Breaking down deals

General Real Estate Investing
1

Just figured I would start a topic of how I break down my deals and hope others will do the same…This way we can all debate like always… :biggrin

After riding out my first year of owning income properties I have definitely learned a few things…I needed to allocate %30 for vacancy,management,repairs vs %25(not because I was wrong on my estimates only for further room just in case)…Even though I have not had any real issues other than regular maintenance and hardly any vacancies to speak of…But my reasoning is I’m putting in much lower bids for the homes I look to purchase…Even though what I buy is very cheap already in comparison to the rest of the country…What I have learned also is the deal is made on the entry…Buy it as cheap as you can get it…If you aren’t insulting someone with your offer it’s too high…Back to the thread…

So I will take the annual rent roll deduct %30 for vacancy,management,repairs also taking out for…taxes…water…insurance (I never buy any property that I have to pay heat,electric,gas etc)…Whatever number remains I take that number and figure what buy price will give me %15-%17 ROI on a all cash purchase…

Propertymanager’s method !!!

2

That sems reasonable to me. You make your money when you buy is the motto. I’ve seen people back the numbers down from the FMV. For instance. If you have a multi-fam with a FMV of $100,000. You deduct say 25% for your profit/equity. Then you get your actual income and expenses for the property. Then you adapt your own expenses to the actual expenses. Subtract the expenses from the NOI. Then you can deduct what you want for positive cashflow. What you have left is what you can use for debt service. This way you’re paying youself first and next to last. It also lends flexibility to adjust your profit to try and get a deal done. There has to be solid parameters set in stone before you do that.

3

Although I have not made any purchases yet, this is what I use to determine value.

Example using nice round numbers.

Duplex renting for $500 each Unit = $1,000 Gross. Asking Price $100,000
From here I break it down to Conservative (lower offering) to Liberal (higher offering)

Conservative:
Subtract out a vacancy factor of 15% leaving an Effective Gross of $850.

Subtract out expenses (42% of Gross before vacancy) 15% for Maintainance $150, 12% for Management $120, 15% for Other $150, and any Utilities (for this example I’ll assume $0) for a total expenses of $420.

This leaves me $430 for PITI ($850 - $420).

I subtract 25% ($107.50) out of PITI for Taxes and Insurance leaving $322.50 for debt service.

The present value of $322.50 at 8% interest for 20 years is $38,556.26 which would be my initial offering.

Liberal:
Subtract out a vacancy factor of 10% leaving an Effective Gross of $900.

Subtract out expenses (32.5% of Gross before vacancy) 10% for Maintainance $100, 10% for Management $100, 12.5% for Other $125, and any Utilities (for this example I’ll assume $0) for a total expenses of $325.

This leaves me $575 for PITI ($900 - $325).

I subtract 25% ($143.25) out of PITI for Taxes and Insurance leaving $431.25 for debt service.

The present value of $431.25 at 8% interest for 20 years is $51,557.79 which is the highest I would be willing to go.

This gives me a offering range of $38,556.26 - $51,557.79.and a mortgage payment of $322.50 - $431.25 (8% for 240 months).

From here I can make a wide range of offers to stay in this range.

Offer #1:
$38,556.26
50% Down (paying myself 12% interest for 180 months) - $231.37
Conventional Loan for the other 50% at 8% interest for 180 months - $184.23
Total payment: $415.60

Offer #2:
$45,057.02 (the median of my range)
20% down (paying myself 12% interest for 210 months) - $102.84
80% Conventional Loan at 8% interest for 210 months - $319.45
Total payment: $422.28

Offer #3
$51,557.79
25% down (paying myself 12% interest for 240 months) - $141.92
Owner Carry 75% at 6% interest for 240 months) - $277.03
Total payment: $418.96

Owner firm on price? That’s OK (Which would you like? Price or terms?)
Offer #4
$100,000
240 principal reduction payments of $416.67

4
Subtract the expenses from the NOI.

Phlemboy, The operating expenses are subtracted from the gross rent to get NOI (not subtracted from the NOI.

Subtract out a vacancy factor of 15% leaving an Effective Gross of $850.

Subtract out expenses (42% of Gross before vacancy) 15% for Maintainance $150, 12% for Management $120, 15% for Other $150, and any Utilities (for this example I’ll assume $0) for a total expenses of $420.

This leaves me $430 for PITI ($850 - $420).

tgauchsin,

That makes your expenses WELL over 60% of the gross rents, in fact closer to 70%. 42% plus 15% vacancy plus taxes and insurance. WOW! That’s extremely high.

Mike

5

Ignore this post. Somehow I double posted, the one I really wanted is below.

How’d I do that? (rhetorical)

6

Propertymanager,

Hmmm…That does sound like a lot - maybe property here will cash flow. I do like rookieNYC’s 15%-17% ROI instead of my 12%. Looks like I have some tweaking to do.

Tg

7

Propertymanager,

You’re right. My mistake. I meant to say subtract the expenses from the net rental income (NRI).

8

I removed out the “Other” section out of my spreadsheet. I was using that for legal and other unexpected expenses. I guess that would better covered under vacancy/management.

With that gone, it leaves my expenses 48% - 57.6%. Might be a tad high, but a little closer. Now it’s time to plug in some real numbers.

:bobble

Aren’t spreadsheets great.

Tg

P.S. Post #50. I would like to buy another house on Park Place. :beer

9

I think expenses are usually around 40 - 50% of gross rents.

10

I am really blown away by the skills you guys have displayed here. I am new to the REI game, but I have been studying for a while now. from Carlon Sheets to James Smith, I feel ready to take on the challenge. I live in NY right now, I am actually looking for investors in my area who are looking for wholesale deals, so any body can refer me to some people that would be great. I plan on calling some REI clubs in my area so wish me luck.

Good Luck to all.