All Forum Posts by: Mark Updegraff

I recommend the following pro forma for Rochester properties.  The vacancy rate will increase if you get into the worse sections of town, and will hold up otherwise.  The others are industry accepted standards and should not be decreased.  They can be increased if you want to be even more conservative.

Pro Forma

Gross Yearly rent

Minus 35% for the following reserves (10% Property Managment, 10% Capital Improvement, 10% Vacancy, 5% Repair)

Minus all operating costs (will vary by property)

On a SF you can pass off water, typically in the city of Rochester there is just one water meter and you cannot bill your tenants a percentage on a multi unit.  You must build that into your rental rate.

I don't include lawn service, snow service, or washer / dryer and I don't recommend you doing it either.  

That leaves taxes (city and county if in the city proper), and insurance.

This will leave you with cash flow.

Divide by the purchase price, plus rehab, plus closing costs and it will give you a cash on all cash return.  You want a decent location, with a decent return.  In Rochester you can hit 10% and still be in a good area.  If you get into Park Ave, Southwedge, Upper Monroe, etc it will be less.  The best locations can have near 0% cash on all cash.  Not good, especially if you add financing.  

Sincerely,

Mark Updegraff

Not a problem!

I would adjust the interest amount to include what it is currently (on 85K) and yes add the PMI.

With those two adjustments (4037.50 interest and 457PMI) 

negative cash flow = -$514

The only way to help this would be to have higher rents.

If you could push to 1200 in rent cash flow would be $266

If you're only out of pocket 3k your ROI is 8.8%

typically when I help investors use a FHA product for their first investment property they end up getting well over 30% ROI due to the nature of the little $ out of pocket. Multi's will perform the best.

Talk soon!

Mark

93,000 acquisition

monthly rent 1100 

gross yearly rent less 35% (10% PM, 10% Vacancy, 10% Capital reserve, 5% repair) = 8580

minus operating costs

-3850 taxes

-750 insurance

(make the tenant mow the lawn & shovel!)

= 3980 cash flow yearly

cash on all cash = 4.27%

if your financing rate is higher than that it will make your return go down.

here you have 4.75% with 91764 balance = 4358.79 interest

= Negative cash flow! -378.7 per year...

unless you can get more than 1100 rent (which you probably can if you have 4 bedrooms) you should ditch this puppy.

Cheers

That seems like a reasonable amount for the scope of work. Repainting and replacing the carpet will be the biggest expense on that list. I would recommend seeing some of their other work if you've never used them before. This will give you insight into the professionalism of the work, as well as the caliber of materials. I've found that with contractors in the rental remodel space often use subpar products that fail quickly (within weeks or months). For instance, think about a water valve. If the contractor wants to maximize his take home on the bid, and you approve the price will that valve have plastic insides or a nice stainless? Probably plastic, after all they'll save a buck on the cheaper part and it will last long enough to get paid. The quality of materials is a key consideration when I'm rehabbing for rental. Tenants can be hard on things, and getting quality products IME is well worth the premium. We bill out for time and materials, and recommend appropriate products that will not leave the client wishing. Some other considerations on that highly lacking work description. How many coats of paint? Are they going to wash the walls down with TSP first? Are they going to apply a primer coat? How many top coats? Is this all one color or will the trim be painted differently? Does this include window sash? Does it include ceiling? What kind of paint? What kind of carpet? Does this include padding?

We provide these services as well, and can show you examples of our work with the totals for reference.  Without a better SOW I cannot comment on if this is a good value.  If it is one quick coat of paint and cheap carpet you're not getting your money's worth.  

Cheers,
Mark

Great city for investors!

Thanks @Karen Margrave !!!

I'm hoping to be more active on the development side of the forum in 2015.

@Mark W. Thanks so much for the kind words!  I had A LOT of fun working with you!!  I can't believe the craziness we endured!!!!  Those deals were by far the best stories I have from 2014!!!  I remember seeing that crapper on the weekend and you were pretty bummed out and in need of some relaxation after the ringer we went through.  I'm so glad you decided to come check out Melrose that day, even though we both probably just wanted to drink some hot chocolate by the fire.  That property is still my all time favorite.  I hope it brings your family the tenants it deserves.  Ones who love it the way we do, and care for it the way it should be.

That is going to be a tough act to follow, but you know how I feel about a challenge :D

Sincerely,
Mark

PS: We also saw the worst "tear off" roof I've ever seen in my career, and I've seen some bad ones!!  Remember when I stuck my fingers through it from the attic?  insane!!!

@Karen Margrave I'm super attentive and responsive and listen carefully to clients.  I'm not pushy, and I provide killer service.  That has pretty much worked for all my lead conversion efforts.  My background in construction, property management, investment, rehab, local ordinances, zoning, and my killer team of professionals that always answer my call make it easy for me to quickly and precisely answer any concerns that someone may have in regards to real estate.  I don't believe the marketplace has specifically enhanced lead generation.  I would say providing good content, and superior services has.

Hope that helps!

Mark

1. I don't use the 50% rule. I take 35% (PM, Capital Reserve, Vacancy Reserve, Repair reserve) off the gross rents and then subtract out operating costs. I divide this cash flow by the cost of acquisition plus rehab. This gives a cash on all cash return. By always comparing properties this way I can mentally rank them. When dealing with financing scenarios, I run my particular scenario (lender fees, origination fees, PMI, interest, etc). A cool thing here, is that if your financing is cheaper than your cash on all cash return, you don't have anything to worry about. If your cost of financing is higher than your cash on all cash return it will negatively effect your return. By evaluating like this you can red light green light very easily and create benchmarks to quickly eliminate the losers and see the winners rise to the top.

2.  Closing costs on a cash transaction are about 2k in NYS.  You should have an attorney. Call them and review all the costs associated with closing.  Call your lender and do the same.  I tell people that are financing to expect ~3k in closing costs plus the money they need down.  Here are a few of the associated costs with closing.  Attorney fee, title insurance, lender fee, recording fee, transfer tax.  Again, always consult with a local attorney.  They will be happy to review the numbers.  Also consult with your lender to get a handle on their fees.  This does not include inspection, which is ~$300 - get a licensed engineer and not a home inspector.  They cost the same, and the latter will refer your to an engineer if their are structural concerns.  Better to just get the engineer from the get go.

3. Insurance costs will vary with your policy. Some people that are risk adverse spend 1k, others spend 400. It will depend on if it is replacement cost versus market value (replacement has a higher cost because it costs more than market to replace). It will also depend on your deductible, and policy limits. Call an agent and have them walk you through your options. I would say you should be able to adequately insure a SFR that costs 50k for about 400-500 and insure a duplex that costs 100k for 800-1k. Again, it will depend on your level of insurance. Best way to get the answer is to get a quote.

4.  If the wholesaler needs to assign the contract you may not be able to perform quickly enough.  If he owns the property it should not be a problem.  

5. IMO prices and interest rates are on the rise.  I would buy as much RE asap personally.

6.  If you purchase correctly it should help your ability.  Banks look at Debt to income ratios.  By purchasing a cash flowing rental you will be improving your ratio.

Happy Holidays!

Mark in ROC

Thanks so much everyone!  I'm looking forward to 2015.  I talk with a lot of investors that give agency a try and don't last too long.  This was my second year, and I'm taking the challenge for year 3.  I do understand the downsides of being an agent while being an investor, however, I think they can actually be quite complementary depending on your business structure.  

Of course I'll keep you all posted if I change opinions next year.  Remembering back to the spring / summer season and the inability to spend time with the family is a huge draw back.