Help me analyze first property

General Real Estate Investing
1

Hello All,

First of all, I’ve been reading these forums for awhile and this is my first post. The information here is invaluable, so thank you to everyone who contributes. I am brand new to REI and am looking to buy my first investment property.

My goals
Buy 1 or 2 buildings per year and hold forever to create a stream of passive income. I would like to concentrate on multi-unit homes. My main goal is monthly cash flow, not appreciation or quick profits.

The first deal
These are the numbers I know
Purchase Price: $120k
Downpayment: $30k
Loan Amount: $90k
Monthly Principle & Interest for 30 years at 4.5%: $456
Monthly Taxes: $337

of units: 4

Current rental income: $2400 ($600/unit)

These are the numbers I need help with
Monthly maintenance/repairs: $?
Monthly Insurance: $?
Property Management: $? (Just curious, probably won’t use to start.)
Vacancy estimate: $?
Other?

Thanks in advance for your help. I have guesses for all of these which predict a healthy cash flow, but I’m wondering if I’m being too optimistic. I’d love some help estimating these expenses.

2

Your rent compared to purchase price looks good, but what concerns me are the taxes. About 4k/yr taxes for 120k purchase price seems really high. Do you know you can get 30 yr financing at that rate? If a bank would only go 10-15yrs on it, would that kill the deal for you?

Monthly insurance - You can call some insurance agents who have access to companies that will insure rentals. Just tell them the basics of the building and you should be able to get some quotes. If you can get the year constructed, foundation type, brick or frame construction, circuit breakers or fuses, type of plumbing, and approx age of roof - you should be able to get a good quote. You can probably get quotes without quite as much info too.
Remember to check into an Actual Cash Value policy and compare that price to Replacement Cost. Also see how much the premium changes by upping your liability coverage to the max amount possible (it probably won’t increase the premium substantially and they’re probably basing their quote off of 300k liability instead of 500k or 1MM).

Property management - estimate 10% or gross rents for this

Maintenance / vacancy / etc - You may be able to get average vacancy rates in your areas. I recommend you just consider using the 50% rule as a good all encompassing number for all of your expenses besides debt service and cash flow.

3

I’ve already been pre-approved, so I’m fine on the 30 year loan. I agree the taxes are high, but they all seem to be in that same range in that city. I’ll get an insurance quote, I’m just not that far yet so haven’t contacted any brokers. I was just wondering if anyone had an estimate for a $120k 4-plex. I have no idea how it would compare to a$120k single family, for example.

So for property management I could estimate $240 a month? That seems like a lot for just a 4-plex. As I said, I probably won’t do this at first because I want to gain experience and learn by managing on my own. However, this is the long-term plan after I get a few more buildings.

Is there an easy way to determine average vacancy rates in a given location? I was going to use 10% but I have no idea if that’s right or not.

And I had heard the 50% rule, but I was hoping that was more geared towards single family homes. Estimating $1200 a month for expenses makes my cash flow much less desirable. Is that 50% supposed to include taxes, insurance, and vacancy (essentially everything except debt service)?

Thanks again!

4

If you do not mind my asking and following up on Justin’s response …Where are you getting 4.5% for 30 years on a NOO, 4-plex?

5

I have several sfhs insured for right around 25k thru Foremost. The premiums are about $350-400/yr for 25k on an actual cash value policy. Knowing that, maybe around $1600-1800 would be a guesstimate.

I’ve heard of people getting 8% for property management. Some people charge a flat fee (like 1/2 month’s rent) to place a tenant in the property. I manage all my own rentals though…

There might be some data on your city or you could call up some apartment complexes and talk to the agents there. They might be able to give you a ballpark estimate for vacancy.

The 50% rule as it was originally stated on this site from Mike (propertymanager - no longer active here) was that the 50% of gross rent average for operating expenses was from a nationwide survey from (I believe) the National Apartment Association. So that info is coming from multi-unit complex owners. 50% of the gross rent is supposed to cover all operating expenses from maintenance/repairs all the way down to office supplies. The other 50% is debt service (principal and interest) and cash flow.

Are you planning to live in this building or rent out all 4 units?

6

Mdhaas: I work with a mortgage broker here locally. I’m not sure who the loan would actually be with. The broker is called Accunet. You can find them online, but I’m not sure if they do business out of state or not.

justin0419: Thanks for the insurance estimate. I am not planning on living in the building.

So, let me see if I have this right:

Income = $2400.
P&I = $456
Insurance = $200 (higher than what justin said, just in case).
Taxes = $337
Other expenses = $1200

Cash flow = 2400-456-200-337-1200 = $207 per month = $2484 per year.

Does that look right to everyone? Or should I include the insurance costs in the 50%, which would make it 2400-456-337-1200 = $407 per month = $4884 per year.

7

You’re confusing the numbers somewhat.
Let’s start here… Gross rent is $2400 per month.
50% of $2400 is $1200.

So that means $1200 per month goes toward operating expenses. In this part, we include everything but your principal and interest on the mortgage and your cash flow. Operating expenses would include insurance, property taxes, vacancy allowance, maintenance, repairs, legal fees from evictions, fees to do your taxes each year, allowance for income tax, any utilities you would pay as the LL, utility connection fees to get them turned on for inspections, your printer paper and ink to print leases / lead based paint disclosure forms and pamphlets, etc.

The other $1200 goes toward your mortgage and anything left over is cash flow.

So in your scenario, the $456 mortgage would be subtracted from $1200 and leave you with $744 cash flow per month for the building.

The other $1200 would have to cover all of those other expenses. Of course, we don’t actually know how much maintenance, repairs, tenant damage, etc will cost over a period of time so we use the 50% rule to estimate and make allowances for that. When you’re analyzing deals, you can nail down certain costs like property taxes, insurance, and to a certain extent utilities too. The more sure you can be of those numbers will help you determine if what is left over will be enough to cover the expenses you won’t know (when will plumbing go bad, how long will that wood deck last before it needs replaced, do I have 10 years left on the roof or closer to 5 years, etc).

So let’s look at your example again.
You have $1200/mo for operating expenses. You subtract $337 for taxes and $200 for insurance. This leaves $663 per month for all other expenses. On months when you have one vacant unit, that’s a loss of $600 in rent so that only leaves you $63 that month before it cuts into your cash flow.

Some months you will have much higher expenses than others due to things like repairs. What we’re trying to do here is estimate the deal overall while leaving a sufficient amount for the what if’s and determine if the deal makes sense to make you money over time or if you’ll be cash flow negative from it.

Something else to consider on these smaller multi-unit buildings is which utilities you have to pay as the LL. Many smaller buildings don’t have the water separately metered for each unit. Some have electric/gas split while others do not. We own a six unit building where we pay $31.90 per month for a trash dumpter. We also pay electricity on the hall lights and electric for the water heaters. We also pay the water bill. On the duplex we own as well as another property that has a 2br house and a 1br bungalow, we pay the water bill (which includes trash service too).
Water isn’t too bad to pay for as a rule (unless a tenant has a water leak and neglects to tell you), but paying for someone’s heat can get very costly. Just some other stuff to consider with these investments.

8

justin: THANK YOU. That was a great explanation that really helped. Obviously, these are just estimates, but that makes me feel much better than the $207 a month I had calculated. :slight_smile:

Okay, now the big question. This is for people that would invest in these type of buildings. Do you think this is a good investment? It sounds like it to me. On average, if I clear $700 a month, that’s $8400 per year, which is a 28% return on a $30k investment. Even if I’m off by half, I’d still say that would be a good investment. Thanks again to everyone.

9

WisconsinLandlord

This is a great first deal and a keepers. Not knowing the age of the building I would definitely make sure I have a “rainy day fund” for repairs.

Are all utilities metered per unit?

Keep in mind that rents do and should go up so your cash flow will increase.

10

On a quad with common area expenses handled by the owner, I would pull out an additional 5%. Plus, if you are going to hire a property manager then you need to factor in an additional 8 - 10% on top of the 50 or 60 percent.

Generally the vacancy rate is calculated as a percentage of gross rent. The average percentage used is 10%. Using all the other figures here plus 5% additional for common area expenses and 10% for a PM, you are looking at an average monthly before tax cash flow of $327.00

As to if this is a good deal. I would buy it. You will have a cap rate of 7.8% which is pretty good and your ROI is 13.1% (22.7% if you manage it yourself). This sounds like a keeper.

11

When we purchased our three 4plexes we looked at it quite simply: assuming the 50% rule we need to be @ 50% occupancy to cover operating costs. Can we purchase where debt service, insurance, and mgmt is covered by the 3rd unit? Which means unit 4 is the cash flow machine. So it boiled down to pretty much what Justin has espoused.

A couple lessons learned: make sure your leases make the tenants pay for water if each unit is not metered it’s expensive. Don’t take any cash distributions until you have cash reserves to repair at least 2 ac units! Hahaha!

Mdhass: our first was 4.75 at 30years with 30% down with wells Fargo. That was in may of last year.

12

By speaking to the owner or property manager (if there is one) will give you all the answers. Ask the owner for last years income and expenses on the building (hopefully he has one). This will give you the exact numbers for insurance, property mgmt. fee, etc…

The rule of thumb of 50% as explained earlier is fine but cannot replace the real numbers on the building. My offers always start at 10 x net operating income. If the Asking price is $120k, NOI (net operating income) must be $12k/yr. The yearly GOI (gross operating income) is $28,800. Subtract $12k/yr (my desired NOI) leaves me with $16,800 for the expenses per year which is 58% of the GOI.

Yearly debt service (mortgage payment) is $5,472 leaving you with $6,528 in net profit. Putting down $30k in down payment gives you a 21.76% cash-on-cash return.

$6,528 divided by 4 units = $1,632 profit/unit per year. ($136 per unit/month).

I personally look to get a minimum of $100/unit per month net profit. It seems like a good buy. But get those exact numbers.

13

These are the numbers I need help with
Monthly maintenance/repairs: 15%
Monthly Insurance: Talk to a local agent about insurance and be sure to get liability coverage
Property Management: 10%
Vacancy estimate: 10%
Other? this will give you a conservative estimate which should cover everything except utilities… Will you be paying utilities? If so this could add a huge expense depending on several factors.