help teach me how to evaluate a property

General Real Estate Investing
1

I am early in the learning phase of REI, but after reading several books on the subject decided it was time to start looking at some properties (more for practice than anything) so I can start building a foundation to be able to recognize good deals when I see them (at least on paper). Mainly I am looking to generate passive cashflow by buying low income rentals. I am going to start in an a=inner city area that I know very well since my firehouse protects it (I’m a firefighter)

So here is a property that fits most of the criteria that I am looking for. I am more interested to know the formula successful investors use, instead of just being told if its a good deal or not. I hope that makes sense. Here are the details from the listing.

Its in the hood, but a lower crime area of my district.

$18,500 listing “property is being sold as-is, XXX bank is being proactive in getting a short sale approved”

semi-tax $590…tax exemptions-none

ranch w/basement, no garage. each unit is 1 bedroom, 1 bath, 4 rooms total. 1,120 total sq ft (assessor)
“renovated in '07 including roof, carpet, flooring, furnace, windows, kitchen, bathroom, and much more”

currently rented at $450 each side. tenants pay elec., gas, water

GOI: $4800 actual exp: $1210 NOI $3,590

I drove by it and it does look in very good shape (exterior only), and I found several comparable sales. They ranged from $18000-$25000, but all 3 looked to be in worse shape than this one.

----so my questions. Should I even be looking at their operating income #'s? What #'s should I look at to see if this is indeed going to be a profitable venture.

I would love any formulas you guys use to narrow down the search for properties, or determine if a property fits your criteria. Hell, I’d love to know the criteria I should be setting.

I totally appreciate any and all help, suggestions, guidance…even insults you are willing to share lol

Thanks

2

Hi. Welcome to the forum.
You’re looking to get into the same kind of deals that we’ve been doing for the past few years. First off, you can do a search on here for the “50% rule.” There are tons of posts on here about that and lots of potential deals evaluated. The 50% rule just means that on average you can expect 50% of your rent revenue to go toward all operating costs (repairs, maintenance, utilities when vacant, legal fees, vacancy, etc) and the other 50% is left for debt service and cash flow.
Cheaper properties in ok areas can usually be made to cash flow whereas properties in nicer neighborhoods are too expensive to cash flow. One of the first things you need to look at is what kind of financing you can get. Through conventional financing, you might find 30 year terms available. Most of the time banks are going to want to keep investment property (NOO - Non-owner occupied) loans on shorter terms.
All properties need something fixed for the most part prior to renting them out. You need to be able to figure out approximately how much money you’re going to have in repairs to get it ready. You’ll get better with this with experience. In the beginning, you may need to get quotes from people for repairs if there are things you can’t do. Look at the condition of the roof. HVAC - does it have a central air unit or really old window AC units? Some houses may not have anything except an old floor furnace that may not work. Does it have HW floors under that nasty carpet that could be refinished? Does it have a circuit breaker box or is it an old fuse box that needs upgraded? Is the house insulated?
All of our properties are on 10 yr amort loans. For a property around 18.5k like you have, our payments would be about $250. We’ve purchased several right around this amount. Some needed more work than others. We’re getting about $550-625 out of properties acquired in this price range so we know there’s $300-375/mo left over after paying the mortgage. Insurance for our properties is usually 300-450/yr. Taxes generally run 700-1100/yr. So we factor all those things in and see if the deal makes sense. We’ve done enough of them now to know where we need to be in order to make money. If we can rent a house out for at least double what our payment is, we’ll be fine even on 10 yr amort.
Your deal sounds very promising.

3

thank you, this is the exact kind of help/guidance I was looking for.

Now, off to read more lol

4

You can download a free copy of my rental property cash flow analysis spreadsheet from this link

www.reiclub.com/forms/cashflowanalysis.xls

At such a low purchase price, expect to pay cash. You will have trouble finding a lender who will give you a mortgage loan for such a small amount.

You say the taxes are $1180 per year and actual expenses are $1210, for a total of nearly $2400 per year. This reduces your net operating income to $2400, or about $200 per month.

If these numbers hold up, this is still a 13% return on your invested capital, provided the property is fully rented. Vacancy periods will lower the yield. Unless you can get a better return on your money in some other investment, this may be a good one to start your investing career.

It will be challenging. I find one bedroom places hard to rent in my area. If this is the case for your area as well, expect long vacancies.

Good luck.

5

FWIW, our small apartment building is all 1/1 units. We have a lot of middle aged to older divorced females, a married couple, and had a young woman in there for a couple years. No kids in the building at all.
So you might be able to find some people like that. All our tenants besides the young woman are long term. Some have been there for about 20 years.

6

…play carefully with that. In a lot of states, it’s illegal to not rent to someone just because of the number of children (“family status”), so theoretically a mother with six kids can rent a 1 BR…

Go figure.

Keith

7

Yes. You can’t target anyone specifically or deny people based on the protected classes. Our papers state we don’t discriminate against anyone based on the protected classes, but we reserve the right to refuse to rent to anyone for any other reason. We also state that we view occupancy within Federal Housing Guidelines of 2 people per bedroom plus one extra.
I can usually find a reason to not rent to someone if I really want to.

8

Be careful. You can still be subject to discrimination charges if you don’t treat everyone the same way. For example, telling an applicant you won’t rent to him/her because she is a lawyer could be discriminatory if you rent to others who are lawyers. Much safer to just say, I don’t rent to lawyers, and then don’t ever rent to lawyers.

9

Let me clarify with a couple real life examples:

  1. A mom came by to look at one of our houses with her 3 kids. Very trashy looking, no bra, etc. She wanted the place because her Sect 8 voucher was about to run out. She didn’t have the money for the deposit (because she didn’t work), but asked her 14 yr old daughter if she could borrow money to get us about half of it and then get us the rest later. Needless to say, she wasn’t considered and we found someone else.
  2. A young guy came by to look at one of our apartments. He had one hand all bandaged up so my dad asked him what happened. He told my dad that he’d put his hand thru a car window. Stupidity isn’t a protected class.

I try to be really careful about the protected classes and all things associated with them. There’s a guy here locally that’s advertising places for rent with “no large families” written at the end of the ad. IMO, that’s just stupid and asking for trouble.