As of August 2023, Selenid and I closed the deal on our 8th rental property! 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!
A quick lesson in patience
And I will first note one thing in particular before going deeper into the rental property analysis. Astute followers will take notice that we bought this property about 9 months after buying investment property #7. This is a much longer time frame than typical?
Well, because the market has been less favorable. Home prices continue to stay a bit high. And interest rates are rising. This all squeezes cash flow. Thus, less properties meet our goal 10% cash on cash return. However, we kept looking and found a great deal here! So always keep your eyes open, even in “bad” markets!
Anyway, we are really excited about the potential of this property.
The property itself is a large duplex with a 3 bedroom upper unit and 2 bedroom lower unit. It is just down the street from our 3rd investment property. It also had been run as an STR. And while we planned to use it as a long term rental, this meant no long term tenants and good upkeep!
So we were excited about the potential when we found this one.
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:
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 $159,900; we knew this was listed way below market value based on our other properties. Likely this was done to drum up a bidding war. We estimated we could get the property for around $184,500.
- We estimated about $15,000 in necessary renovation/rehab. Both the upper and lower vacant units had been recently renovated but we knew we would add washer/dryer hook ups to each unit to increase value and would likely replace carpet for flooring in one unit to start.
- We conservatively estimated rents of $1000 for the 2 bedroom unit and $1100 for the 3 bedroom unit based on our knowledge of rental prices in the area.
- We got our mortgage terms and closing costs for our lender. You can see that the rate is much higher than our other properties at >7%!
- 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.) We also knew leasing costs for each unit would be less, around $600.
- Vacancy rates and maintenance costs are general estimates.
Based on this, the cash-on-cash return was an estimated 10.3%!
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:
- This property was somewhat turnkey. However, we felt we could really increase rents by doing some cosmetic fixes and added in unit washer/dryer hook ups. Both units also had central air conditioning which is very rare for Buffalo so that was a big bonus.
- 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:
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.
- Regardless, as we did more research, we felt pretty strongly that our initial rent estimates were overly conservative. We estimated we could easily get $1200 for the upper unit and $1100 for the lower unit.
At this stage, our expected CoC increased to 13.2%!
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, our agents did a great job and their experience and reputation played a role in us getting the property.
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 3 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 after 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 25 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 upper unit for $1250 and the lower unit for $1150.
And so far, we elected to replace carpet with flooring in the lower unit and install washer/dryer hook ups in each unit. These repairs have come in slightly under our initial estimates.
In the end, our deal analysis looks like this:
Final cash on cash return is equal to 15.0%!
One last aspect to appreciate (pun intended)…
Adding a new number to my deal analysis spreadsheet:
This highlighted 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…
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 (albeit barely) 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?
- How To Actually Buy A Real Estate Investment Property
- Powerful Case Study of Passive Hustle in Real Estate Investing
- How to Pick the Right Real Estate Market
- The Complete Physicians’ Guide to Real Estate Syndications
- Real Estate Investing: The Good, The Bad, and 50% Returns!
- How to Win the Fight Against Analysis Paralysis
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!