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Insider Look: Deal Analysis of Investment Property #2

As many of you know, Selenid and I recently closed on and rented out our second investment property. It is a duplex in the city of Buffalo with three bedrooms and on bathroom in each apartment. You may remember this property from my case study of how our passive hustle set the foundation for long term gains! But now it’s time to share an insider deal analysis of this property like I did for our first one!

First, a primer…

Before going into the deal analysis itself, I’d recommend you read this post on my analysis strategies first if you haven’t already. 

But, I’ll give a quick recap as a refresher.

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Check out the bonus module on real estate investing in my course, Graduating to Success!
  • I invest in multifamily cash flowing rental investment properties using a Buy, Fix, Rent, and Hold model
  • To screen investment properties, I use the 1% rule (Monthly rent/Purchase price >/= 1%)
    • If it meets criteria, I move forward to more analysis
    • If it doesn’t meet criteria, I move on to another property
  • To analyze investment properties, I use cash-on-cash return (Annual Net Income/Money Out of Your Pocket >/= 10%)
    • If it meets criteria, I lock up the property by placing an offer based on your criteria
    • If it doesn’t meet criteria, I move on to another property
  • To valuate investment properties, I use NOI (Annual Income not including financing)
    • Estimated Sale Price = NOI/X% (based on local market data, usually 8%)

We are going to pick things up in the analysis stage. My wife and I had already screened this property (which we ultimately bought) and it met the 1% rule. So we moved forward for further in depth analysis.

And now for the property deal analysis!

Stage 1 – Initial Investment Property Analysis

Here’s what our initial analysis looked like:

initial property deal analysis

This analysis was based on the following assumptions that we made after walking through the property with our investor real estate agent:

  • The asking price was $185,000; however we knew that it was severely underpriced and would go for closer to $190-200K. 
  • We planned an asking price of $196,500 since we would also require an inspection contingency. The higher price made our offer more enticing.
  • We estimated about $9,000 in necessary renovation/rehab. There were no appliance included so this accounted for most of the predicted cost.
  • Based on our agent, it was estimated that we could get rents of $1000 for each unit.
  • We got our mortgage terms and closing costs for our lender. Notice that our interest rate of 3.5% is much better than the one we got on our initial property. This is because our credit score improved greatly.
  • The insurance terms were from our insurance broker and the taxes were from the county open access database.
  • Utilities were estimated from the utility companies (they will give you an average of past month rates for the property).
  • Property management and turnover fees were based on a traditional property management company that we had interviewed and liked.
  • Vacancy rates and maintenance costs are general estimates.

Based on this, the cash-on-cash return was only an estimated 5.4%

Based on our goal of 10% or greater cash-on-cash return, we should have walked away from the property. However, we had yet to consider the hidden value of the property. 

Hidden value is the concept that, by making your property more profitable (increasing income and/or decreasing expenses), you can increase the value of the property and even force appreciation. 

This is a very powerful concept. The real estate market is inefficient. This means that the business of local real estate is not run as well as it could. That is what allows you to come in, buy a property, make it run efficiently by tapping hidden value, and increase its value!

However, this first, most conservative estimates did demonstrate that the property should have a positive cash flow in the worst case scenario, even if it was only 5.4%. This is a good thing.

Stage 2 – Investment Property Deal Analysis including Hidden Value

This is what our analysis looked like after we took into consideration hidden value that we identified in the property:

property analysis hidden value

Let’s review what changed.

  • First, we believed that the rent estimates we received were slightly under market value. But we didn’t think they were under by very much, maybe $50 each or so. We decided not to bake this into our new analysis so we remained conservative.
  • From our experience , we knew that we could bill back utilities to the tenants, decreasing our monthly utilities expenses to $0.
  • We also knew from our previous experience with the first property, that self managing with a platform like Hemlane is super easy (contact me for a referral). (Here is a primer of successfully self managing a property.) So, our property management fee dropped to 0.1% ($2). We also knew leasing costs for each unit would be less, around $650.

By tapping perceived hidden value, we increased our estimated CoC to 12.9%. Now, the property met our criteria.

Based on our strategy, we thus decided to move forward and make an offer

We offered $196,500 with an inspection and financing contingency and it was accepted!

More on that process here.

Related Post:
How To Actually Buy A Real Estate Investment Property

We now moved into the due diligence period and scheduled the inspection.

What changed at this stage?

Actually, nothing. The inspection uncovered some issues like leaky pipes, a missing part of the water heaters, etc. We asked for a $10,000 price credit. The sellers actually just agreed to make all the repairs themselves before the close. They ultimately did all of this except for make 2 minor repairs that we ended up taking a $500 credit for.

So the CoC remained at 12.9%!

Final Stage – Analysis after Renting Out Units

final property deal analysis
  • We advertised the top unit for $1050/month
    • The unit rented for $1200/month
    • We then added $50/month for off street parking and $25/month for pet rent
    • So, the total rent came to $1275/month!
  • We advertised the top unit for $1050/month
    • The unit rented for $1200/month
    • We then added $50/month for off street parking
    • Total rent came to $1250/month!

In this final property deal analysis, our cash-on-cash return is now 21.5%!

Take Away(s)

I hope that this exercise has demonstrated how property deal analysis is critical for success as a real estate investor. But, it is also a process and evolves through the acquisition of a property.

The other important take away is that your initial cash-on-cash calculation likely will not meet your 10% goal. 

Again, the reason for this is that the real estate market is not efficient. Your CoC should reach your goal after taking into consideration tapping hidden value. This can feel scary because you have to take a leap of faith. But, the important thing is that you are conservative in your estimates. 

automating your real estate investments

Also, as long as the property is cash flowing in your most basic estimate before taking into account tapping hidden value, then you are ok even in the worst case scenario. 

In my case, we knew that even if everything fell through in the worst way, we could expect the cash flow to be 5.4%. In this worst case scenario, our renters would still be paying our mortgage every month and some cash would still be going into our pocket. 

But beyond that, a still conservative estimate after accounting for hidden value gave us our goal CoC of at least 10%. We knew that if we reached this CoC, we would be ecstatic. 

Doing this built multiple layers of cushion into our analysis.

As you can see we even exceeded our estimates by aggressively tapping hidden value and forcing appreciation so that our CoC is over 21%!

And soon we are closing on our third property which has an expected CoC above 22%!

Ready to learn more about investing in real estate? Check out these posts!

What do you think? Have you invested in real estate? How have your investment done? Do you use the same analytics as I do? Let us know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

    4 thoughts on “Insider Look: Deal Analysis of Investment Property #2”

    1. If you listed the apartments to rent for $1050, how did you end up renting them for $1200? Did you relist them at a higher price because you received a lot of initial demand?


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