEX when putting in offer, so you can use it to negotiate. If the seller's don't agree, then you move on to the next property.

@Brian H. As Brandon mentioned previously, CAPEX is not an operating expense; therefore, it not be included in NOI calculation, or you statement of income and expenses. CAPEX is inevitable, so you need to consider things like how you plan to hold an investment, age a major systems (plumbing, electric, HVAC, etc.), age of roof, windows, etc. If you are like me and have no experience in estimating the remaining useful life a roof, or hot water tank, then you will need to find someone who can. I found a home inspector that tailors their reports to investor needs. In addition to a standard inspection report, he provides me with additional information about the remaining useful life of things like the roof and hot water tank.

In regards to OPEX, that depends on the type of property.  For example, the current property I currently have under contract is a multi-unit.  It has a common area, a large yard, and sidewalks.  Therefore, I include a Lawn/Snow expense, and Utilities - Common Area expense on my proforma.  Another property I looked at last year did not have a yard or sidewalks.  Therefore, when I performed an analysis of that property, I did not include Lawn/Snow expense.

You can find examples of proformas out on BiggerPockets, or Google to give you ideas.  I also recommend trying out the calculators on BiggerPockets as well.  From there, you can use your own judgment as to what expenses will be incurred to maintain a property.

I agree with Brandon Sturgill. Make sure the numbers you are using for OPEX and CAPEX are as accurate as possible. I'm currently in the process of closing on my first property. While preparing my proformas, I reached out to other investors in the same market, my real estate agent, etc. to get an idea of what to expect to pay out in OPEX. Obviously, one property's expenses will never be the same as another property; however, I was able to utilize percentages (which are important) and my own judgment to arrive at reasonable OPEX.

Also, I think your CAPEX might be a little aggressive. Are you calculating that cost as 5% of your income or purchase price? I would utilize purchase price, and again, talk to other investors, an inspector, etc. If you feel that there are some required repairs/improvements, consider negotiating those costs at closing. Run the numbers to make the deal work for you. Depending on where you are finding these properties and a seller's situation, what you are looking for could work out.

Nice to see a familiar face!  I saw your name pop up in my alerts and had to check to see if it was you. I'd like to catch up with you guys soon.

BP is great place to learn about REI. I've read a few of their books and have started on their podcasts during my commutes. In addition to books on here, I'd check out What Every Real Estate Investor Needs to Know About Cash Flow Flow... And 36 Other Key Financial Measures by Frank Gallinelli, if you haven't already.

In regards to bank accounts and accounting, I recommend to keep things simple at first before you create a cluster of accounts and ledgers.  Obviously, you will want to account for each property separately, but you can operate multiple properties with one bank account (easier to track if it is separate from your personal account).  However, if you are going in on a property with someone else, might be better to open up an account specific for that property to keep things separate.  

In regards to ownership and liability, I do not plan to setup a LLC to own our rental property. I plan to have a fire policy on each rental, bundled with our other insurance coverage, with an umbrella, collectively considered as "one" policy. Not only do we receive discounts on our auto insurance, personal homeowners, etc., we can then apply discounts to our rental properties.