My quick sketch property analysis

General Real Estate Investing
1

Hi Forum!

I am a new investor who has read as many books as I think I practically can and have gotten as much knowledge as I can get from them without getting into the game. Now, I know there is always more I can learn, but getting started is the best way to get going.

I am looking to find myself a place to live. I am not thinking of anything really long term for myself (5+ years), but rather a place I can rent from myself and model it as an investment property.

My plan is to find a house  that needs some rehab to get up to prevailing neighborhood value and then rent the bedrooms (with myself as one of the renters).

I have gone and looked at only a handful of properties so far and have not gotten too deep into the analysis yet, however I would like input to see if I am taking the right things into consideration when evaluating a deal. I have put together a little sheet I plan to use to evaluate properties with.

The income portion is straightforward as I plan to rent by the bedroom and I have used craigslist for similar area room rents.

Do I have most of the expenses accounted for? (the individual utilities are summed up in the Utilities line). The property taxes are input as an annual expense but are incorporated in the total expenses as a monthly cost. Also, I will be the one doing the management, however for future deals I would like to have an idea of what that might cost should I decide to give that a try.

The Debt Service section it is not a strict plan for financing, just a model. Loan 1 is the amount left after the asking price minus the down payment and loan 2 is the amount projected for the rehab budget. These are calculated on another worksheet not shown, just using the excel PMT() function, but for this example the loan 1 principle is $53,900 and $6,000 for rehab.

Property Address 123 Main Street
Asking $ 63,900.00
Down $ 10,000.00

Income
Total Gross Income $ 1,500.00
Rent / Room $ 500.00
Bedrooms 3
Total Income $ 1,500.00

Expenses
Property Taxes (annual) ($1,510.00)
Insurance ($100.00)
Management (5% Gross Rents) ($75.00)
Maintnence ($100.00)

Utilities (paid by owner) ($145.00)
Electricity 50
Water 20
Sewer 15
Gas 50
Garbage 10
Vacancy allowance (8%) ($120.00)
Uncollectable of Credit Losses (8%) ($120.00)
Total Expenses ($785.83)

Debt Service (see Debt Service sheet)
1st Balance ($323.16)
2nd Balance ($35.97)
3rd Balance $0.00
Total Debt Service ($359.13)

Monthly Cash Flow $ 355.04

What do you think? I am mainly interested in your opinion about the completeness of line items rather than the specific numbers as these are mainly just guesses for most of them like utilities and maintenance and rehab budget.

2

You have blended annual numbers and monthly numbers in your presentation. Makes it a little difficult to figure out whether you have a good deal or whether your income projection is just wishful thinking.

I also think it is misleading to count rent you are paying yourself in the calculation. It appears that you are paying $500 per month for one of the rooms, money that is coming out of your pocket, with just $355 going back in. It would seem that this is a negative cash flow property for you, but your cash flow analysis may be distorting the magnitude of the monthly deficit.

I would compute the expenses as though you were not a renter. Compute your vacancy factor on a full month of rent, not just 28 days. Since these are rooms you will be renting, your renters wil expect to see fully furnished rooms, both for the bedrooms and for the common areas they will be sharing (living room, kitchen, bathrooms). Where is your cost for furnishing the house? You may end up getting furniture on a rent to own basis, but there is a cost for that which does not appear in your analysis.

3

Thanks Dave! The formatting of the table doesn’t help to make things easier to read, they’re easier with spreadsheet formatting. The only annual number I have in this calculation is the property tax as that’s listed as an annual expense on the MLS listings. I do convert that into a monthly expense when I do the calculation, but it does not show up as a separate item anywhere. It’s just divided by 12 and added to the rest of the expenses.

Yes, I will be paying rent as I would be living in the house. I understand that will make this a negative cashflow deal when I account for my own living expense (ie. I will not be able to live for free). However I do not account for my personal costs of living in the house in my analysis because if I were not actually living there and it was a strait investment only property there would be that rental income. This is how I am computing the deal, as if I am not one of the renters.

About the vacancy factor, I have it figured as a monthly cost equivalent to loosing 1 month annually (1 month / 12 months =.08333 = 8 % of income). In this case that is $1,500 * 8 % = $120 a month. There is also a number that accounts for uncollected but still owed rents of one month a year. This is the same as the vacancy number. You say I should be using a full month as vacancy. I believe this is what I am doing, but it is not necessarily clear without knowing my rationale for the numbers. Does this make sense as a way to use a full month or am I missing something?

Thanks for bringing up the furnishings! I had not thought about that. In this particular case I would be furnishing the common areas and leaving the bedrooms unfurnished for the renters for the time I am living there. However I should think about that possible expense for future properties.

4

bconway6,

First, way to jump into the game. Second, I became involved in real estate the same way you did. I purchased a house for $62,000, rehabbed it, live there and rent out 2 rooms. I think the most important thing to realize is that you should be able to afford the mortgage without anyone living in the spare rooms. My vacancy rate has been higher than 10% as I do not want scumbags living in my house and I look for the right people and have turned some away. I rent out one room for $450 and one for $500 including utilities. My mortgage, taxes and insurance are $720 and my utilities are about $330. So I breakeven excluding maintenance when fully occupied.

I think your numbers have some inaccuracies. First, You would most likely not be able to rent for $1500/month if you were not living there. I wouldn’t recommend renting out rooms if you are not living there as that will be a rooming house and you will need all sorts of other zoning and whatnot. Also, $100 for insurance per month seems high.

What is a reasonable rent to obtain if you’re not living there? $800?

If you are living there, I don’t think you really need to be running too many numbers. As long as the mortgage and most of your expenses are covered, positive cash flow shouldn’t be a concern. Other people are paying your bills and you have a free place to stay.

5

Thankfully, I am able to cover the expenses independently of the rental income for projects in the price range I am looking at. That is a good point, when I do move out I would probably rent the house as a whole so you’re right it wouldn’t be in the 1500 range. I am not too concerned at this time with the accuracy of these particular numbers as I haven’t gotten estimates or quotes for things like insurance or done much of a market survey beyond surfing Craigslist and the newspaper to see what similar rents have been in the area. It seems that it would be something between $900 and $1100.