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Insider Look: Deal Analysis of Investment Property #3

Selenid and I closed on our third investment property just a few weeks ago. Honestly, we weren’t quite expecting to get another property so close to our second one. But our agents had a great off market deal that they presented to us. We did our due diligence and ended up having our offer accepted. It is a 3 units property in the city of Buffalo with three bedrooms and one bathroom in each apartment. It’s time to share an insider deal analysis of this property like I did for our first and second one!

First, a primer…

As always, 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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  • 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 and it more than 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:

insider deal analysis

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

(Remember, this was an off market deal. So we were only competing with ourselves at this point. This is a HUGE advantage that we received as a result of the great relationship that we have developed with our investment agent!)
  • The asking price was $202,000; we felt this was reasonable for the area and property.
  • We estimated about $2,500 in necessary renovation/rehab. Just minor cosmetic stuff. In fact, since the units were already rented out (as you will see), these repairs wouldn’t need to be done immediately.
  • The units were all rented out with long term tenants. Based on our currents rents, our gross monthly rent for all units each month would be $3,150. We asked for and received evidence that the tenants were current with the rent payments.
  • We got our mortgage terms and closing costs for our lender. Our interest rate increased a bit to 4.2%, likely as we bought so close to our prior property.
  • The insurance terms were from our insurance broker and the taxes were from the county open access database.
  • Utilities were overestimated as we would only be responsible for water. Each tenants paid their own gas and electric.
  • Property management and turnover fees were based on known fees based on our prior properties using self management with Hemlane as our management platform.
  • Keep in mind that we 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. 
  • Vacancy rates and maintenance costs are general estimates.

Based on this, the cash-on-cash return was only an estimated 28.4%!

Based on our goal of 10% or greater cash-on-cash return, this was a no-brainer!

But we still had to look for hidden value…

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:

insider deal analysis

Let’s review what changed.

  • First, the previous owners did a nice job of getting pretty optimal rents. Based on our knowledge as research into the area (which was a new part of the city for us), we estimated that we could raise them ~$250/month total. We would do this when we re-upped our current tenants leases or got new tenants.
  • From our experience, we knew that we could bill back utilities to the tenants. However, we decided to cover water only in this property for simplicity sake. A more accurate estimated is $20/month total.

By tapping perceived hidden value, we increased our estimated CoC to 33.2%. Wowza!

Needless to say, we were excited.

After running the numbers, we quickly placed our offer which was immediately accepted. Talk about a nice change of pace compared to when we were competing with a bunch of other investors!

Many of you will rightly wonder why the owners were selling the property. Well, we got some of the story from our agents. The owner is a pharmacist who became overwhelmed during COVID. He wanted to cut down on work and buy a place in Florida. He then found a place and his ability to buy it was contingent on selling this property. Therefore, it was a bit of an emotional decision for them.

We benefited from that emotional decision. Like I’ve said many times before, the local real estate market is inefficient. That is why investors like me and Selenid can come in and get such great returns from our investments.

We moved into the closing phase, but we did something different

Normally, we would have moved into an inspection phase after making our offer with an inspection contingency.

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

However, unlike our other 2 properties, we actually did not include an inspection contingency on this property. The reason was that we felt comfortable with the state of the property after a careful review with ourselves (given our increased experience) and our investor agent (who owns >100 doors).

This is a risk. It is a calculated risk that we took knowing that the owner wanted to quick process and did not want to deal with a long negotiation.

I’ll keep you posted on how this works out…

We then got a very nice surprise…

Our insurance agent contacted us. We have all of our insurance (home, auto, umbrella, investments properties) bundled with one carrier to get the best rates. She had run our situation by a bunch of other insurance companies and found one that had wayyyyyy better rates for investment properties.

So, we changed insurance carriers. Instead of paying ~$3,600/year for this property, we would pay only $1,324. That’s a huge change!

This again highlights the importance of having a great investing team and working with an independent insurance broker!

The deal now looked like this:

cash on cash investment property

So the CoC went up to 36.7%!

A new addition to the deal analysis

Some of you may have noticed a new number included on my deal analysis spreadsheet:

forced appreciation

This number represents the value of the property based on an income based model after forced appreciation using capitalization rate and NOI. If this seems confusing, read this post!

I usually include this number in my calculations personally but haven’t always put them in these posts.

But I want to make sure to include it here because it demonstrates the dramatic impact that forced appreciation can have on your property as well as just illustrate again how real estate investing, done wisely, is a wealth accelerator!

Take Away(s)

I hope that this exercise has demonstrated again 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.

automating your real estate investments

Again, the reason for this is that the real estate market is not efficient. In this case, the CoC met our goal from the beginning. But as we’ve seen with property #2 especially, this is not always the case.

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. 

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. 

The other thing that this deal really illustrates is just how important it is to have a great investing team!

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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    The Prudent Plastic Surgeon

    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]

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