# Correct Equation for Identifying a good deal

I am looking to start investing in a multi family property. Have about 90k Equity on my current home, willing to take out 50K equity line for a DP.

Properties in my area are selling for 500k-600K for 3 *3bd units(& a 4th basement 1 or 2 bd apt). Rents range from \$1250-1400 for 3 bed room and about 800 for the bsmt. Taxes are about 2.5K a year, utilities at about 3k a year. How do I determine if I am getting into a good deal or not. Is there a common equation?

Also any help on finding good deals in the Bronx, NY area would help. Currently just looking at craigslist and realtor.com and odviously calling up brokers. Any other good sources I am missing?

simple add up all the rents. (Income)
subtract All your expenses. (don’t forget to add in vacancy rate and a reasonable amount for repairs that are needed or management fee (your time and labor what you would have to pay someone to fisx the roof for example. I always tack on a bit more be prepared for the unexpected.

Re: Bronx and greater NY markets. penny savers in northern ny and the penny pincher in the bronx. Drive around the neighborhoods that you are interested in and look for realator signs there is always a for sale by owner sign in a three to four block radius.

Good luck

A good quick and dirty that a friend of mine developed works real well to get a rough idea of break even point when determining purchase price. This formula works right now - you need to adjust based on financing you expect to obtain.

The assumptions for this formula are 100 % of purchase price, 20 year loan at 7%.

Apply as follows:

Total Gross Rents X .6 / 7.75 = break even price in thousands.

You multiply your total gross rent by .6 (60%) to allow for vacancy, maintenance and insurance, then divide by 7.75 determine break even price based on financing.

A practical example:

4 unit building renting at 750/unit.

Total gross rent = \$1500/mo.
x .6 = 900

900 / 7.75 = 116.13 or 116,130 (your break even price)

I thought it was a unique way to help quickly determine a good deal or not. It seems to work well for him, and I plan to include it in my decision making process as well.

HTH
Phil

so based on this equation you are calculatin 60% occupancy rate?

Also how did you get the 7.75 figure?

The 60% accounts for vacancy, maintenance, taxes, insurance…not just vacancy alone.

As for 7.75, it is based upon the financing assumptions previosly stated. I.e. the P+I payment on a 20 year loan (100%) at 7% will equal .6 x gross monthly rent if you use the formula as stated above. I wouldn’t say its a ‘magic answer’ but it is a quick and dirty way to weed through a lot of properties… HTH

Phil

Maybe it is just too early in the morning, but what’s with 4 units at \$750 =\$1500. The rest I got.

im with you on that one. I am just assuming that it is supposed to be \$3000 and went from there. If i am missing something let me know.

take your pick…2 units @ 750 = 1500 or 4 units @750 = 3000…

Of course 2 @ 750 works with the rest of the example.

Perhaps more helpful would have been if I tried to apply to your specific example…

3 - 3BR @ 1250 = 3750
1 - 2BR @ 800 = 800
Total = 4550
x .6
= 2730 / 7.75 = 352.26 or 352,260 break even price

Estimating Cash flow would look something like this…

Gross Rent: 4550/mo 54600/yr
Net Rent (90%): 4095/mo 49140/yr

Mort. (P+I): 2731/mo 32773/yr
Taxes: 208/mo 2500/yr
Insurance: 167/mo 2000/yr (Guess)

Utilities: 250/mo 3000/yr

Prop Mgmt 328/mo 3931/yr (8% of Net Rent)
Maintenance 587/mo 7045/yr (2% of Purchase Price)

Cash Flow: 4095
- 4271 = -176/mo or - 2112/yr

If you don’t include property mgmt fee you will be slightly positive ~150/mo. Of course that’s assuming that estimates are good. It also is based on financing 100% of the ‘break even’ purchase price. I like to include a property mgmt fee even if i plan to do it myself because it is an expenses - ie. my time is not without value. Plus, it gives you the option to hire a prop manager, and also gives you some add’l slop in your calculations.

The point of this exercise is to illustrate how using the quick and dirty formula will provide you a quick method of determining a rough break even point after doing the lengthly calcs in the 2nd part of this post. If the quick method looks good then it warrants a closer look. If not, its not worth wasting the time doing the lengthly calcs, imo. Again, just my .02…HTH

Phil

I gotta learn math i guess