Crunching Numbers

[AIR]

Well tomorrow I plan to crunch the numbers for the two possible investment properties we are interested in. Does anyone have a process that works well? We just want to take a look at possible profit/ loss etc. See where we should bid...

[Debbie]

It's only an idea, nothing more----

I'm thinking that you hold off on purchasing any property for about 60 - 90 days.

Use the time to become familiar with your new job and secured.

Take advantage of the time spent giving you higher FICO score.

Get to know your work schedule so that you'll know how much free time you will actually have to spend on rehabbing a property.

[brianb_cobbres]

Well tomorrow I plan to crunch the numbers for the two possible investment properties we are interested in. Does anyone have a process that works well? We just want to take a look at possible profit/ loss etc. See where we should bid...

Throw the numbers out there. Lets see what ya got.

[Dan Auito]

People talk about running the numbers before buying an investment property, but what are the numbers and how do you get accurate numbers? Running the wrong numbers can make the difference of making $500 or losing $1000 per month. In this article we will go through the costs and factors to consider to make your investments successful.


Rental Income
Rental income is not as straight-forward as it seems. Sometimes properties are under-rented and sometimes properties are over-rented, so be sure to find out the market rents when you consider a property. When we bought our first fourplex, we looked at comparable leases and realized our rents were too high, so instead of assuming we would continue to receive $3600 of rental income, we had to be realistic and assume it was more like $3200.


Mortgage Interest
A huge cost is mortgage interest. You should definitely sort out the details of your loan options and get an idea of current rates before running the numbers. It could make or break a deal. If you are getting a duplex or a house, the loans are generally similar to other home loan programs.


Triplexes and fourplexes tend to have higher rates, and commercial is a whole other ballgame. One thing to consider is to put more down because the more you put down, the less your loan will be, which means less monthly interest to pay.


Another consideration is the type of loan. We usually recommend for people to get a fixed rate mortgage these days because the current ARM (adjustable rate mortgage) rates are not all that much lower than fixed rates.


Basically, just get educated about the loan options and run the numbers with them. Oh, and also, do not just take advice from one mortgage person. The best way to get educated is to talk to a variety of mortgage brokers and banks to find your best solution; not all loan places have the same programs.


Taxes
People frequently use the taxes from the year when they purchased the property, assuming the taxes will stay the same. Taxes change every year. Taxes can go up drastically after a purchase. For example, an owner occupied property usually has tax breaks, so unless you intend to owner occupy too, your taxes will go up.


Also, the county appraisal that your taxes are based on could go up after your purchase. For example, if you buy a property for 100,000 but the tax appraisal last year was for 50,000, don't count on it remaining at 50,000. In fact, I have seen cases where a year after a property was purchased the tax assessor increased the appraisal value to the purchase price. The safest approach is to look at the tax rate and the purchase price to determine your future taxes.


Vacancy Cost
For some reason people tend to forget to take into account vacancy rate. Even when looking to invest in a desirable rental area, it's best to always take into account at least an 8-10% vacancy rate. Do some investigation, look at your market and find statistics on the average vacancy rate.


Tenant Turnover Cost
We have personally found the biggest surprise to be the expense of tenant turnover. This includes advertising for a new tenant, cleaning, repainting, replacing carpet, etc. If you expect to have high tenant turnover, like next to a college campus, anticipate this to be a significant cost.


Insurance Cost
Insurance on investment properties are typically higher than owner occupied, single family properties. So get an insurance quote on the property instead of basing your expected insurance off of the insurance bill for your house. You also should purchase liability insurance which can be expensive.


Maintenance Costs
This is by far the most difficult number to estimate. It depends on the property, whether you fix some of the problems yourself or hire outside help, and random luck. So we can't give you a hard and fast number but we can look into different factors to take into account.


* Property Type - When you evaluate different properties remember to take into account the type of property. If it's brick you won't have to paint or worry about wood root. Decks need constant maintenance. A property with wood or concrete floors will be easier to clean and will not have to be replaced when a tenant moves out. Just think about the aspects of the property and their maintenance costs.


* Property Size - A smaller property is easier to maintain than a larger property. For instance, say there are two properties for sale for 200,000 and each have a combined rent of 2000. A property with 2 units and a total of 1000 square feet will be cheaper to maintain than a property with 6 units and 3000 square feet. The larger property will be more expensive to maintain when you are replacing the larger roof, painting the interior walls, etc. Also, more units mean more money spent on advertising, make-readies, and more appliances to repair.


* Property Location - Consider your proximity to the property. If you buy a property 30 miles away, over the course of a year you can spend a decent amount of gas money driving back and forth.


* Your personal management style - How often will you do maintenance work yourself vs hiring help? For instance, when a unit needs painting will you paint the rooms or hire a painter? Hiring professionals is definitely more expensive, but you have to be realistic about how much you will personally do, especially if you are looking at a lot of units.


Utility Costs
Be sure to check what the tenants pay for and what the owner pays for. This includes all the utilities and lawn maintenance. In addition, there may be owner expenses like parking lot lights and trash bin service.


Property Management Costs
If you are going to hire a property management company, definitely get their rates. We personally choose properties that we can manage ourselves.


Summing the Numbers
We wrote a investment property calculator which is located here http://www.escapesomewhere.com/real_estate_calculator.html Real Estate Calculators, Once you add all the numbers up, you often find the property has 0 cash flow or even negative cash flow. This doesn't necessarily mean you should not purchase the property. There are positive tax benefits to rental properties and depending on your situation, a property with technically 0 cash flow could still put more money in your pocket due to tax benefits. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow property could still be appealing.


The point here is that if you are buying a property with zero or negative cash flow, it's best to know beforehand instead of after the property has been purchased.


Ki Gray is a real estate agent with www.escapesomewhere.com (http://www.escapesomewhere.com)

[Dan Auito]

Standards and Strategies
By Bob Beckman

There are different standards and strategies that real estate investors use when evaluating properties. To get involved with a property, the following standards are judged for the worthiness of any rehab project:

"You should look for the worst house on a decent block"

Whether your strategy is to "flip" properties, or to hold them for their rental cash flow, it's important to be able to draw potential buyers, or strong potential tenants, as quickly as possible. With this in mind, you should look at properties on streets that are maintained properly. This does not limit you to higher end homes. There are many "blue collar" areas that properly maintain the condition of their homes and yards. However, a street that has poorly maintained properties or many vacancies do not lend themselves to fast turn around sales or well suited tenants. Always remember that this is an investment. You take on a large risk, and a lot of work as a rehabber. No matter how much loving care you put into your property, you can do nothing about the condition of your neighbor's property.

"You make your money when you buy a property, not when you sell it!"

Here is the key Purchasing Formula:

There are many formulas used for the successful purchase of a rehab project. It's important to use one. There must always be a comfortable cushion between the purchase price and the selling price of investment property. This cushion price will help you achieve a successful investment, even if you have repair cost over-runs, or hold on to the property longer than you had anticipated. Remember, every day that the property is not sold or rented comes right off your bottom line. The interest, taxes, insurance, and utility bills compound each day. Buying the property at the right price will protect you from Murphy's Law.

Mathematically the formula is as follows:
1) Establish an after repair value for your property.
(Get "area comps" and view each one. Pick out the property that has a street that is most similar to your house's street, and a structure that is closest to your house's structure, and then compare the square footage, amount of bedrooms and bathrooms that are all listed on the "comps." This will help establish a real fair market value for your property).

2) Multiply the ARV x .65
(This will give you 65% of the ARV).

3) Establish a comprehensive and accurate list of repairs that you plan to do to the property, and estimate the costs for each repair.

(This is important. If you are knowledgeable and experienced in doing repair work, you may not need help. If you are not experienced or skilled in this, find someone who is and have them draw up a plan. Even if it costs you a little money to get them out there, this could save you thousands of dollars).

4) Subtract the cost of repairs from the 65% value of the ARV.

5) To wrap closing costs into your loan, subtract an additional 10% of this number.

This should be the maximum price that you pay for the property! This is a conservative formula, and it usually works well. Remember, anyone can buy a property at close to fair market value, but with your costs and risks, you must do better!

[Dan Auito]

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In today’s complex insurance market and with the time constraints of the small business owner, we make it easy for you not to have to worry about your insurance needs. We can handle most every aspect of your insurance needs.


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[AIR]

thanks for the replies! That was the formula I was looking for

[Dan Auito]

Glad I could dig it up.

[AIR]

Interest rate @ 6.3% 30 year mortgage

$100,000 $ 618.97 a month

$105,000 $ 649.92 a month

$110,000 $ 680.87 a Month

$ 115,000 $ 711.82 a Month

$ 120,000 $ 742.77 a Month

$ 125,000 $ 773.72 a Month

$ 130,000 $ 804.66 a Month


Closing Costs: (not sure what we are missing here)

1% transfer tax: $1,100???
1 year Real Estate Tax: $2,500 or 208.33 per month

HUD seller assist??? 3%???


Rehab Cost: (what is the best way to finance the rehabbing budget?)
Could we borrow for more then we buy the property at. For instance if
we pay 100,000 could we borrow $110,000? Or do we have to borrow this
money a different way, ex. personal loan, hard money lender?

$10,000-$15,000 Budget

????: monthly payment

Other expense:

Homeowners Insurance: (not sure what the rate is?) or Renovators Insurance?

Mortgage Insurance: (not sure what the rate is?)

Utilities: Electric, Heat, Water: $100-$200 per month


Price
The Fair Market Value is $160,000

65% of $160,000 would be $104,000 ( I think somewhere in this range
should be our bidding price)


After closing costs our monthly expense will be:

1: Mortgage Payment= $620.00
2: Rehab Loan= ???
3: Homeowners or renovators insurance= ???
4: Mortgage Insurance= ???
5: Utilities= $150.00

The interest and insurance will eat our profit so obviously the longer
we have the property on the market the less money we make. If we bid
$100,000 + $10,000 for rehab costs= $110,000 if we sell at $160,000 we
make $50,000- minus listings commissions and monthly expenses. Ideally
we could revamp the property in one month and have it sold. I think we
should look at what our profit will be if it doesn't sell for a few
months and we have to carry the costs.

[brianb_cobbres]

This is a rehab for resale? If so you are WAY overthinking this.

[brianb_cobbres]

Okay, using your numbers. If the ARV is $160,000 and the rehab budget is $15,000 there here are the numbers.


Rehab ($15,000)
Interest ($4,480)
Carrying Costs ($3,200)
Realtor ($11,200)
Closing Costs ($6,005)


Total $39,885 but lets call it 40k to make the math easier.

You can expect the buyer to ask for closing assistance so deduct another 5k

So, 160,000-40,000-5,000= 115k and you have not made a dime yet so deduct what you want to make. At 10% profit you can only offer net 99k and it only goes down from there.

You can get more detailed if you want but you can set up a spreadsheet to do this simple analysis.

[AIR]

I dont understand how your getting these numbers? What time period?

[brianb_cobbres]

Is this a rehab for resale?

If so, I allow six months for expenses. For the record, I started with a very, very complicated spreadsheet but have cut it down to just what is necessary to quickly analyze a deal.

Specific questions.

[AIR]

:SM077: Well we were outbid today. We bid 105,000 and someone got it at 120,000. kinda ticked off but oh well, we are back at it looking for the next deal.

[ThreeRiversREI]

:SM077: Well we were outbid today. We bid 105,000 and someone got it at 120,000. kinda ticked off but oh well, we are back at it looking for the next deal.

That's the spirit! If the numbers didn't work at 121k, then it's time to say "NEXT!"

[AIR]

I am away on business and currently sitting in my hotel room scanning the web for some deals... somehow the HUD I was interested in that I was outbid on is now back up for sale. The price has also been lowered another 15K, if I bid before can I bid again now with a lower price? They have also added that the property is located on a FEMA flood plane, im guessing I will need to buy flood insurance any other risks besides the obvious???

[Debbie]

They have also added that the property is located on a FEMA flood plane, im guessing I will need to buy flood insurance any other risks besides the obvious???

Um...just curious...why would you want to consider the obvious?

[brianb_cobbres]

Being in a flood zone will make it much harder to sell and may make it difficult to finance. That may also explain why it is back on the market and at a lower price.

Please think about it a bit more before pulling the trigger

[Jim FL]

I am away on business and currently sitting in my hotel room scanning the web for some deals... somehow the HUD I was interested in that I was outbid on is now back up for sale. The price has also been lowered another 15K, if I bid before can I bid again now with a lower price? They have also added that the property is located on a FEMA flood plane, im guessing I will need to buy flood insurance any other risks besides the obvious???

air,
Sure, you can bid again, with a lower number, since the price has dropped.
Frankly, as long as hud nets, what the website says they want to, you'll get it, unless someone else comes in before you.

As for the fema flood plain issue, do more research.
It is in one, since they disclosed that, and yes, this means you'll need a flood certificate, and flood insurance, etc, when buying with financing.
The thing is, this does not mean it will flood, so just take those expenses into the overall, buy price, versus profit equation.

I grew up in a river valley, our river did flood, but never anywhere near my house, we were at the middle of the valley incline.
And our house was also in a fema flood area.
I also bought and sold a ton of houses in my village and surrounding cities, also in flood plains.
As long as they were not on the rivers edge, or places where I had personally seen historical flooding, and the numbers worked, they were still good buys.

Like I said, just take into account the expense of having a property in the flood plain, and make sure it did not go back to hud, because it was a chronic flood victim.

Good luck, and let us know how it turns out,
Jim FL

[AIR]

air,
Sure, you can bid again, with a lower number, since the price has dropped.
Frankly, as long as hud nets, what the website says they want to, you'll get it, unless someone else comes in before you.

As for the fema flood plain issue, do more research.
It is in one, since they disclosed that, and yes, this means you'll need a flood certificate, and flood insurance, etc, when buying with financing.
The thing is, this does not mean it will flood, so just take those expenses into the overall, buy price, versus profit equation.

I grew up in a river valley, our river did flood, but never anywhere near my house, we were at the middle of the valley incline.
And our house was also in a fema flood area.
I also bought and sold a ton of houses in my village and surrounding cities, also in flood plains.
As long as they were not on the rivers edge, or places where I had personally seen historical flooding, and the numbers worked, they were still good buys.

Like I said, just take into account the expense of having a property in the flood plain, and make sure it did not go back to hud, because it was a chronic flood victim.

Good luck, and let us know how it turns out,
Jim FL

Thanks for the reply Jim but as quickly as the house was back up for sale it has been sold. This is still excellent info for deals in the future.