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Insider Look: Deal Analysis of Rental Property #5

As of August 2022, Selenid and I closed the deal on our fifth rental property! We closed on this one about 4-5 months after our fourth investment property which you can learn more about here.

We are super excited about this property and actually got it rented out and cash flowing less than 24 hours after we closed! This has kind of become the new norm for us.

This is a property that was brought to us by our investor agents.

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

It is a large duplex with a 3 bedroom upper unit and 3 bedroom lower unit. We loved it and then loved it even more after our analysis. So, we put an offer in and got it!

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 property 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 $180,000; we knew this was listed wayyyyy below market value and was done so to incite a bidding war by the listing agent. We estimated we would need to pay around $235,000 to get the property and get the cash flow that would make it worth it. This was based on our experience with our fourth investment property as well.
  • We estimated about $5,000 in necessary renovation/rehab. Really there was nothing much to fix since it was all just renovated. But we have learned through our mistakes to overestimate.
  • The units were both vacant. But previous rents were around $1100/month. We err on the conservative side for our estimates initially.
  • We got our mortgage terms and closing costs for our lender. Our interest rate increased a bit to 6%, as rates have recently risen.
  • 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 3 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 only an estimated 10.4%!

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 pretty turnkey. Very similar and maybe even more turnkey than our 4th property. 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!

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 who did a fantastic job at renovating and renewing the property. 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 and conservative get $1200/unit. Our second rental property is just a few streets away so we had good rent estimates from that.

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 $15,000 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.

We also actually put an escalation clause in up to $235,000. We didn’t want to pay more than we needed to.

In the end, it came down to a few offers including ours and we got it at the top of our escalation clause.

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 two units about 5 days before our closing. In the ad, we stated we would be having an open house for viewing in the 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 20 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 units for $1275 each. Both parties renting the units had pets for which we add a $25 pet rent. So the actual rents are $1300/month.

Once we selected tenants, we just needed to do a few minor touch ups ourselves like:

  • Sealing upstairs countertops
  • Rekeying the locks
  • Installing lock boxes to minimize lock out calls

This in total cost around $1800.

In the end, our deal analysis looks like this:

rental property

Final cash on cash return is equal to 16.8%!

One last aspect to appreciate (pun intended)…

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

investment 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…

This property also illustrates the importance of your team and connections in real estate investing.

While we were in closing, we actually were contacted by the seller of this property. Our attorney is the one who actually put us in contact. It turns out she has two more properties in the area that she may be looking to sell off market in the next year…

We had some great conversations and have been in touch. At this point we will see what happens. But you never know when and how opportunity may knock…

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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