All Forum Posts by: Mack Benson

Calculating the ROI is going to be all about the math, much like most things real estate. The basic formula would be NOI / Cash invested. For your example we'll need to make it more complicated an make some assumptions along the way.

Scenario 1 Assumptions

1. 1 - You pay out of pocket the entire cost to build your ADU, cash invested $100,000
2. 2 - The value of the property does not justify the fees associated with cost segregation so you will use a 27.5 year  depreciation schedule. On a value of $100,000 assume the annual depreciation is $3,636
3. 3 - Your property taxes will increase by adding an ADU to your property, this is difficult to assume an amount without knowing the market so I will bake it into the expenses
4. 4 - Your utility cost will increase as well, again we won't know how much so additional assumptions will be made
5. 5 - We assume you will self-manage the rental so the expenses will be lower but we will include the management fee in the total expenses.
6. 6 - We will assume a 45% expense rate from your gross rent collected. I am using a lower percent than normal because the ADU is newly built and I assume you will not have much in the way of maintenance costs and you will use more efficient fixtures to reduce your utility cost. In reality you may be able to lower your expenses even more but I'll let you calculate that
7. 7 - Rental income is $2,000/month
8. 8 - I'll include a vacancy of 5%
9. 9 - CapEx will be included in your normal expenses
10. 10 - I'm not a CPA but the number I use to estimate taxes is 30% of income and that's what I'll use on your cashflow to estimate the tax liability

Scenario 2 Assumptions

1. 1 - Same assumptions as scenario 1 but rather than paying out of pocket you get a loan. Assume the amortization is 25 years, interest rate is 4% and the equity down is 20%.
2. Loan amount = $80,000
3. Monthly Payment = $422
   
4. Annual Payment = $5,064
5. Cash invested = $20,000

Income:

• Gross Rent - Vacancy = Gross Income = $24,000 - 1200 = $22,800

Expense:

• 45% of Gross Rent = $24,000 * 45% = $10,800

NOI:

• Income - Expense = $22,800 - $10,800 = $12,000

Tax estimate = $12,000 * 30% = $4,200, depreciation was $3,636 so tax estimate is $564

Cashflow after taxes = $12,000 - 564 = $11,436

Of your initial investment of $100,000 your cashflow is about $11,436.

For your return we'll take your cashflow and divide it by your investment. In scenario 1 you don't have a mortgage so your return will be $11,436/$100,000 = 11.436%. It will take about 9 years to make back your capital assuming nothing changes. 

In scenario 2 you have a mortgage but your initial investment was only $20,000. The mortgage payment is $5,064 per year so your cashflow before taxes is $12,000 - $5,064 = $6,936 and your estimated tax liability is $6,936 * 30% = $2,080 but your depreciation is $3,636 so your tax liability is -$1,555. We will keep the cashflow of $6,936. In this case your return will be $6,936/$20,000 = 34.68%. It will take about 3 years for you to make back your capital assuming nothing changes.

I made a lot of assumptions but this would be the general process I would go through while contemplating the investment.

A good site for income data is justicemap.org

City Data is another go to for various metrics

Trulia has some pretty good crime data.

Some other sites are US Department of Labor, US Bureau of Labor Statistics and Department of Numbers. 

I think before you can dive into deciding what type of content you want to post online you may want to clearly define your niche. Since you are a broker do you focus on being a listing agent or a buyers agent. Each of those paths is going to have very different content. If your focus is on being a listing agent you could post about ways to make your home more attractive to buyers, if you focus on buying, are there certain things you repeatedly deal with from clients? It looks like you are from Seattle, maybe you could do a series on attractions in or around Seattle to make a certain area shine. What are other brokers in your area doing, is there something you like that they do or is there something you don't like that they do? Each of those things could point in you a positive direction.

I'm in favor of both approaches. You can learn a lot by self educating through books but I firmly believe most successful syndicators employ a mentor or coach in some way. Some books even list a mentor as one of the most important team members you have. They will know the markets, have vendors and be able to help you through the process. Additionally, think of professional sports players, I don't know of any who have gotten to where they are without the help of top coaches and mentors.

There are a number of short books that you can read through before making a decision to seek out a mentorship program. I would suggest checking out "Wheelbarrow Profits" by Jake Stenziano and Gino Barbaro and "Syndicating is a B*tch" by Bruce Peterson. Both are short reads and give you an overview of what to expect during a deal. 

@Walter A. Ferman my intention was to list mistakes to avoid. I firmly believe you should have an agent sending you deals. I also believe you need to analyze a deal and never fall in love with it, fall in love with the numbers, not the deal.

Skip the analysis and buy on a feeling

Skip due diligence

Fall in love with a deal

Don't use an agent

So many more I'm sure there's a book or two out there

Have you tried local mortgage brokers rather than working directly with the banks? A broker would leverage multiple banking relationships to get you the best financing for your deal and it shouldn't cost you any more than working with the bank yourself. I work with a local broker and he has existing relationships with over a dozen banks and I've had a relationship with him for a couple years so he is comfortable advocating on my behalf to the lenders.

Age isn't the end all be all but it is something to consider. Minneapolis and St. Paul have a number of solid brownstones built in the late 1800s through the mid 1900s and many of them have gone through extensive rehabs over the years. If you are looking pre 1960s you will likely want to perform a more thorough physical due diligence paying close attention to the electrical and plumbing. While looking at the plumbing I think you should get the sewer lines scoped so you know if there is any existing damage or failures.

I'm not familiar with your market but in mine you won't find much on the MLS. Just about anything over about 7 units is going to be listed by a multifamily broker and only available through their website or an e-mail from the listing broker.

@AJ Smith I'll take a stab at the MFH part of your question. The space is tough, there are a lot of buyers and not many sellers so prices are inflating at a high rate. I've been told this price inflation is also preventing many sellers from listing because they feel they will need to 1031 into an equally over priced property. I'm not sure exactly how valid that is but it's what I've been told. The 5-10 unit properties can be listed on the MLS so you'll want to be set up with a search. 15+ unit properties are going to be listed by one of the commercial brokers in town but they haven't been advertising then much lately and have been trying to work with their preferred buyers. If this is a space you are interested in I'd suggest networking as soon as possible with brokers and those buying apartments.

I'm looking for recommendations for multifamily brokers in MN that are currently active and listing 20+ unit apartments in the Minneapolis/St. Paul, and Saint Cloud MSA's. Buyers agent isn't needed just for MLS search access. If there's anybody you would recommend in 2020 drop their info below.