All Forum Posts by: Nick B.

Market analysis is all about population trends. The metrics are: population growth, income growth, jobs growth, property values growth. That applies to the metro/city level.

If the city looks good, then look at a particular suburb and zip code to see if they are populated with desired renters. E.g., median income $50-70K, diverse economy, low crime, good schools. Then you look at the property values and rents. Ideally rents should be less than 20% of the median income (30% is the max, but you want some room to raise rents). Property values are important to determine your ARV.

Once you have these three metrics (income, rents, and property values) for a given area, any house in that area becomes very easy to pre-qualify: 
- can you rent it for the going rents in the area?
- if yes, can you buy it for less than similar properties sold for in the last 3-6 months?
- if you're satisfied with the discount, go for a detailed analysis.

I started to analyze in a similar way that you did: property first. What property? Any property that I would want to live in.

Than I talked to a few experienced people and was told to establish a criteria first, then analyze a market (e.g. a city), a submarket, a neighborhood,  and then a property in that neighborhood.

Damien,

I did not pay attention to individual line items except for HOA. My analysis process is different from yours and it goes like this:

1. Does location match my criteria? If not, stop right there.

2. Does the physical building match? If not, stop.

3. Do high level numbers (ARV vs cost, rent to cost ratio, expenses unusually high or low) make sense? If not, stop.

4. Now, do the detailed analysis. 

The first 3 steps allow to quickly assess the potential of a given property and the decide what to do with it.

If the value is $330K but the asking price is $375K why do you even care to do a detailed analysis? It's a bad deal simply based on the instant loss that you would incur if you bought it.

The goal is to buy below after repair value, not above it.

The second negative about this deal is the fact that its a condo. You are not buying a building. You're buying air space in a building. Oh, and HOA of $522/mo? Run from it!

Only buy condos if you can buy the majority of units which in turn would give you control over HOA and other owners.

The number of investors depends on the size of the deal. Anywhere from a few to 100+. There is no average. 

For the rest of your questions I highly recommend to start with this book:

https://www.amazon.com/gp/aw/d...

Variable rate debt allows for flexible exit with minimum prepayment penalty (1%). That beats any potential rate increase, especially if the rate cap is purchased. 

I would suggest to build your own model using Excel or Google sheets.

This way you will know how each input affects your outcome and how various parameters depend on and interact with each other. 

Plus, you will always be able to improve and enhance it.

If this is a heavy value add, it is quite usual to have no distributions in the first year or even beyond. The next step is refinance and then distributions follow. Refinance drives IRR higher.

This strategy tells you nothing about sponsor's conservatism but it is not a red flag. 

I'd be more concerned with stable income and expenses as well as exit cap rate. 

3.9% is too low unless there is a way to increase it. Based on your "not much room for future growth" statement, you won't be able to increase it more than inflation. You did not provide expense break down but I suspect that $3K/year/unit is too low and the real expenses may be higher thus making CoC go negative. So, overall, I would pass on this deal.
Besides, it's a 4-plex which is valued by comparable sales just like SFH. You won't get any extra value by increasing NOI.

You can get much better return than 3.9% if you simply loan your downpayment money at 10%+ or invest it in an apartment syndication.

#1 - only you can answer how much CoC matters to you. There is no standard. Your property needs to be cash flow positive and be able to make debt payments once it's stabilized (90%+ occupancy). Most lenders require debt coverage ratio (NOI/debt payments) to be at least 1.3 on a stable property.

#2 - Cap rate is market- and property class- specific. Ask a few brokers what the current cap rates are for a given area and different property classes.