Analyzing skills

Hello, all! :]
I’m new to REI and my goal is to get in cash-flow investment, but while learning the ropes of the business I wanna do some bird dogging. So the other day I got my eyes on this property and found a step by step analyzing tutorial. So here is my attempt to make sense of it.

From Pro Forma

Purchase Price (As is) Number of units Total Rent (Annual Gross) Taxes (Annual)
$120,000.00 3 $35,100.00 $3,800.00
Insurance(Annual) Maintenance / Vacancy (6%) Total Rent (Annual Net) Management (10% Gross Rent)
$1,200.00 $2,106.00 $30,100.00 $2,808.00

Possible Financing *Based on 7% interest rate
Down Payment (40%) Loan Amount Monthly Payment Yearly Debt Service Net Revenue Cash on Cash ROI
$48,000.00 $72,000.00 $476.24 $5,714.88 $24,385.12 50.80%

Unit Breakdown *Based on 100% occupancy
Units Bed/Bath Rent
Unit 1 3/1 $900.00 (empty)
Unit 2 3/1 $900.00 (empty)
Unit 3 3/1 $1,125.00 (already occupied)
Total Sq. Ft. 2800
Total $2,925.00

  1. Location - looked at it with google maps, on the 360 view there was a minivan in the yard and the area looked like a very low income area. Fance in bad shape
  2. Age - 121 years
  3. General info -none
  4. Price per square foot - 14.26
  5. Unit Mix - all 3 are 3bed/1bth
  6. Rent per sq foot - 0.32 (900) .40
  7. expenses 2,106
  8. Cash flow - 1,562 (i feel something’s off)
  9. Cash-on-cash return - 50.80%
    Notes: The area looked pretty shady to me. The cash flow doesn’t look right at all. In the description it says it needs some rehabbing. Overall, I think it is not worth it. Please correct me if I am wrong and please critique my analyzation (new word? haha) if needed. :] Thank you in advance.

P.S. is it possible to attach files here?

I see some problems with the analysis.

If the gross rents are $35K, then a 10% management fee will be $3500.

Maintenance and Vacancy is understated. For a three unit property, I would use a 9% vacancy factor and 10% for maintenance and repairs – three times higher than the number you are using.

Now, Net Operating Income (NOI) is
Gross Rent - (Taxes+Insurance+Maintenance+Vacancy+Management) =
$35100 - ($2800+$1200+$3510+$3159+3510) =
$35100 - ($13126) = $20921

Cap Rate = NOI / Value x 100%= $20921/120000x100% = 17.4% (good number but a lot less than the 25% your analysis tool gives you)

Your monthly loan payment on $72000 @7% is $479.02 with a 30 year amortization.

Cash Flow = NOI - Debt Service = $20921 - ($479.02 x 12) = $15172.76

If you add about $5K in closing costs to your downpayment, your cash on cash return comes closer to 28.6% at full occupancy. Still not too bad if the rest of your numbers are good.

Some questions I would ask,

  1. Is a rental income of $975 per month, per unit, realistic. Call some property management companies that serve this neighborhood and ask what would be a fair market rent for this property.
  2. What is the average vacancy for properties in this neighborhood… I used one month vacancy per unit per year. If the average vacancy rate is longer, then you need to adjust your cash flow projection accordingly.
  3. What is the value of similar properties in the same neighborhood. If $120K is significantly lower that the comparable value of similar properties, then there may be problems with the property – Deferred maintenance, high vacancy rate, delinquent rents, etc. If the comparable value of similar properties is lower, then the asking price is too high. Your friendly real estate agent should be able to tell you what the comparable value of similar properties is for the neighborhood.

Do your homework. This might turn out to be a good deal, but you need to lock in your numbers

Please note that a high downpayment increases the cash flow. Most lenders will only require 20% down. If you put 20% down, your debt service is higher, and your net cash flow is lower. Don’t get sucked in by a cash flow number that is artifically high due to a very large down payment. Making a very high downpayment does not make a bad deal better.

Don’t overlook the operating costs that are not included in your analysis. If you have vacancies, you will have advertising costs and maybe some leasing fees. What about utilities, are any provided by the landlord? Is there a cost for trash removal, are any special assessments pending?


Price: $120,000
Down Payment (40%) <$48,000>
Balance to be Financed (60%) $72,000

Gross Scheduled Rent (GSI) $35,100
Less 5% Vacancy and Credit Loss (5% of GSI) <$1,750>
Less 35% *Expenses (35% of GSI) <$12,385>
Equals Net Operating Income (NOI) $20,965
Less Annual Debt Service ($72,000 over 30 years at 7%) $5,478
Cash Flow After Debt Service $15,487
Return On [Cash] Investment (ROI) 32.22%

If your actual numbers vary significantly from what I’ve outlined, something is going wrong, or will go wrong.

Meantime, the expenses I outlined do not allow for 10% management fee, which is typical.

As an aside, professional management does not mean you’re not going to have to manage the managers. No management company will do much more for you than collect the rents and fill vacancies. It’s up to you to follow up on the condition of the property and nag the management co. about the upkeep.

Also, some MGT co’s will charge a low fee, but make it up with a 10% surcharge whatever they do extra, and will deliberately nickle and dime you to death on “over repair.” So, this brings me to the limit on maintenance and reserves. You should allow for about 5% for maintenance, 2% for repairs and 3% for replacements and reserves. If you do this you won’t be caught off guard by HVAC malfunctions, roof replacements, and hiccups. It will also keep your MGT company from thinking you’re an idiot and spending stupid amounts on cosmetics and ignoring important maintenance.

I had a management company tell me the tenant was going to move out of my unit unless I replaced a tub surround and the garage door which the tenant allegedly drove into. I agreed. A year later I made an unannounced visit, and the old garage door was still in place (the one I installed) and the old tub surround was still there, too. I got taken for about $750 dollars. The management company disappeared on me.

I could have avoided this theft simply by taking the time to visit the unit to verify the problem, or request photos of the finished work, before I paid the bills. Either of these requests would have saved me $750 bucks.

It would appear that this deal is sound. 40% is a lot to put down, but it reduces the risk to a point.

Taxes (1.2% of sale price where I’m at)
Insurance ($3-$4 per thousand of coverage)
Maintenance (5%)
Repairs (2%)
Replacements (3%)
Management (10%)
Gas (Average $50 per unit per month?)
Electric (Average $50 per unit per month?)
Water (Average $50 per unit per month?)
Cable (Manager’s perk on larger buildings?)
Pool (Don’t buy buildings with pools with less than 30 units)
Lawn/Landscape (??)
Phone/Internet/TV (Manager perk on larger buildings?)
Pest Control ($3 per unit per month for 20/units and larger)
Legal (Depends on competency of management $1500?)
Bookkeeping $700

Adjust expenses to conform to 50% across the board, unless you’re doing your own management and paying yourself nothing for doing it.

Thanks for the replies!

My first analysis were made based on the pro forma given to me by a real estate agent. Also the listing agent said that this property is in need of some “fixing up” and as far as I understood the company he works for can take care of that.

I did some changes and discovered a new analization tools/websites. To take less space and to show you the numbers I punch in I just uploaded pictures.

  1. This is a screenshot of the property itself:

  2. Here is the rent comparison for 3 bedroom apartments in the area (I put down as rent $1100)

  3. Here a calculator tool displaying all the info, I tried to tailor in all suggestions from Dave T and javipa (btw according to this calculator rent should be priced at 1700 haha, but i changed it to something more reasonable):

Dave T as far as to compare prices of similar buildings i was not able to find info on it. I’ll do more research.

Javipa I understand what you’re saying for the management companies and I appreciate your advices. I am not sure if I understand what you mean by "Also, some MGT co’s will charge a low fee, but make it up with a 10% surcharge whatever they do extra, and will deliberately nickle and dime you to death on “over repair.” So, this brings me to the limit on maintenance and reserves. You should allow for about 5% for maintenance, 2% for repairs and 3% for replacements and reserves. " So basically if I hire a MGT company to do the management for me 1st I gotta pay them 10% mngmt fee a month, and then give them more 5/2/3% (another 10%) for the misc. repairs and maintenance per month?

What I tried to say is that some management companies will “lure” you into contracting with them with a cheap “base fee” (say 3% to 5% of the gross scheduled rents, and later make up for it with surcharges on any maintenance, or repairs they are required to do.

If you’ve got a pretty, new house, this might be a bargain. However, don’t expect ANYTHING free or extra out of them not matter how much they charge. Managing property is a hard job when done correctly and nobody brags about becoming rich managing single family homes. Just saying.

Meantime as an example, if you need the carpet replaced, the “cheap” management company will do everything you need done (and sometimes don’t need done) for “cost plus 10%.” It’s not dishonest, it’s just a way to make up for “thin management contracts.”

And yes, the maintenance, replacement and reserve percentage(s) of 5%, 2% and 3% are paid on top of the 10% management fee. Together, with the management fees, we’re talking 20% of the gross scheduled income. Add the rest of the costs of operating the property, and you might be topping 50% of the gross scheduled income.

Now …you don’t just give a management company a blank check. You tell them what they’ve got available and how you expect the money to be spent. Then you give them permission to tap a certain amount money for certain types of repairs and maintenance on an as-needed basis.

You don’t really want the management company calling you about small amounts. This adds a lot of extra bureaucracy to the job of managing, and it will cost you eventually.

Meantime, you have to take the initiative on the management of your own property. No management company will care for your property like you will. You can’t pay them enough. So, that means going through the property with the management company at the get-go, and sketching out a budget for maintenance and repairs (before they negatively impact the marketability of the project) and set some limits. This way everyone knows what needs to be done, when it needs to be done, and for approximately how much it must be done.

Good (medium sized) management companies have contacts with contractors that do good work for a reasonable prices. My management company gave me a list of contractors that saved me a bunch of money on a rehab job I did on a property they managed for me. I was really happy with the results.

That same management company “fired” my house, because it was too much to handle after a certain point (and I was paying top dollar). They actually sold my contract to another company to thin out their management intensive inventory. It was after my account was sold that I started getting ripped off with bogus invoices/requests to fix garage doors and tub surrounds that never got fixed.

Hope that helps.

Your calculator tool tells you that this property has a negative cash flow before taxes. This is a cash outflow that you may not get back in the form of a lower tax bill.

In your original post, you had allocated $5000 per year to taxes and insurance, but in this calculator tool, you entered $1848 for taxes and insurance. I find it implausible that you can insure your building for $48 a year. If the annual costs for taxes and insurance are actually much higher, then your annual cash flow will be even more negative.

Additionally, consider your rent structure. I don’t know if you can get $1100 rent for all three units. You have a three floor walkup. I wonder if renters will be willing to pay that rent if they have to walk up to the third floor every time they come home. If the market rent for your area and for this property type is $950 to $1100 per month, then base your cash flow projection on the bottom of the rent range. Holding out for the top of the market rent will just lengthen your vacancy period.

As to vacancy, a 10% vacancy factor is saying that each unit will have a vacancy of no more than 36 days during the year. There are two vacant units now, so do you really expect to fill each vacant unit in 36 days or less, especially if you have to do repairs first?

Suggest you increase your first year vacancy allowance to 20% (minimum). After you have filled all three units, you can adjust your vacancy allowance going forward to 10%.

Remember that all those repairs you have to make before you can put the property in service increases your initial cash investment, and, lowers your cash on cash return.

There is a reason the calculator told you the rent should be $1700. I am guessing that is probably the rent you need to get to break even on this property.

One final observation on your calculator tool. If you are in the 28% tax bracket, an AGI over $100K reduces the net passive loss allowance and phases it out completely at $150K. The caution here is that the After Tax Cash Flow your calculator reports may be phantom income. You may not see any of that in your pocket after taxes.

Javipa, Dave T I am so grateful you guys share your experience! They say the best way to learn is to teach and I’m hoping i’m helping out a little too by asking questions. ;]

Javipa: I see where you’re coming from. Some challenges no matter how much money you throw at it it still might not get resolved, unless you go fix it yourself. I wanted nothing to do with management of properties, but you definitely brought up good points that I will adopt. One example is the before and after pictures of repairs.

Dave T: For the insurance I did 3 dollars per every 1000 dollars coverage (120,000/3,000=$40) of coverage and adjusted the % so it ends up close.

Conclusion: This is a money pit.

For next time: when get a rough estimate of rent right away remove 50% for expenses and then 10% for mgt. Then look into who pays gas, water etc. Subtract those if needed. Subtract insurance and taxes. And 20% vacancy.

This property bothers me.

My first flag is that it looks like you once had two houses to the right that were demo’d. and then a bunch of cramped houses further to the right, one to the left and several parcels behind it that may have had houses. Why were they demolished? Can you check with the fire department if they were fire bombed? Why haven’t new houses been built in these spots? When was the last house built in that neighbourhood? If not in decades, why? I don’t see why they haven’t built houses on these vacant parcels if it’s fetching these kinds of rents. It doesn’t make any sense to me.

My second flag is you have an occupied unit renting for $1,125.00 and two other same size units that can’t rent for $900.00. Why would the cheaper units not rent? Personally, I’d want to inspect all the units to figure out why. Then, I would personally phone up, set up an appointment and visit rental properties around the block to find out the difference in size, price, condition and vacancy rates of other rental properties. What do these other properties tell you in comparison? Forget about the online data. What do your own personal visits tell you?

When I see something like a higher paying unit while the vacant ones are cheaper, I’m thinking is this tenant a friend of the owner? Will this tenant give a two-month’s notice to move out after you buy it? Will you have an empty building after you buy it? I would demand to see their income tax returns for the past three years to find out the rental history of this place. Something’s not right. My gut tells me $900 is way to high rent to expect, so I would say you must personally investigate to confirm or deny these suspicions.

Awesome questions Davewindsor! Btw I just got called from the group that I found the property through. Man that was awkward trying to work around trying to say I have no money, yet not lose his interest in me as a client completely. lol

Anyways, yeah I learned a 100/10/3/1 rule or something. So I’m done with this one. I’ll go to another property now. Thx for all the help.

The next one is:

One thing that I don’t understand is I used two different calculators and they both show this property is a total black hole…I don’t get it what I’m doing wrong, please look at these and comment. Here is the thing behind the numbers half of the total rent (1,000 bucks if each unit rents for 1,000 bucks) is for expenses then separately 10% mgt, 5% repairs, 3% maintenance. I don’t get it with calculations like these it seems impossible to find a profitable property…

In the second calculator, you used a maintenance expense of 50% not 3%

Really, the only way to make a property like this work is if you asked for a VTB 1st at 80%LTV at a much lower rate of interest. If you can’t negotiate a better price, you can always try negotiating a VTB with lower interest.

I wouldn’t offer more than 2% interest on a 90%LTV for 10 years because the building seems really overpriced compared to stuff you can find in other cities. I’ve gotta be able to build some kind of reserve fund in case the flat roof goes, heating system dies or I have to put in costly fire retrofits. But, that’s just me.

No, it’s not 50% overhead, plus another 10% for management.

It should be (theoretically and conservatively speaking) 40% for expenses, plus another 10% for management, or 50% total overhead and expenses, based on the gross scheduled income.

Most real estate agents and sellers I’ve dealt with will balk at this assumption: that it costs 50% of the rents to maintain a property.

Well, one reason they balk is that they don’t anticipate replacement and reserves and they assume you’re doing your own management and doing it for free. And, you’re competing with a lot of buyers who don’t think very far ahead, and do manage their own rentals for free.

So, you’ve got some things going against you when it comes to assuming what numbers are “real” and which are practical to adopt …and not treat the investment like a gamble.

Let me just say, when we’ve miscalculated the overhead costs and are now having to rob Peter to pay Paul for the unexpectedly broken air conditioning compressor, or whatever, it’ll be too late to figure that the price we paid was too high.

Now… is there a circumstance in which we might just get “fudgey” with the numbers …and be willing to accept the gamble on some unexpected repairs…? Yes. If the area is appreciating 10-20% annually and/or inflation is at 10-15% annually… then maybe it’s time to buy every single house possible, and throw caution to the wind (and actually outbid competing offers…).

Many investors do this when they are observing massive appreciation and/or inflation that is forcing values to climb on real estate. I’m guessing that sophisticated investors will determine “why” there is massive appreciation/inflation, so that they’re not getting sucked into a short-lived, “government-induced bubble” like we experienced from 2002 to 2006. Just saying.

What I’m trying to do is simplify the analyzation process. I can go in and for every single property and find every single tiny detail about gas usage per month etc. But I want to get a percentage that I can do a rough and a little pessimistic idea of cash flow. 50% for a rough estimate seems reasonable to me. This way I can analyze many properties and spend time on the ones that make more sense.
50% of total rent + Monthly debt payments < Total rent (go and analyze deeper)

Javipa, every time I see you posted I get excited, I learn so much from your experience. :]

Dave, I put 50% because I couldn’t find the expenses column to put the 50% :] I just noticed tho, maintenance takes % from the value of the property not the rent. That is why the difference is so huge. On that note do you take 50% maintenance from the property value of the monthly rent?

Just dividing the asking price by the income is a quick way to see if the project is worth exploring further. This is a rough “Gross Rent Multiplier” method of evaluation.

Here’s the short-hand analysis I do:

3 basic assumptions for the area:

  1. I know what the market rents are for similar units.
  2. I know what the market cap rate is.
  3. I know what the market gross rent multiplier is.

After I know the market rents, the CAP rate and GRM for my area, then I can take a snap shot analysis of the property’s value, based on income.

First, let’s assume the average CAP rate in our farm area, for 40 year old projects, between 10 and 20 units, is 10%.

Let’s also assume the market GRM for these same size and age units is 5, or five times the income.

Okay, let’s figure out how to calculate GRM’s and CAPs.

First…we need to know what the NOI (net operating income) is:
–We divide the GSI (Gross Operating Income) by 50% to get the NOI

Then…we calculate what the project’s CAP rate is, based on the asking price:
–We divide the NOI by the asking Price to get the CAP rate % (Capitalization Rate)

Finally…we determine the GRM, based on the current GSI and the asking Price:
–We divide the asking Price by the GSI to get the GRM (Gross Rent Multiplier)

Now, for giggles, let’s say that we want to buy at a 10% cap rate OR a GRM of 5.

This means we have to work backward on a given project’s numbers to see where we need to be on price. For example…

If the GSI is currently $100,000 annually
And expenses are assumed to be -50%, or <$50,000>
Then the NOI is going to be $50,000

Now, of we use a GRM of 5 to determine value based on income, then five times $100k (GSI) equals $500,000. So, we don’t want to pay more than $500,000. based on the income.

If we use a CAP rate of 10% to find value, then we divide the NOI of $50,000 by .01%, (<.10%>)which comes to $500,000.

Now, these two evaluation methods happen to offer the same valuation of $500,000k.

Frankly, these will rarely match up this well. The market is NOT that efficient. GRM’s are used for rough evaluations, and CAPs are used for specific evaluations.

I like to think of GRM and CAP as being part of a scale you see at the doctor’s office. The GRM represents the big slider that marks the pounds in 10lb increments. The CAP rate represents the smaller slider that marks the 1 lb increments. The GRM gets you into the ballpark. And the CAP gets you into the seat.

Hope that helps, more than confuses…

Read this a couple of times and practice your math.

:biggrin :biggrin :biggrin

Here is how you use the 50% rule.

First assume that 50% of your market rent will be needed to cover all your ownership and rental operating expenses that you would pay if you owned the property free and clear.

Taxes, insurance, maintenance, repairs, utilities, legal costs, advertising, property management, and a vacancy allowance all come under that 50%.

This leaves half your rental income to cover your loan payment. Whatever is left over is your cash flow.

The first step is to look at the big costs, property taxes and insurance, to see if they total less than 30% of the rent. If they don’tm then move on to the next property. If they do, then it is usually safe to assume that the other operating expenses will be covered by the remaining 20%.

The second half of your rent has to give you your cash flow and pay the loan. If you require $100 per month cash flow, then half the rent minus $100 needs to pay the loan principal and interest. If it does for the amount of the purchase that you will have to finance, then you have a property that may bear closer examination. Otherwise, move on to the next property.

Javipa I saved your comment in a word file. I’m gonna be decoding it in the next week. lol

David T: That makes sense. Pretty straight forward.

Here’s another one I found:
A building with 4 units 2 bedrooms 1 bath. 100% full with rent of 725. Asking price $170,000

Here is the rent comparison:

And the analyzation (the other tool didn’t make any sense):
Cash flow comes out to be 518/month.

The cap rate comes out to be 10%.

Comes out to be an ok property? I’ll ask for a pro forma get more info on it. Then I’ll get some insurance quotes and property taxes rates. In the 30% I’ll include the 10% for mgt as well.


If you can decode what I said, you’re gonna be considered the genius between our families!


Wow…you’re making it about 400 times too hard. Usually, all these gyrations indicate procrastination leading to a sever case of analysis paralysis.



If you’re finding a lot of deals with these numbers, then maybe you need to dig deeper and find better numbers. Frankly, 90% of the deals being offered in a given area are over priced. 10% are within range, and 5% are worth making offers on, and 1% will accept them. Somebody offered a formula on this, but I can’t find it.

Meanwhile, your rent/price ratio is greater than 1%. That is, the average unit rent of $725 is greater than 1% of the price per door of $42,500. That’s a great starting place in some areas. That’s considered at great arrival place where I’m at.

Asked for pro forma on the last property (4 units), and found a 13 unit property for 440,000 gonna do some math.

OK, Keith what’s you advice? :]

If you had a 13-unit property, how would you figure on acquiring it? Where is it and where are you? What is your experience with managing multi-family properties?