Hello, everyone! :]
I am new to your forums and new in the area of real estate investing. After reading a couple of the Rich Dad series books I decided to expand my education in the real estate investment area.
I am aiming towards rental properties for cash flow and maybe a couple of deals for selling in the future.
Right now I am educating myself, because I am totally fresh. I live in the Chicago suburbs, and today I was looking around and found this property, can you please analyze it if it is a good buy or not and why. I want to find out what the experienced people are looking for and the way they analyze.
I am not looking for advice as much as ways to analyze a property if it is a good deal or not. :]
One thing that popped in my mind is if the property has such a cash flow why would the owner be selling it?
Thank you in advance. ;]
As a new investor be wary of what your reading or what your being told until you look over and forensicly analyze the numbers on a property!
I ran statistics for your property address, your ad did not say the bedrooms / baths but I guessed from the square footage they are 2 /1 units.
At your address fair market rents for a 2/1 are $850 month, so although initially renting them as freshly remodeled for $900 per month, sustainability at that number in the event of a vacancy may not be possible.
It would appear the seller only calculated the net published number by calculating and adding together the taxes and insurance and deducting those numbers with a vacancy factor from the gross possible income.
You will still have to hold out basic repairs and long term replacement cost from the numbers along with landscape maintence, snow removal, legal, bussiness supplies and advertising cost’s. (Property Management 10%?)
New 1st TD - $95,200
Down Payment - $23,800
Closing Cost - $2,380
$95,200 @ 6.5% - 30 years = $601.73 per month or $7,220.76 per year Amortized!
$26,180 (Down & Closing) cash on cash return @ 8% - 30 years = $192.10 per month or $2,305.52 per year Amortized!
So $9526.28 is your cost to own this property per year!
Your long term repacements are Flooring (5 - 7 years) Roofing (20 years) Painting (7 - 10 years Exterior) (3 - 5 years Interior Common Area)
Your short term repairs are general maintence $250 per unit per year allowance for 1st year on newly remodelled property.
Calculate all the cost’s then determine whether it is positive or negative???
Hi and welcome to the forum!
There are tons of threads/posts on here about evaluating deals. You can use the search button at the top of your screen. I would suggest just reading thru all the old posts in the Beginners and Rehabbing/Landlording forums as these will have most of the posts you are looking for.
Be careful about believing everything you read.
Just look at the info from the ad:
119k purchase price
1800/mo rent income or $21,600 ← best case scenario assuming NO vacancy
advertised “cash flow” of 15,500/yr
Mortgage payment for 119k at 7% for 30 yrs: $791.71
$791.71 * 12 = 9500.52
Here is a definition of NOI:
It’s possible to make some money with this, but I’d rather see the purchase price lower based on the rent amount. Who knows what the owner’s motivation is? They may be old and want to cash it out, tired of the rental business, want the money for another venture, etc. Just don’t read this ad as meaning you’ll have $15,500 per year in your pocket because that won’t happen with these numbers.
New and Willing,
Nice looking building. I like the fact that it has SELLER FINANCING. That means you pay a down payment (usually) and the seller than “carries” the loan, you make the payments to the seller, not a bank.
Look up 50% rule on these forums. Now sit down with a piece of paper and analyze it. Calculate full-price (gotta start somewhere), with a 10% down payment, and let’s just say the seller carries the mortgage at 6% for 15 years. Look up “amortization tables” online.
Do your homework and post it all here. We will be happy to analyze it. If we do it all for you, you won’t learn anything. There’s nothing like having the calculator in your own hand.
You need to call the listing agent or seller and ask, “Excuse me, but why are you selling?”
I look forward to seeing your next post, and welcome to the forums!
Thanks to everyone that replied!
Gold, awesome! Can you tell me how you find out the average of the market rents for the units of that type?
Justin, yep. Sometimes I get too excited, I’ll remember your advice about taking claims (like the 15,500 per year) with a grain of salt.
Furnished, done. I looked up the 50% rule and basically what I found out is that 50% of the gross rent goes for maintenance fees and the other 50% for mortgage and cash flow. So that means one of the units will be paying off the maintenance. Leaves me to work with $900.
The down payment (10% of 119,900) would be 11,900.
I used this http://www.amortization-calc.com/ I put in 107,100 for the loan amount (119,000-11,900)
It came out with $903.77 Monthly Principal & Interest. 10,845.24 a year.
So far I am coming out with -$3.77 that is with maintenance and mortgage.
Now if I include 10% for the management company (10% of 1800=$180) meaning I will be losing $183.77 a month.
To double check my math I punched it in http://www.richdad.com/RichDad/Member/Tools/RealEstateEvaluator.aspx and came out the same.
I was thinking, just because I can, to offer $59,500. At least it will lift the seller’s spirit that someone is taking interested in the property.
P.S. What do these values mean?
Commission Split:3% ???
Cap Rate:13.03% I read in the forums somewhere that cap rate is not important, yes no?
The commission split means how much the listing Realtor and buyer’s agent will be making. This percentage will be taken out of the total sales price for commission. There are lots of posts on cap rate on here. You can search the Commercial forum for those. Multi-unit buildings generally have cap rate calculated on them. Cap rate is a building’s NOI / market value. So as a buyer you want the cap rate to be larger because you’ll be getting a bigger NOI for the cost of the property. As a seller, you want to get the lowest cap rate you can because that means you’re getting a premium price on the value of the property.
The 50% rule is a good place to start to estimate real world cash flow. You want to nail down as many fixed costs as you can. Figure out what your financing will be. Obviously the longer you take the loan out for, the lower your payments will be but your goal should be to have places paid off in well less than 30 yrs for investment purposes. You can also check interest rates for the type of loan you’re looking for. Expect to pay a higher percentage for an investment or NOO (non-owner occupied loan). Get several insurance quotes for the property. You want “landlord” insurance meaning insurance for a NOO property. This will cover the structure, assosciated fixtures, etc. You’ll want to make sure it includes the appliances if you own them. Next check property taxes. Make sure there owner doesn’t live in the building and have some type of homestead exemption (don’t think that applies in IL).
These are some major fixed costs you can narrow down before you buy to know if it’s worth it or not. Something else to figure out on muti-unit buildings is who pays for which utilities. Many smaller buildings may not have separate utility meters. As an owner, paying water isn’t really a big deal because it doesn’t cost much but you wouldn’t want to pay for the tenant’s heating/cooling.
For market rents, you can look in the same area for other comparable buildings for rent. You may be able to call phone numbers from signs in the yard or look in your newspaper for ads. If the ads and signs have been out there for a long time the LLs are probably asking too much. I don’t like to try and push the limits for market rent on our units. Just one month of vacancy will kill that extra 25 or 50 you’re trying to get each month. If people know they’re getting a good deal on a quality unit, they’re more likely to stay if they can’t go elsewhere and get more for their money.
I put in to get some quotes on it for insurance (500 deductible and 300,000 liability), just gotta wait a little.
I contacted the listing agent to ask about the appliances and utilities.
And look what I found while digging around, there are price histories, demographics and many more. ;]
I searched for rentals near that area http://tinyurl.com/2uvhrzn
Gold was right it hovers around $850.
Well I found its full information:
Alright, I’m starting to wet my feet at looking for real estate. I am exploring Austin Texas right now. The things there are pricey as hell duplexes start at 140,000.
Then I went on Houston and found this http://tinyurl.com/2vamw3g
Comes out -40 bucks cash flow. If I had to offer a price I would offer 39,000 for it.
Then found a condo in Dallas:
If I calculate with 8% for 5 years, comes out -$184. This, not even close.
Since I can’t go check the property out what do you guys do when faced with a potential investment located far away before offering\buying it?
if u r new it is best to stick to your local area. and one that u know. get it right locally b4 u go trying to be a bigshot in another city you are not in.
Tony is right. The only reason we have a building in another state is because it is near where I grew up and my parents are still there. We started there, but our other units are where we live now. Your acquisition prices are genereally higher there because you’re in a large metro area. Many other areas of the mid-west will cash flow. Springfield, IL is a few hours away, but you’ll find cash-flowing deals there. Some people on here invest in several areas all over the country, but many of us prefer to stay closer to home so we can be more involved. You’re at the mercy of a property manager when you go far away from home.
Also check on financing options before you get too deep into this. Our loans are 10-15yr amortizations. I couldn’t go out to 30 yrs so there’s no reason for me to use 30 yrs in my calculations when I’m screening potential deals.
I was looking for location. Because I know Texas is a big place that people migrate to. While everyone runs away from the cold Illinois and last year more people left than came. I was looking location, location, location. But you are right I better start close so I wet my feet.
Justin, what do you mean check financial options? Check it for each building 1st before starting to research anything else about the building?
And as far as managing I am going to be relying on property management firms, because I don’t want to deal with those things.
For financing, I mean you need to see what type of financing is available to you. We have an LLC and get commercial loans thru it. Some banks refuse to do non-owner occupied (NOO) loans period. Others want 30% down no matter what the purchase price is. Many will not take investment loans out to 30 yr amortizations. So I’m saying you don’t want to count on getting 30 yr amortization and lower payments when evaluating a potential deal if that financing isn’t an option. I know for our deals I have to look at generally 10 yr or possibly 15 yr ams. That could kill your cash flow on a deal if you were expecting 360 payments instead of 120.
You can check out potential financing now. You’ve got an example. See what people would do for something like that.
Also remember the more hands off you are, the less you’ll make. You should at least learn enough about what you’re doing to be able to tell if you’re getting screwed on repair bills or not.
OK, makes sense.
So for investment purposes it’s better to make a LLC, than put it on my name. So the loan types depend on me not on the property? Is there a ranking or something of that kind that shows the different types of loans available and what they mean to me and the seller?
For this one it explains everything. What does “proposed new” mean regarding loan type?
There have been lots of posts regarding having or not having an LLC for investing. You can head over to the Asset Protection, Legal forum for that. A couple resident experts on that stuff are BLL and mcwagner. Understand anything 5 units or more falls under commercial financing with different rules and generally a higher percentage down than for smaller buildings or SFHs (single family homes). The “proposed new” for the loan is just saying they’re using $281,250 at 6.5% for 25 yrs in their calculations for debt service and things like that.
Your example includes lots of different numbers. The pro-forma numbers show what “could” be. You would get those numbers by raising everyone’s rent to $750. You should evaluate a property based on current conditions. $750 might represent current market rent, but you may need to spend thousands on upgrades to get to that point.
I would suggest just talking to some of the banks in your area to see what they’re offering. Expect the larger big name banks to have strict guidelines they won’t waiver from. Smaller local banks may be somewhat more flexible. Some banks will do NOO while others won’t touch them.