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Insider Look: Deal Analysis of Rental Property #7

As of November 2022, Selenid and I closed the deal on our 7th rental property! We closed on this one about 1 month after our 6th investment property which you can learn more about here. Let’s take an inside look at our deal analysis of this rental property.

Please also note that screenshots of our financial property analyses are adapted from the Semi-Retired MD calculator from their course that Selenid and I took. More info here!

We are really excited about the potential of this property. Uniquely, this property came with 1 long term tenant already in place. Even more interesting, this tenant is a friend of our investor real estate agents! We will definitely share how that plays into things as we go on…

Related Post:
5 Important Questions to Ask Your Investor Real Estate Agent

Anyway, the property itself is a large duplex with a 3 bedroom upper unit and 3 bedroom lower unit. It is in the same area as 5 other of our rentals and it the largest of them all. So we were excited about the potential when our agents brought it to us.

rental property

With that said, as I usually do, I want to walk through each stage of the deal with you all.

First, a primer…

As always, before going into the rental property 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.

  • We 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%)

Remember, you can download our free Cash Cow app on iPhone or Android here to help you analyze deals on the go!

We are going to pick things up in the analysis stage. My wife and I had already screened this property when our agents sent it to us and it more than met the 1% rule. So we moved forward for further in depth analysis.

And now for the rental property deal analysis!

Stage 1 – Initial Investment Property Deal Analysis

Here’s what our initial analysis looked like:

rental 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 $190,000; we knew this was listed close to market value based on our other properties. We estimated we could get the property for around $185,500.
  • We estimated about $5,000 in necessary renovation/rehab. The upper vacant unit had been recently renovated and the lower unit with the tenant was in good shape.
  • As mentioned, the lower unit was rented to a friend of our realtors in a very random coincidence. She paid $750 for rent currently. We planned to increase this but left as is for our conservative estimates. Then, based on recent rentals of ours in the area, we conservatively estimated we would get at least $1200 for rent of the upper unit.
  • We got our mortgage terms and closing costs for our lender.
  • The insurance terms were from our insurance broker and the taxes were from the county open access database.
  • Utilities were estimated based on our experience as we would only be responsible for water. Each tenants would pay 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 our other 6 properties, 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% ($4). We also knew leasing costs for each unit would be less, around $500. 
  • Vacancy rates and maintenance costs are general estimates.

Based on this, the cash-on-cash return was an estimated 11.2%!

Based on our goal of 10% or greater cash-on-cash return, this met our criteria. It didn’t obliterate it, but this represented a solid opportunity.

But we still had to look for hidden value…and a sidebar about turnkey properties:

  • This property was somewhat turnkey. The upper unit had just been redone and the lower was very well maintained by a long term tenant. Now usually we don’t go for turnkey as much of the value is already taken out by the flippers or, in this case, the previous owner. But that is why deal analysis in this way is so important. We found that even despite this fact, we could get this property to cash flow really well!
  • The other point is that even though it is pretty “turnkey,” things always turn up that still need to be fixed. We have learned from our mistakes on this! So we still overestimate repairs.

Stage 2 – Rental 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:

deal analysis

Actually, not a ton changed.

  • That’s again because a lot of the hidden value in this property had been tapped by the previous owner. This is a downside of buying turnkey properties in general. So, our excitement with the property is really just based off of the initial cash flow rather than a hidden cash flow after tapping into hidden value. This is why our selection of a purchase price that worked for the cash flow we wanted is so important!
  • Regardless, as we did more research, we felt pretty strongly that our initial rent estimates were overly conservative. We estimated we could easily get $1300 for the upper unit. Our second rental property is just a few streets away so we had good rent estimates from that.
  • Speaking with our investor agents who happened to be friends with the lower tenant, we felt comfortable that she would be okay with a rent increase to $950. She is a great tenant and takes excellent care of the place. Plus she has been there a long time and we wanted to be respectful of this.

At this stage, our expected CoC increased to 16.5%!

We placed our offer and learned that there were many others

First, we made our offer more competitive by offering $10,000 in escrow or earnest cash. This is basically the money we put down once the contract is signed. Putting a larger amount signifies that you are very serious about the deals and have good cash reserves, etc. You can see other ways that we strengthen our offers to have a better chance here…

In the end, it came down to a few offers including ours. Honestly, the tenant ended up having a say with the owner of who bought the property. And her relationship with our realtor friends and thus us, helped get her in our corner.

We were thrilled!

Rental property deal analysis after closing

I think one of our super powers is to get an investment property rented out quickly after closing to get the cash flow started.

In this case, we started advertising the upper unit about 7 days before our closing. In the ad, we stated we would be having an open house for viewing in the afternoon/evening on the day of our closing.

It was easy to get these ads out because the sellers had included great pictures in their listing. So we just used these pictures in our ads. It doesn’t always work out this way.

We got about 30 hits from interested tenants that confirmed. About 10 of these actually showed up to the showing. We had multiple interested parties apply online and chose who we felt were the best fits.

And, we advertised the unit for $1300 each. The couple we rented to had pets for which we add a $25 pet rent. So the actual rents is $1325/month.

We also worked with the lower tenant to get the rent raised to $950 after 1 more month at the $750 rent. Our agents helped with this transition given their mutual friendship.

And so far, repairs have been less than anticipated so we dropped our estimate from $5000 to $2000.

In the end, our deal analysis looks like this:

rental analysis

Final cash on cash return is equal to 17.8%!

One last aspect to appreciate (pun intended)…

Adding a new number to my deal analysis spreadsheet:

investment property analysis

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!

So, take a moment to look through each successive deal analysis for this rental property. Pay attention to how the property value increased as we optimized the property. This is the power of forced appreciation…

Actually, another important side note about this rental property…

Once again, this property also illustrates the importance of your team and connections in real estate investing.

Our real estate agents once again helped us get this great deal because of their connections…this time with a tenant. You never know!

Take Away(s)

I always like ending with some takeaways…

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.

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 investment 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?

You can also download our free Cash Cow app on iPhone or Android here to help you analyze rental property deals on the go!

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].

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