Financial Freedom Fighters
Step into the world of real estate investing with your hosts, Jacob and Mike. Join Jacob, a W-2 tech employee trying to escape the rat race, and Mike Magno, a top 1% Cleveland realtor, as they share real stories and valuable insights from their journey towards financial freedom.
Financial Freedom Fighters
EP #27 - How To Analyze a Rental Property (Cleveland Duplex Example)
Join Jacob Sandoval and expert realtor Michael Magno as they dive deep into the intricacies of analyzing rental properties, using a real Cleveland property as their case study. Learn how to filter properties, assess their pros and cons, and calculate potential returns using a rental property calculator. This episode provides tactical tips for first-time investors to set their expectations, budget appropriately, and make informed decisions for long-term success.
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This is the Financial Freedom Fighters Podcast
jacob:Welcome everybody to the financial freedom fighters podcast. I'm your host, Jacob Sandoval, AKA cash flow saga. I have with me, my co host, he is the best realtor in Cleveland. Realtor, Michael Magno, Mike and I have a very fun chat. planned for today. And the episode is going to be how to analyze a rental property. We're going to go super, super in depth. We're going to be focused on the market of Cleveland, Ohio. Obviously a market that Mike is an expert in a realtor in a market that I've invested in as well. So you have two people experienced. With investing in Cleveland, we're going to pick a property that's on the market right now on Redfin on Zillow. Mike and I are going to talk about the pros and cons of this particular property. We're going to talk about Cleveland at large, right? How to think about investing in Cleveland. What are the areas that Mike recommends focusing on? Um, and then we're going to pick a property that's literally on the market right now, and Mike and I are going to live analyze the deal. Uh, we're going to pull up a rental property calculator. The one that I've built. We're going to plug in some numbers. We're going to analyze all of the metrics, all the cash on cash return. And then at the end, we're going to say, is this a go or no go? And we'll kind of like summarize all the different aspects. So this is a very tactical episode. another thing too, is we are going to be sharing our screen. We're going to be pulling up the map of Cleveland. We're going to be pulling up the rental property calculator. If you are listening to this on audio, I highly, highly encourage you. pull the episode up on YouTube on my YouTube channel at cashflow saga. So you can see Mike's beautiful mug and we're just going to be live analyzing the deal. So I really want this to be a valuable episode for you let's just hop right into the topic for today. The first thing I'm going to do is I'm going to pull up a map of Cleveland. Okay, Mike. So all I've done is I've gone to redfin. com. It could be Zillow doesn't really matter. I prefer Redfin. I just like the interface a little bit more, but you know, you can use Zillow as well. All I've done is I put in Cleveland, Ohio, the market that we love and know. And I just have for sale property. So we're looking right now, all the properties that are for sale in Cleveland, but the first thing we're going to do is we're going to Mike filter down to our buy box and for the listeners right now, if you don't know what you're looking for, Mike, right. you're never going to find it. let's talk a little bit about for the first time buyer in Cleveland, what is a buy box that typically makes sense for them? And we'll just kind of chat about that. And then we'll input that directly into the search. So Mike, what is a typical buy box that you kind of recommend?
mike:so it will vary a little bit. typically what I will do is it's going to be based on how much capital that someone's willing to deploy into the market. one of the reasons I asked those questions consultations with people is understanding one, you know, their risk profile, how much they're willing to spend. Um, cause that enables me to kind of direct them. And here's, here's a good example with some numbers. If someone says, comes to me and says, Hey, I want to buy a or B class multifamily for 250, 000, I can quickly ascertain that that's just not going to happen in our market.
jacob:elaborate a little bit? Why
mike:We don't really even sell much in like what I would consider to be an a area, right? And a area for me is going to be very suburban. And it's going to be very expensive, right? You're talking about the best school districts. you know, you're talking about the best amenities and you're just not going to buy properties. Like where I live, for example, is an a, a class community. I live in a, an area with one of the top school districts in the entire state of Ohio. And you're just not gonna, you're not going to find investment properties in my area that makes,
jacob:Mike is a Mike's Mike's a little bougie. Mike's a little bougie.
mike:bougie. I'm a little bougie. Yeah. but that being said, you know, what you have to do is you have to kind of get people to understand. Cause the neighborhood grading is also very, very subjective, right? There's no, there's no, There's no clear cut criteria to determine what is an A class, a B class, a C class, and the D or worse, right? I have my own feelings on what that looks like. you know, a lot of it surrounds schools, you know, I get, I get that theme a lot from people. that's part of it. part of it's going to be areas where you feel safer. Part of it's going to be. Maybe neighborhood amenities, like what's going on in the neighborhood? Is, is there, is there restaurants? Is there nightlife? Are there jobs? You know, do people want to live there, right? So neighborhood grading, very, very subjective. let's just use Lakewood, Ohio, as an example, Lakewood to me, very solid B, B class area or better, depending on which side of Lakewood you live on. But Lakewood's a very hot area. The typical two family in Lakewood sells for between three and 400, 000 right now. So, you know, so if someone comes to me and says, Hey Mike, I want to buy multifamily and I want it to be B class or better, and I want it to be 250 or less, that's going to be very difficult to achieve.
jacob:Yep,
mike:So that's why I always kind of start with, let's, let's start with the end in mind and reverse engineer what we want to do. So for that person who comes to me and says, I want, um, you know, to buy that, I might, I might then suggest we look for. a single family in a nicer area, right? Because you could buy a single family in some of these B class areas and it would probably fall in a say 175, 000 to 200, 000 range and something that's going to be in a better school district and it's going to have a good renter pool and you're going to have a strong price to rent ratio. Um, so there are different, different tactical ways you can go about it.
jacob:absolutely. So I think everything that Mike said is is very important. For you, the listener to understand, you have to come in with the right expectations, Just because Cleveland is a lower price market, than maybe some other markets that you're used to. You have to really calibrate your expectations and your goals, So like Mike is saying, you want to be in the best school, school districts, in the best neighborhood, you're just not going to find a multifamily property, 250, 000. Now, if you have the right expectations and you come to Mike and say, look, I understand that Lakewood is going to be a nicer area. I understand that I'm going to be probably trading off cash flow for maybe more appreciation and I'm okay with that. And you come with the right budget, then Mike certainly can help you find maybe a multifamily property in Lakewood for 400, To four 50, right? And so there's expectation setting, but for the, for the purposes of this call, Mike, I want to go ahead and say, let us focus on a price range I'm going to say 150, 000 as a minimum, 150, 000, the minimum to 200, 000. As a maximum, right. And so for me, for me personally, I like to have a buy box that is fairly tight, you know, like I think there's probably different things that different schools of thought here, you know, maybe you want to have a wider buy box. Buy, buy box in terms of a hundred Ks, you see more deals. Um, but for me personally, I like to have a pretty tight buy box. Um, so that I get really used to seeing the types of deals in that buy box and understanding the quality and just get really used to seeing that because there's a vast, vast spread you can go to a hundred K Mike in terms of like the difference. And you're going to see so many different properties. So for me personally, I like to keep the buy box tight. Now, Mike, I personally like to have a floor here. And I like putting it a min because I find that when you kind of go below a certain point in Cleveland, and maybe you can speak to this a little bit more, you just might be seeing properties that might seem tempting on paper, but they just might not be the properties that you want. And so for me personally, I just like to set a floor and I've been looking at properties in Cleveland long enough to know that. I just don't like what I see most of the time when they're below that kind of 150 threshold. And for me personally, that's where I like to live. But maybe you can comment on that in terms of like people probably come to you all the time and say, Hey, I want to buy a 90, 000 house in Cleveland. Um, and I want to cashflow a ton. but you know, the expectations again, might not be aligned there.
mike:Right. Yeah. No, um, the 1 50 number is a, is a good number to start with. Um, especially for those are looking multifamily. in my experience in the neighborhoods where a vast majority of our investor clients are investing. You're going to be somewhere in that 70 to 80, 000 per unit price point. So if it's a duplex 150 to 160, you know, and you can do the math from there. So, and that's kind of a, it's, it's kind of the floor and you'll see, I mean, anyone can get on Zillow or Redfin and, um, pull up these properties at different price points and thumb through pictures, you know, and they'll figure it out pretty quickly. On what they're looking at and they can see and um, so you you'll you'll find you'll figure it out quickly that you're at a good That's a good price point to start.
jacob:Yeah. Yeah. And just to kind of talk through, if you're listening on the podcast right now, I'm a, I'm in red fan. Um, one thing I did, Mike, while you're talking is I actually removed the Cleveland, um, filter just because as you were talking about Lakewood. Lakewood is technically not in Cleveland, Ohio, right? And there's a lot of suburbs around Cleveland. So just for you, the listener to be aware, there are a lot of suburbs surrounding Cleveland that you might want to invest in. So if you're filtering on Cleveland, Ohio, it's technically, depending on the platform, it's going to filter out places like Lakewood, like Parma, like Akron and things like that. So just for you to be aware, I removed the Cleveland filter just so that we can capture kind of the broader area. So, okay, cool. we've dialed in the buy box of 150 to 200 K here, and we've gone from a thousand properties on the market, um, to just 300 now. So we're already filtering down what we're looking for. And this is exactly what we want, right? We don't want to be looking at everything under the sun. Cause it's going to be, it's going to take a lot of time to obviously analyze all those properties. So the next thing that I want to go to Mike is the home type. So Cleveland. Is a market that you can get, you know, a single family house, and that might be your strategy. You could also be small multifamily, That could be what you're hoping to accomplish here for the purposes of this call. And I think there are merits to both single family and multifamily. Cleveland is a great small multifamily market. So for the purposes of this call, Mike, I want to dial in on multifamily. So I'm coming into. the home type filter here on Redfin. And again, this is all part of the buy box people, right? You have to have this dialed in. So when you have your first conversation with Mike, you know, exactly what you're looking for. I'm I want 150 to 200 K multifamily. And so we're selecting that right now. And look, it's, we've already dialed down to 47 homes. So just. Filtering on price, just filtering on multifamily. We're now down to 47 homes in Cleveland that fit the two criteria that we have so far. So. We'll kind of keep going because we're not done with the buy box here. We're not done with the buy box here. The next thing that we want to do is specify obviously the bed and bath count. So if you're talking about a multifamily, this is pretty straightforward. But for me personally, Mike, from what I've seen, you have a lot more success in multifamily when the units are at least two bedrooms, or more, The single bedroom units. I think you probably have a different, you have a more transient tenant. Um, you probably won't get them to stay as long. And I just find that it's probably better to have at least a two bedroom unit. So if we're talking about multifamily. I'm well, I'm looking for beds of at least four or more, Because if you have two, you have a duplex, let's say that, right? You have two bedroom, each side, it's at least a four bedroom house. So all I've done here folks is I'm just specifying that I want to rule out because I've already selected multifamily. I want to rule out any multifamily that is just single bedroom units in the multifamily property. Right? And so that's what I'm doing here. See what that does. And it only filtered out one house. So, or it filtered out like three houses there. So cool, Mike, this is where we are going to play in terms of the properties that we're going to pick to analyze. And we're probably going to have time to do one because we're going to go super, super deep here. Um, another thing to point out for the listeners, right? There is more to the buy box. That you can play with. And we're not going to dive super deep into this, Mike, but you know, you might have some opinions on what the square footage might be, right. You might have some opinions on, you know, you want to filter for air conditioning, maybe you do want a basement, all this type of stuff. Or another thing that you can filter for is, um, a year built, right. Maybe you don't want a property that's built in 1900. Maybe you want to focus on properties You know, 1960s or newer, right? Just different things like that. So I'm just pointing out to the listener that there are different things that can construct a buy box. You don't want to get too, too focused on the filters here. Cause you might actually miss things that could work for you, but I just want to point out that there are other things. And so that's all the buy box is folks. You were just specifying the criteria of what you want to look at. And then you put that in a red fin, you set up that automated search. Mike is also going to set you up on the MLS for an automated search. He's also going to do a very similar thing, setting your buy box in, but you want to get this deal flow. You want to be seeing these deals. You want to be an expert on these deals so that when the deal comes up and you know, it's the one it's because you've looked at so many deals that fit this criteria. That you're going to be an expert, right? So that's kind of what we want you to get to is to be really comfortable with your buy box so that when that deal hits your inbox. You already know it's the one and you'll be the first to offer on that property because you've seen so many like it. And so that's the competence that we want you to get to so that you have more confidence pulling the trigger because Mike, as we, as we found out, right, you know, speed to offer is a critical, critical component of landing the deal. And every single deal that I've gotten specifically in Cleveland, I was probably one of the first to offer on that property. And that just goes a really, really long way. So don't discount speed, right? But you can't get to that speed to make that offer unless you have the confidence to analyze the property, which Mike and I specifically are going to talk about. And so Mike, now that we have the, the, the buy box filtered down, I want you to speak a little bit on, okay, I'm looking at this map, right? It kind of spans from the West side of Cleveland to the East side of Cleveland. all the way down to kind of Garfield Heights and things like that. And so when you are, you know, you obviously counseled me in the very beginning that You want to focus likely you likely want to foot. There's a very different, there's a big difference within the east side of Cleveland and the west side of Cleveland. So I want you to talk a little bit to the listener. Maybe they're not as familiar with Cleveland, um, but talk about the geography of Cleveland,
mike:There is a, there is a divide of Cleveland. You have East Siders, you have West Siders. Uh, it's just the way, the way it goes. and you have, uh, and that can be that mu, that can be that way for investors too. People who like West Side, people who like East side, you know, the areas that have seen the most investment. Um, and the most appreciation and say the last three to five years has been predominantly on the west side of Cleveland. Um, it's closer to the airport. Um, the infrastructure is a little bit easier to navigate on that side of town, uh, in terms of interstate highways, uh, and things like that. And you haven't seen as much of that on the east side. However, we are starting to see some, some nice improvements on the east side. Um, you know, I was actually driving through an area of, uh, east, uh, the eastern side of Cleveland recently, and what used to be one of Cleveland's largest housing projects, um, I didn't know it because I hadn't read about it, but they're actually tearing it down. Uh, and they're going to rebuild it. So that's awesome, right? Those are the types of things that we need to see in an old rust belt city like Cleveland, like Detroit, you know, some of these Midwest cities and towns where our properties are very old, right? So we, we need some of that revitalization. So, you know, driving through some of these areas of, you know, Uh, both sides of town. I'm, I'm really happy to see some some really nice growth and, um, you know, revitalization.
jacob:Yeah, absolutely. No, like love to hear that. Love to hear that. Obviously as owning property in Cleveland myself. And so to be very tactical for the listener and for those that are geographically challenged, like myself, uh, when we're talking about the East side and the West side of Cleveland, um, I think that was explained to me. That was very helpful is that if you look at downtown Cleveland here, right. And I'm pointing right now at the map. Again, for those listening on the podcast or on audio, I'm pointing at a map of Cleveland. If you go. Downtown and you draw a line straight down, everything to the left of that is going to be the west side of Cleveland. Everything to the right of that is going to be the east side of Cleveland. So from a very tactical standpoint, that's like a way to just kind of divide the map. Okay. Interstate of 77 right here. So on the left side of interstate 77 will be the west side on the right side is going to be the east side. So that is very helpful, right? That's just a helpful nugget. And whether you're investing in Cleveland or whether you're investing in, I don't know, Kansas city, Louisville, Kentucky, whatever, whatever, there are going to be nuggets like that, right? Maybe it's not East and West, but maybe it's North and South, or maybe it's like particular neighborhoods, things like that, that's the type of knowledge that you have to really lean on your investor friendly agent for, right? Because you're not necessarily going to know that, um, as somebody that is an out of state investor. And so these are nuggets that are just extremely, extremely helpful. And if you didn't have a person like Mike, you might just randomly pick, um, a property that is just like in a terrible area that you're not going to know. And despite the numbers working well, you just don't want to be in that area. Right. So anyway, I think that's very helpful. Thanks for talking through that, Mike. So now we're just going to dial in. I want to say to further You know, continue to filter down the properties, which is what we're trying to do there. Um, I want to say we want actually just want to zoom in more on the West side of Cleveland, right? Cause that's what we're trying to do. Ladies and gentlemen, we're really trying to become experts, not just on a market, but on particular areas, right? Particular areas so that we know exactly what we're looking for. So I'm taking for all the listeners that are listening on audio, I'm taking the map of Cleveland and I'm zooming in. To the West side, right? So I'm zooming into the West side here, and now we're looking at 19 homes, Mike, 19 homes. And I already know that Mike knows all of these homes. Um, obviously being a expert on this market and understanding what is on the market right now, because he has clients that are looking for deals actively. So Mike, we're looking at a map of the West side of Cleveland right now. We're looking at about 17. To 19 homes, you know, Cleveland very well. I want you to kind of direct me. Cause they're all kind of, you know, in the buy box that we have, we have one 65 all the way up to one 95. So Mike, I want you to tell me which one should we kind of like, take a closer look at here based on your knowledge of the neighborhoods here in the west side.
mike:Uh, what's the one over there? That's lit up red. It's over probably West 140th West
jacob:yep. Yep. have clicked on the property that Mike is suggesting. It would be. It is, you know, three, six, eight, six West, one hundred and 30th Mike. Um, it's listed for 190, 000. Um, and it is a four bed, two bath duplex, which means that each unit is two bed and one bath. So Mike, what I'm going to do here is, uh, I want to, the first thing that I like to do, Whenever we kind of pull up a property that we like to analyze here and Mike, let's, let's back up before we dive into the property specifically, why did you pick, why did you pick that a property, uh, specifically as the one that you want to look at first?
mike:I wanted to see it, what it was, because we're looking at a 150 to 200 price point. The further west you go in Cleveland Traditionally the prices kind of go up and the fact that that one was pretty far west and it was under 200k I was intrigued.
jacob:Okay. Okay. That's great. That's great. So we've pulled up that property now. And again, like a great nugget for you, the listener to understand. Um, that's just another. That's a little bit of insider baseball, right? That you don't know necessarily if you don't have the investor friendly agent, um, that's kind of suggesting the things to you. So we pulled up the property. Um, the first thing that I always like to do, Mike, as somebody that is out of state and that hasn't necessarily, like, doesn't know the streets and everything that well is I like to pull up the street view, right? And so I'm pulling up the street view right now on Redfin, and I just like to take a little gander, right? And so we've, we pulled up the property. What I'm kind of noticing off the bat is, okay, so we do have some homes here that don't look In the best shape, but all around, I think this is a nice blue collar neighborhood. We have some single family houses and things like that taken a gander. So overall, I think that it looks, it looks decent. I would say it's, it's not the cleanest kind of street view, but overall, do you have kind of any concerns on this? And, and do you feel like this is typical of what you'd find?
mike:yeah, so 130th is a is a busy road, right? so if someone Reach out to me and say, Hey Mike, tell me about this property. I would say, well, what's 130th is busy. Um, so as long as there's off street parking, cause that's going to be a concern for your tenants. Um, you know, we, we'd want to make sure that there's plenty of off street parking. Now on 130th, you can, I don't know the rest. I don't know the restrictions off top of my head. I know you can park on the street some hours of the day. I think there's restrictions and stuff. Now, obviously that one house that's next to it looks a little rough. Um, so I, I do, I would be concerned about that property there. Um, you know, cause I'm looking at the pictures on my, on my other screen here. Um, so it's a little bit easier for me to see and yeah, it looks like it's boarded up. So
jacob:Yeah,
mike:obviously that's a concern, right? Cause if you're going to get, if you're going to get good tenants, they're not going to want to live next to a
jacob:yep,
mike:uh, you know, boarded up or, you know, got a squatters in it or something like that. So hopefully whoever owns that property is in the process of, of fixing it up. Right. So, you know, in this instance, I may even do a quick dive into that property next door to see like, Hey, when was the last time that thing changed hands? If it, if it was just sold three months ago. Then there's a good possibility that the current owner is going to flip it or fix it up and rent it fix the rent If it hasn't been if it hasn't changed hands in 20 years We know that that's a pretty shitty landlord there That or homeowner that owns that property that they let it to fall into that kind of disrepair. So
jacob:yeah, yeah, yeah. So this is all very, very valuable commentary. Uh, ladies and gentlemen, um, that kind of Mike and I are having right now. And it's the type of commentary that Mike would have with you. Um, should you be his client and things like that? Um, because it's all very helpful. Right. And so for me, I've always liked taking the street view. I've always liked, and, and be really honest with yourself, guys. Like, look to me, Mike, I, I probably call this, you know, Based on the street view and probably based on what you're saying, the knowledge, you know, this is probably like a C class area. I'm just Eyeballing it and things like that. Right. So you, as a listener, you gotta, you gotta be okay with that, or if you're not okay with that, right. Then you say, okay, cool. No, this, you know, just the feel of it, the look of it. I don't really like it. I don't really like the boarded up kind of aspect of it. Um, and so you kind of move on, right. But this is the type of, at least eyeball view. So let's go ahead and look at the rest of the photos. Mike, I w you know, I, I think you always have a lot of very valuable commentary in terms of with your experience as a flipper and obviously your experience as an agent, um, would love to. And I know you're flipping through on your computer as well, but is anything jump out to you?
mike:first thing i'll point out is this property doesn't have a basement. So Um, so it doesn't have a basement. So it's kind of almost a You Almost like a garden style apartment there. It looks like on the
jacob:yep.
mike:Right. So, um, you've got that, that's no big deal. A basement is whatever, not, not that big a deal. you know, I've thumbed through the photos here on my computer and I see. What looks like quite a bit of off street parking. That was one of the first things I had concerns with. Um, it looks like a nice yard. Um, the exterior photos, it looks like vinyl siding with the brick facade. Um, the current owner has done a nice job cleaning up the landscaping. So it looks, it looks pretty low maintenance. Um, so that looks solid to me. Um, unfortunately, the roof pictures, it's really hard to see what kind of condition the roof's in. So. Um, but the, you know, the home inspection will help us with that. So, um, you know, going into the interior photos, um, so it's steam heat. So you do have a boiler versus forced air furnace. So, you know, that's one thing I'll point out. Um, boilers are a little bit more expensive, um, To to to replace. Um, They're pretty efficient. Um, they're, they're pretty efficient as long as you can, and this one's not an older unit, like it's not like this massive, you know, 1940s boiler that I've seen before. So, um, but you know, our home inspector will run through that, run it, you know, run, run it and make sure it works properly. Things like that. So, um, you know, it does look like it's been, uh, updated. I'm not going to say it's been like extensively rehab, but it's definitely updated for the level of finishes. Um, you know, the other thing I do like about this property is that it was built in 1973,
jacob:which is newer, newer for Cleveland.
mike:that's new for Cleveland. Um, and why is that important? Um, this property won't have any knob and tube wiring in it. Um, it'll have modern plumbing. Um, so it just doesn't, you know, it won't have a lot of the defects that we run into in the, in the really old properties. So that's, that's always good. So, um, so those are some positives. And then. Uh, thumbing through the rest of the photos. Yeah, I, it looks, it looks really clean. Um, fresh paint, fresh carpet, uh, vinyl flooring in the kitchen. Uh, nice looks like newer cabinetry. Those are definitely not seventies cabinets, right? It's got appliances, which is nice.
jacob:where would the washer dryers be if there's no basement unit for each of the units? So there's a separate washroom in, in each of the units.
mike:the, the, the, the likely scenario in this property is that there's a utility room in each, in each unit that houses, um, the boiler and the hot water tank.
jacob:Yep.
mike:it has a laundry, a laundry hookup. So it's hard to say exactly because, um, this agent didn't provide us I don't think, I don't think we've been provided photos of both units. one, one of the units is actually occupied currently. The other one's vacant.
jacob:Okay.
mike:I'm, I'm guessing that we don't have pictures of the occupied unit.
jacob:Okay. Okay. Another thing I'm noticing too. Mike is One of the bedrooms at least looks fairly small And so I'm just kind of pointing that out because when you're thinking about your end buyer your end tenant You're thinking about That's something that they're going to take into consideration as well. Right. Is the size of the bedrooms. Um, and I have a property similar to this, where one of the bedrooms is actually quite a bit smaller than the other one. And it's really just a couple that uses that as an office, right? So you have to think about, you know, am I truly going to have two people that are living in each of these bedrooms? Or am I really just having, um, one person that's using this as a one bedroom, one office type of situation. But that's another thing that I noticed, Mike, is that one of the bedrooms does look a bit smaller. at this point right now, Mike and I have just had a very qualitative Conversation about the area, about the street that it's on, about the property. And this is the type of conversation that you should be having with your agent, the pros and cons, what Mike likes, what he doesn't like, and things like that. Before you even run any type of numbers, right? Before you run any type of numbers, you want to get comfortable with the quality This is, this is all things that you need to get comfortable assessing. But for the interest of time. Let's say that we wanted to move forward with this deal and, and, and best, and best belief folks, maybe this deal isn't a deal that Mike and I would move forward with, right? There's a lot of reasons that we may or may not want to go forward with this deal, but for the interest of time, Mike, let's say that it's past our qualitative assessment. If it's kind of our criteria and we actually want to move from a. A qualitative assessment to more of a quantitative assessment. Um, and so we're going to go ahead and move forward with this. Let's say that it's kind of past our sniff test, so to speak. And for the listeners, Mike's sniff test is very strong. Um, he will not let you analyze a deal if it doesn't kind of. Even past the very basic assessments of what Mike would want to get in out of a property. So, but let's just, let's say that it passes sniff test and let's kind of move forward.
mike:I do like, I do like the property as an
jacob:Okay, great.
mike:the property. Um, I like the fact that it's built in 1973 straight off the rip. So you got the modern construction, those types of things. Obviously I do, like I mentioned, I have concerns about that vacant property next door, but what, what really. Is attractive to me on this one is the fact that they do have a tenant in place in one of the units Paying a pretty good clip.
jacob:What are they paying?
mike:They're paying a thou a thousand fifty. So for a two bedroom unit in cleveland That's about 900 square feet 950 square feet on this building Uh per unit, that's a pretty good rental number. That's a really solid rental number So so that's the other thing that has me thinking. Okay You This is probably worth at least doing a deeper dive on
jacob:Yeah. Okay, great. So, you know, just off the first property we, we, we picked, right. Um, It's past the sniff test for Mike. And now we're going to the next phase of this, which is we are going to actually analyze the deal. And this can take a lot of time, but Mike and I are going to probably go through this very quickly. Again, very much encourage you guys. If you're listening to this on the audio to go on to, um, YouTube and watch this as well. On my channel at cashflow saga, because you are going to be able to see the rental property calculator that I built. The rental property calculator is also available for free download. So we'll put this in the link in the description. You could download it for free. Um, it's great tool. I use it for every deal that I analyze, but Mike, we're going to now transition to the analysis of the deal specifically. So we're now looking at the rental property calculator that I built. Um, it is a spreadsheet and I've tried to organize to make this as organized as possible and all we're going to do, right. Analyzing deals, I think can scare a lot of people, especially if they're not really oriented into numbers, but Mike. All we're doing here is plugging in some numbers. The calculator does a lot of the heavy lifting. All we're going to be doing is plugging in some numbers. So first thing I'd like to do, Mike, is, um, I just like to take the address of the building and I just like to plop that into my rental property calculator here. So we're talking about three, six, eight, six West 130th street, Cleveland, Ohio. The purchase price I believe was 190, 000 built in 1973. Was it Mike? Okay. 72, 73, 73. Um, and the unit count, it's a duplex. So we're talking about two units. So we're looking at roughly 95, 000 a door. And for all those folks, the only reason that's really important is because what we try to achieve, at least in the Cleveland market, um, where we can is the 1 percent rule. Right. And so we already kind of know a teaser here is that one of the units is rented for a thousand 50, right. With a price per door of 95, 000, that's already kind of hitting or surpassing the 1 percent rule threshold. So that's just a little bit of an aside. So Mike. Now we're moving on to the financing for, uh, the listeners here. You obviously are going to need most likely if you're not paying for this in cash, you are going to need to take a loan. And what we know about the Cleveland market and not the Cleveland market necessarily, but when you're buying multifamily property, the lender highly, highly prefers for you to put a 25 percent down payment on a multifamily property versus 20 percent or less. And so what we're going to assume here is that you're putting a 25 percent down payment on this property. Okay. Mike, I know the rates are coming back down to us. And so the, the, the, the loan amount here is going to be 142, 000. And the down payment is 47, 500. So we're already at 47 and a half thousand in terms of the amount of cash out of pocket here, but we're not done. Don't the down payment is not the only thing that you're going to need to have. Mike for the interest rates. I don't know if you know what the rates are today. I think they're probably in the low sevens. I want to say,
mike:i'm i'm actually you're creeping into the high sixes now
jacob:okay, okay,
mike:for this for this example,
jacob:let's go. seven. Let's go seven. So 7 percent right now. And the rates are coming back down to us, obviously. Um, but Mike is seeing things in the high sixes as well. The other thing I want to point out is, um, the rates are different for residential, like for, you know, if you're just buying it to occupy versus if you're an investment property, so you should assume a little bit on the higher side, unless you know, specifically from your lender, what the investment property rates are at, but right now we're going to assume 7%. And then, so the next thing here, um, so long term 30 years, most residential properties are going to get obviously a 30 year fixed rate on your loan. So just putting in the loans from their, um, closing costs, Mike. So, um, what I have put it here in terms of this is a percentage obviously of the purchase price of the property. In my experience, Mike, what I typically see is this is usually around 3 percent of the kind of total purchase price of the property. So this can vary. Obviously it can be less, it can be more, but I like to put in 3 percent here. Um, do you agree with that Mike?
mike:I do, I was gonna say two and a half to three is what I
jacob:Yeah,
mike:yeah. Cause there's going to be points and fees and title charges. And so, yeah, yeah, yeah, yeah.
jacob:Yeah. And so, and, and, and folks, if you're buying a rental property for the first time, this is usually something that catches a lot of first time investors off guard is that there are more costs than just the down payment. Right. And so for this one, putting in 3 percent your, Total cash invested goes from 47 and a half to 53, 000. Right? So if you didn't have that five, six K to additional to toss into the deal, you're already kind of on the back foot. Right? So this is another reason why the rental property calculator is helpful because it's factoring in the closing costs. Now, another item here that I have, Mike, um, is repair costs. looking at the property from the pictures and things like that, it does look pretty clean, but Mike, what I always like to tell people, and I know you're a big proponent of this as well, is don't, don't, don't, don't Assume that you're not going to have to do anything to the property to get rent ready, or at least assume that you want to have a little bit of reserve. So for my money, um, I always like to put something in here, you know, even if it's for, even if it's four grand, four or five grand, I always want to put something in here and not assume that I'm not going to have to spend anything on the property. So Mike, you want to talk a little bit about that in terms of the reserves or the assumption that they're going to need to do a little bit to get a rent ready,
mike:Yeah, absolutely. So in this example, I think we're pretty close to rent ready. Um, obviously the one unit up, the one unit up is rented. The second unit, we see the pictures. Nothing is jumping off the page at me. That would be in a need of an immediate fix. The other thing too, and this is another little nugget for people. While you were talking, I looked up the current owner of the property. She bought it three years ago with an FHA loan. Why is that important? It's important because FHA, as we all know, is a house hack loan, right? So this, the woman who owns this property used to live in it, or at least she bought it to live in it. Typically owner occupied properties are nicer and well, more well maintained than properties that are done by Investors, right? So those are, those are more reasons why I think the property is in good condition. However, I think you should always fund a reserve account to begin your journey. So for me, given, given everything that we've seen in this property, what I know about the property, what I've been able to ascertain, I would probably just put a 5, 000 number in that
jacob:Yep. Agreed.
mike:to start with.
jacob:Agreed. Agreed. And folks, we also, at this point, we don't know, and we'll know more, right? Say you wanted to put an offer on this. Mike would obviously, um, him or someone from his team would obviously walk that property, take video, take pictures, get a look at the occupied unit, um, and so you can put a more educated number in here once you know, a little bit more, but I always, always, always would counsel to put something in here just to be prepared. Right. And so now our kind of. Taking all of that into account. If you just assume you just had to put the down payment, then you're talking about 47, 500, but with the closing costs and the reserve account that we're talking about funding here, you're now jumped up to 58, 200. Right? So we're talking about 11, 10, 11, 000 more. Then just the down payment. And so this is what I want to hammer home for, for folks. When somebody says like, Hey, I have 50 K Mike for a down payment. Mike is going to tell you, no, you don't, you know, you have 40 K for a down payment and then you have 10 K for closing costs and reserves and things like that. Right. So that's a very important point. So at this point, Mike, we've already filled out the financing details, a little bit of the repair slash reserve budget. And now we're going to come into kind of the bulk of the underwriting or deal analysis here, which is the income and the expenses. So what we have to do here, Mike, is we have to estimate what the property can do in terms of income. And then Mike and I are going to go through a very detailed assumption on what The expenses for this property are going to be, and this is the nuts and bolts of it, folks, rental property math is not very complicated math, but you have to do the math and you have to make sure that you're in a good position, uh, to be able to, you know, hold this property for the longterm. That's all. That's all we have to do here is hold this property for the longterm and see what the cashflow is. So Mike, we'll go to the rental income first. We already have a little bit of a teaser here in terms of. what the property can do in terms of generating the income because the one of the units is occupied. But what I always like to do, Mike is I like to take a, just a gander at, um, what rentometer. com actually says. And just for the listeners, I'll tab over to here. Um, we can rentometer. com is a site that obviously just aggregates, um, rental data and it's quite handy. Um, so I would definitely recommend it to anybody. Um, I've used it a ton and I think it works great. All you do is just plop in the address here, right? It's going to recognize the address you're talking about, you know, a two bed, one bath unit. We're just talking for the unit rent and we'll just multiply that by two. This is very important. I always like to select apartment, single family houses. We'll always have higher rents than a duplex because you have the whole property it's, Oh, it's typically larger and they're going to pay a premium. So even if it's a two bed, one bath house, Mike, that single family house is going to garner higher rent than the apartment building. So I don't want you to select house. And actually get overly optimistic with what the building is going to do because of the fact that you did not filter out the single family houses. So that's another important nugget that I've learned kind of went in doing my deal analysis. And then all we're going to do is check the rents, right? So let's see what rentometer. com says for this particular property. Okay. So this is interesting, Mike. This is interesting because based on what rentometer is saying, they're saying that the average rents in that geographic area is actually nine 30. Right. And what I like about rentometer is it's telling you different things. It gives you the median, gives you the 25th percentile, and it gives you the 75th percentile. The reason why this is interesting is we already know that we're exceeding these projections here. And so we already have a proof point that this property can do better than what rentometer is saying. And this is an important point because. One, this is data, right? And you can't just blindly trust data either. You know, I think Mike has, you've seen different instances where the data doesn't really make sense. You know, actually the data skews too high and Mike saying in no world is it's going to do what rentometer is saying, or this is actually, I know for fact, it's going to outperform this. So this is another instance of that, but I do like to pull it up as an option because this is something you can validate with Mike. Um, and so what I'm going to do here, Mike, is because we already have a data point. that proves that this property can outperform these rentometer estimates. I trust it enough to say, look, I think we can probably do 10 50 on each side and do 2, 100 for the total property. But I just wanted to show that to the listener that you can at least get a good starting point with rentometer. com and you can refine based on, uh, you know, what your realtor thinks. And at this point, you maybe have a property manager that can validate that too, as well. Um, so you can triangulate all of these, but this is very important because you should not be too optimistic. You also should not be too pessimistic because you can miss out on a good deal. If you're too pessimistic and you assume that this property can only do 851 in reality, it can do a lot more. So I just wanted to show that Mike, but I think we have enough data with one side rented that we can actually say that this property does 10 50 each side or 2, 100 in total rental income for a month. Right? So now that we've got rental income, we have to talk about the expenses now, starting with the property taxes, Mike. So this is an area that I think a lot of. Rookie real estate investors We'll get tripped up, right? Because they do not assume that their property taxes are actually going to go up. Right. And so this is where I actually think it's very important, um, for the listeners to. Sorry, I'm tabbing through here. And usually Redfin shows the tax history. It's not showing it right now, but anyway, I want to, I want to talk about, okay. Okay. So the property taxes folks, um, are important because obviously the property tax, the previous owners are going to be paying a property tax, but depending on the state that you're in, property taxes are reassessed. Right. And they might be reassessed upon sale, or they might be reassessed on specific time intervals. So you have to know that. You have to know that because when you're buying it, you're likely buying it at a premium from when the previous owner bought it. And it's going to have a new assessed value, which means higher property taxes. And if you don't assume that your property taxes are going to go up when they eventually do go up, you're going to be hit with a surprise. And what could have been a positive cashflow and property actually becomes a negative cashflow and property simply based on the property taxes in Cleveland does skew higher in terms of the States from a property tax perspective. So. This is just something that you want to be very, very careful with because I have seen deals that went completely sideways just because they didn't monitor the property taxes. And this is just something, so this is something that I want you to be sure. Um, cause it's very different. A lot of States do this very differently and it's kind of like opaque and very cryptic and sometimes you might not know. So. Make sure you talk to your realtor about this, right? Make sure you talk to Mike about this so that we can say, Hey, I want to be conservative here, Mike. I want to assume even if the reassessment is going to be in a few years, I want to assume that it's going to go up. What should I be baking in? So Mike, you want to kind of talk a little bit about this, maybe this property specifically, like what we should be inputting. For property taxes.
mike:Yep. Yeah. So I pulled up the property tax bill. So the current, the current property tax bill on an annual basis for this property is 2, 866. and it will go up because it will go up eventually because of the sale. Um, I couldn't tell you exactly when that would happen. So for me, 2, 900, that's what two 50 a month. I would probably, for the, for the exercise that we're doing, I'd probably put 300 a month
jacob:Okay.
mike:tax, the
jacob:Okay.
mike:calculation.
jacob:So one thing I also like to do. So right now, Mike is recommending obviously a 50 bump, 50 a month bump in terms of the, what we're assuming here, what I also like to do. And Mike, you tell me if this is bad or not, but there is a, I'm going to share this tab instead. There is a, um, smart asset. Property tax calculator. You can filter to the specific state and you can actually put in your address here and you can say the assessed value of the home. Cleveland, Ohio, and then we're buying this for 190, 000, right. And it's going to tell you, so this actually saying, look, this is at a reassessment, right? It's going to be 4, 427 for the year divided by 12. So this is actually saying, Mike, this is going to go up to three, around 370. Um, and so for me, and, and maybe this is high, But for me, I, for the property taxes, just to be very, very on the conservative side, right? Let's just bake in that. We're actually going to put three 25 a month, um, in terms of something. So we're baking in an increase. You know, how much, how much, how much exactly the increase? We don't know, but we want to be conservative and let's just assume that it's going to go up. Okay, cool. uh, we've gotten to, uh, the property tax and I'm going to have to go through the insurance. of.
mike:the insurer for the insurance on this building, I think it's going to be a lot lower than you would traditionally see in Cleveland's multifamily market.
jacob:Yeah.
mike:property is not that big. It's only 1, 900 square feet.
jacob:Yup.
mike:not have a basement. It does not have a garage. Those are going to factor into the overall cost of your insurance. Plus this building was built in 1973, newer construction buildings are going to, they're going to factor less when it comes to insurance. So if, if I were a betting man, I'm going to say on the very high side, you're going to be no more than 1, 500. A year. So yeah, whatever that calculates out to in a monthly, I think one, maybe one 25.
jacob:Once one 25, yeah, so one 25. So just, just over 60 a door, which I think makes sense. Um, I have, I have a properties that are kind of like in this range as well. So we're putting in one 25 a month. We'll just keep it rolling here, Mike. So gas and electric, typically, typically, right. Gas and electric is paid by the tenants. So we're actually going to put 0 here, water and sewer. This is a very important point, depending on where you are, right. In which market you're operating in water and sewer could be, Very ideally it would be the responsibility to the tenant, but a lot of places, it is actually the responsibility of the landlord in Cleveland, Ohio, specifically, it is the responsibility of the landlord. You are in charge of that water bill. So this is something we're going to put in here. Mike, from my experience, what I've seen, um, this can depend, but I also think like, you know, 60 to 70 a door makes sense here. So I will kind of want to put in 125 to 150. Ah, we could, we could be a little bit more conservative. Let's put at one 50, 75 a door. Um, we'll, we'll put it at that. Um, landscaping here, Mike, I don't know if you have any opinions here. I think, you know, it's not a, it's not a massive yard. Um, I would kind of want to put in like, I don't know, 50 or 75 bucks a month a year, just depending.
mike:I, I think you're going to pay probably 30 to 40 per per mo and it's going to be twice a month.
jacob:Yeah. So
mike:it's, and it's only, you know, and you're only doing it eight, eight or nine months a year. So, you know, if you put in 75, that's more than enough.
jacob:Yeah, let's put in 50 cause you're right, Mike. You're not going to be doing this. Um, you're not going to be doing this the entire year. Um, let's just like round it up to 60 here. And so we're kind of, we're kind of, we're kind of rolling through this, uh, ladies and gentlemen, but I just want to kind of like impart on you that this isn't a perfect science. Um, you'll get a lot better at this as you go through, but. Really just want to kind of hammer home that we are just making sure that we're covering our basis in terms of everything that the property is going to generate in terms of costs. So Mike, I have a line item here for garbage. Now I kind of also use this as like a cash all and things like that. But, um, what would you think to put here in terms of garbage?
mike:Also in Cleveland, the garbage is in your tax bill. So you, for this property, you wouldn't have to put a, you could put zero.
jacob:Yep.
mike:now we could always go back and add something to it, you know. Um, but I don't think there's really anything to add at this point.
jacob:Yep. Yep. Cool. So, and, and just for the listeners here, like there might be markets where you actually do have to pay garbage, right? And so that's something that, that is a line item that you should put in there. But for like, as Mike explained for Cleveland, you actually don't pay garbage. That's just baked into your property tax bill. So we don't want to double count costs there. So we're just going to put that at zero. moving on to more of our variable expenses, Mike. So property management, Mike and I will always say, if you're not a state investor. Just get a property manager, right? At most, you're probably going to pay 10 percent here. Um, and that's usually what I like to input there. And so you're talking about 2, 500 a year. Um, the money that you're saving here is just not worth, you know, that's Two, 200 bucks a month. It's just not worth the stress and headache that you're going to save yourself to just have a good property manager. Right? So put in that 10 percent there. Right. And then next Mike is the vacancy maintenance and CapEx reserves. This is probably the number one thing that I think real estate rookie real estate investors just do not account for. And if you don't account for this, you might say, Hey, I'm going to cashflow 280 bucks a month. That's great. But. You have to factor in the reserves, um, if nothing else to just give yourself the peace of mind that this property can sustain itself over the longterm and pay for its own repairs and pay for the months where you don't have vacancy, et cetera, et cetera, et cetera. So you just want to factor these in. So Mike, for the interest of time, cause we are, um, deep into this episode here, I like to say like, let's just put 5%. On each of these. And the thing that I'll say here is that might actually be too much. That might actually be too much. You know, for a property that's newer and cleaner, you might not have as much maintenance, right? You might not have as much CapEx and things like that. So this might be something that you toggle, but as a baseline for this property, for example, let's just call it 5 percent to be conservative. And that means that every single month, you know, you're tucking away a hundred bucks, you're talking to me 300 a month. For a rainy day. Right. And so if you have no vacancy, if you have no maintenance, if you have no CapEx, that is your cashflow, right. In terms of like what's coming into your account, but you're just tucking that away and you're treating that as rainy day funds, right? So we're saving more than 300 a month for a rainy day, which I think is great. I think that's a healthy, you know, reserve to be building up from a reserve perspective.
mike:just for people to understand, you know, you're, we're putting that in there so that you can build those, those reserves up. In our example, we started with 5, 000,
jacob:Yup.
mike:not going to want to save a ton more than that because then you're just, you're going to just get an analysis paralysis and never, never buy a deal
jacob:Yes.
mike:going to feel like, Oh my God, I'm never going to make any money when in actuality that's, that money is, is. Designed to be saved to a certain point. And then it's, it's better off being put into a next deal than it is just to accumulate in a, in a savings account somewhere. So that's all I
jacob:Yeah. Yeah, yeah, absolutely. Absolutely. So like, and also factor that into, right. Cause like we did, Mike is right. We did budget for the reserves. So actually we might, because we have 5, 000 in reserves, we might take these reserves down to 4%. We might take these reserves down to 4 percent because we did budget that 5k. So let's call it 4 percent Mike. Um, just because we do have that initial reserve. Uh, account set up initially. Right. And then the last, last thing laser gem is our last set of assumptions. And this is also very important is what is our assumptions on future growth, Mike. Right. And so we have to play some assumptions so that we can actually forecast what this property is going to do, because ladies and gentlemen, it is not about year one results, and if there's anything you take away from this episode, I want to hammer home this, the year one results don't matter. The year two results even don't matter. What really matters is the year, you know, five results and onwards, because you have to make. You have to hold this property for the long term and these are long term rentals for a reason, right? If you want to make money in year one, be a flipper like Mike, right? Like that's, this is not designed to be making gobs of money in the initial term, if you want to make a lot of, a lot more cashflow in year one, you know, flip the property or, you know, focus on short term rentals. That's what it's going to be designed for, but long term rental shine when you hold a property for five years or more. Um, so that's kind of what I want to, And, and to be able to project what this property is gonna do in five years and beyond, that's where you really need to put in the assumptions, Mike. So in terms of rent growth, um, I know this from my own experience that Cleveland has had really strong rent growth so far, but we don't want to be too aggressive with this, right? I see people put in really aggressive assumptions here, but if you want to be conservative, rent is going to grow a little bit more than the rate of inflation. Right. That's typically what it's going to grow. It's going to grow a little bit more than the rate of inflation. So inflation historically has been around 3%, right, Mike. So like that, that's kind of where I want to say. If you want to be conservative 2%, if you want to be a little bit more aggressive, I would say 3%. We can split the difference here and call it two and a half percent. Right. And this is again, baking in conservatism. I've had months actually, or I've had a renewals at 5 percent actually, Mike in Cleveland, um, where we've actually been able to bump the rent 5 percent and And, but I don't want to, I don't want to count on that, right? I don't want to count on that. You, you, you don't want to count on that either, because when you assume 5 percent and you're only getting 2%, then you get into a scenario where your analysis is not accurate. So I would just say, let's do two and a half percent right now. You also have to assume your expenses are going to grow as well. And to be conservative again, Mike, I just assume my expenses are going to grow at the same rate as my income. And so. That is what I like to assume. That's just, again, a personal preference. I see a lot of people assume expenses are not going to grow as fast, but with insurance increasing and property taxes and all these things like that, I just like to be very conservative. So I actually hold this constant to the rent growth. Um, and then lastly for appreciation. Same kind of deal here, Mike, right? The what do you expect your property to appreciate at Cleveland's actually been a pretty strong appreciation market as of late, but I also don't like to assume too much here. So I also hold this at kind of two and a half percent. Again, this is all personal preference, but at the end of the day, you can make the numbers say whatever you want. But you have to stick to your philosophy. You have to stick to what you really want to stand behind. And you want to feel good about the analysis at the end of the day. Um, so I like to be conservative as possible, right? Um, you can make these things say whatever you want, right? And the spreadsheet is going to spit out whatever you want, but garbage in garbage out, Mike, and I, and I don't like to do analysis like that. And lastly, Mike, I put in selling costs. Cause if you do this, dispo this property. You can't just bet bank on the fact that, you know, you're going to get all that money back. And so what I like to do is I like to input here and Mike, for, for all intents and purposes, I see this as being around seven and a half percent, um, of the total kind of sale price here. And so that's what I like to input so that you can factor in your true, your true equity in the property. Right. Because when you sell it, you're going to have some costs. And you should always have a perspective on your true equity of the property. So Mike, do we feel good about everything we've input here? We can, uh, kind of move towards the analysis.
mike:no, I think I think it's a I think we built out decent decent assumptions across the board. So
jacob:Okay, great. So ladies and gentlemen, now we can go to the PNL here, which is just an analysis of how much cashflow this property is going to generate and an analysis of the returns, right? So at the top here, we have your one, and then it kind of does some skipping because I really like to demonstrate the power of real estate over the longterm. So in column one, we have your one in column, uh, uh, here we have your five, but you can also expand upon this. You can see what years two, three, four do. Okay. And things like that. Right. So if you really wanted to dive into the nuts and bolts of it, you can expand on it. But I always like to tell people it's not about year one, it's about year five and kind of beyond for the longterm rental specifically. So that's why I like to kind of collapse the view like this. So the rental income is 2, 500 a year. Right. And we have all of our expenses lined up here. Our OpEx ratio is 53. 4%, which I think is a little high. I think that, you know, what we typically see, especially for a newer property in Cleveland, this should probably be hovering a little bit closer to 50%, um, but again, this is where we're baking in conservatism. Right. We're baking in conservatism into this because we have assumed a certain things like that. So we're rolling to a 53%. I like to see this at 50 percent or lower. If it starts to creep up Mike above 55, 60%, you probably have a property that's not worth analyzing further because the operating expenses are too large of a portion of the income. Right. So for, um, for all intents and purposes, I don't like to see this go too high, but I think for now that's fine. We have the cap rate here at a 6. 2%. Um, and for the listeners cap rate stands for the capitalization rate. It is the NOI or the net operating income divided by the purchase price. We don't have to dive too deep into the cap rate conversation here. in terms of a rule of thumb that I like to kind of follow by Mike is I like to see the cap rate higher than the interest rate, right? I like to see the cap rate that's higher than the interest rate. Cause that means you are in a positive leverage scenario. Another way to interpret cap rate is. What am I going to, what's my net return if I bought this property in all cash? Right. What is my net return? If I brought this property in all cash and that's a 6. 2 percent return, that's lower than the interest rate. So what that tells me is that, okay, that's red flag number one for me personally on this deal is that we're in a negative leverage scenario because the cap rate is lower than the interest rate, but we don't have to go too deep there. That's just another thing to kind of analyze there. so now that we have the net operating income, which is just the income minus the expenses, then we have to subtract obviously the debt service. And the debt service is the mortgage and interest payments. So that's roughly 11, 000 per year. Another metric I have here, Mike, is the debt. Coverage ratio, the debt coverage ratio is just out of my NOI. Can I service my debt? Right. Can I pay for the debt after I subtract all my operating expenses? And right now that's just hovering over just over a one, which means you can, you can pay for your debt service coverage ratio. But personally, I like to see this number a little bit higher, Mike. Um, just so that you have a little bit of wiggle room here, but to remind everybody, if We are also subtracting out our reserves, right? So that's about 3, 000 a year in reserves. And because we have, if the property is performing well, right, this is, this is not actually a real expense that's going to come to you, but we're analyzing it for conservatism again. So in year one, we're basically breaking even Mike, right? We're not really making any money. Again, we've analyzed this conservatively. We're not making any money. It's basically break even from a conservative standpoint. Now, Mike, I want you to kind of talk about this. For me personally, right. And everyone is going to be different here, but for me personally, besides the negative leverage of the cap rate being lower than interest rate, which I don't like to see, we've input reserves, we've been very conservative with everything in terms of like the assumption so far, seeing a breakeven number in year one, I'm not mad at that. Personally, I'm not mad at that. I know that, you know, it's going to improve over time. I know that I've been conservative. I know that I've baked in reserves. A lot of people would be a breakeven, but for me personally, with my experience and what I know now, a breakeven year one is not a terrible result,
mike:is it a home run? No, it's not something I would consider to be a home run it's hard to quantify too, right? Because 1970s built multifamily And newer it doesn't come along very often So, you know, I think you are paying a little bit of a premium based on the age of the property Which at the end of the day, right if this is about the long term growth and the long term rental the long term income for someone It's probably a pretty solid introduction into Into our market, And once again, we're going to do a, we're going to do an inspection, right? So we're going to know exactly what, what pitfalls we may or may not have to do with, with this property. But on the surface, I, I feel like this is going to be a pretty safe play.
jacob:yeah, a hundred percent. And, and, and look, this is why I like to show the forecast view. And this is why I always say year one doesn't matter, Mike, because look at what happens over time, right? In year five, you're jumping up to, you know, um, 131 a month in cashflow. You're 10 at two 73, you're 15 at six 15 or year 20 at six 15. And then eventually, right. You're at a thousand dollars a month in cashflow on this property. And that's not even factoring in the fact that look, you might be paying down your debt. And what if you can refi just for the, for purposes of demonstration here, what if the rates drop and you do refi and you can actually get a rate in the fives, look at what happens to the numbers when you have a 5 percent interest rate versus 7 percent interest rate. These cashflow numbers jump up quite handily. So these are all the strategic conversations that you as the investor have to have with yourself. And you have to think a little bit more beyond year one, because what is the asset that you're going to want to own for the longterm? It is that newer asset that Mike is talking about. That isn't going to give you a lot of maintenance problems. That isn't going to give you the headaches. And also Mike, I'll end with this because we have actually gone to a long episode, but I do think that this is very valuable for the listeners today. And everyone watching on YouTube. Cashflow is just one part of your return in real estate. Cashflow is just one part of your return in real estate. And that's what I try to show here. Um, here is that you do have cashflow, but you also have that debt pay down, right? Mike, your tenants are paying down your debt and you do have that appreciation. So when you actually add in the cashflow ROI, the debt pay down ROI, the appreciation ROI, your total ROI on an annual basis is 11. 3%. 11. 3 percent your property values, increasing your loan to values, decreasing over time. You are 11. 3 percent comprehensive return on an annual basis. That's what you're getting in real estate, right? And that's what we're getting every year. And it's cut up between cashflow, debt, paying on an appreciation. And that ROI is increasing over time, right? Because remember, you're only putting your initial investments of the property is that 58, 000. Okay. But over time, your appreciation continues to rise. Your cashflow continues to rise. Your debt pay down continues to get bigger and bigger, right? As your interest gets paid down. And so you were looking at a property that comprehensively is going to be delivering you a very, very strong return. So it is more than just the cashflow. This is why real estate for the. Longest time has been heralded as one of the strongest investments, um, comparative to the stock market as well, because there's more than one ways to make money. So with that, are we saying that you buy this deal? No, we're not saying that, but we want to arm you with the knowledge and the tools to be able to assess whether or not a deal is worth buying. Buying. So I'm going to close this again. This is my rental property calculator. You can find this down in the link in description below. You can also go to cashflowsaga. com slash tools. I hope you guys got a lot of value out of this episode. Mike and I are all about trying to give as much knowledge as possible. I hope you learned something about Cleveland. I hope you learned something about deal analysis. if you want to reach out to me, reach out to me. You can do so at cashflow saga on all socials. If you want to reach out to Mike, you can find him at realtor, Michael Magno on all socials. We are the financial freedom fighters podcast. We will see you guys in the next episode. Peace.
mike:See ya.
Nancy:Goodbye
