Rental Property Investment Analysis February 2010
Today’s rental property investment analysis is this 9-Unit property in Indianapolis, IN. Here are the stats:
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- Asking Price: $130,000
- 9 Units (7 apartments, 2 business)
- 1 apartment rented ($500/month)
- Two business suites rented ($1500/month)
- Potential rental income: $5,150 per month
The analysis was performed on a new iPhone application for real estate investors called NestVest. It’s in advanced-beta right now but from what we’ve seen it’s really nice. You can use the Business Modeler to do the analysis.
Assumptions:
Assume the worst: the building needs a lot of repairs and only the 3 occupied units can only be rented at this time. When our rehab crewstarts, they will be able to rehab the empty units. During a six month rehab project, our rental income is $2000/month.
Analysis:
By doing a quick analysis, we can see that even with only 3 units occupied we still meet all our expenses.
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With the numbers provided, we’re looking at $354/month in positive cash flow with only 3 units rented.
How this might work:
The property requires some TLC. How much?. Assume the worst; then we could figure out if this would still be worth it.
- Entire plumbing/electrical needs updating.
- New Drywall, New Flooring
- New Fixtures/Appliances (bathroom and kitchen)
The dollar amount now depends on what path you wish to take. Do you renovate the entire investment all at once? Or one unit at a time?
Let’s start with the all-at-once renovation. Based on the assumptions above, it would not be unreasonable to think the renovations would cost around $50,000 ($10,000 per unit). Even though the ad says the renovation costs will be low due to the low square footage of each apartment, plan for the worst.
With the renovations at $50,000 and a potential increase of cashflow of an additional $3,000 then the ROI on that investment would be 72%. After finishing the renovations, eighteen months later and the renovations will pay for themselves.
If an investor did have $130,000 to buy the property, would they have an additional $50,000 to renovate all at once? With contractors having a habit of walking off the job, the owner could find themselves with a building that isn’t livable let alone rentable.
One unit at a time might be more feasible. The cost to renovate one unit is much lower than renovating an entire building. This has the benefit of being able to cherry-pick which apartment to renovate first. Go for the easiest, fastest renovation. Once the renovation on the unit is done, rent it out. Gain that extra $500/month and start rehabbing the second easiest unit. Rinse, Repeat.
Summary:
This rental property investment analysis makes sense on paper. It is just an issue of finding out all the hidden problems and determining the extent of the repairs that are required. Did the previous owner let the property go bad? Is it the casualty of a divorce or lawsuit? A very intense, thorough inspection would be required.
The biggest obstacle is financing the deal. The seller seems intent on cash-only. This would block 90% of potential buyers, even if they were experienced. Also one big reason for buying real estate is for the write-offs come tax time. Paying cash for a property, unless it’s a loan, provides none of the real benefit of real estate. Maybe after sitting on the market for a while, the seller might relent and accept financing terms as part of the deal.
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>This rental property investment analysis makes sense on paper . . . A very intense, thorough inspection would be required.
Yes the devil is in the details. I could tell without even putting pen to paper that is a deal worth checking out. At less than $15,000 a unit, it could be a steal. BUT as you point out, the key is the condition, how quickly it can be renovated and filled up, and how to manage the cash flow.
Agreed. Getting the place rentable is the key to making this property a resounding jewel in someone’s investment portfolio. The only question for the buyer is how quickly can they do this?
Hi Clifford,
I just found your blog by accident today. Don’t even remember how I got here, but I like it.
I’ve been a real estate investor for the past 11 yrs. but just this year have decided to lean towards multi-family investing. Have done plenty of research and have made some offers but nothing in the works yet.
I’m hoping you post more of these scenarios up here. All I have to say to is “15k per unit is nice!”
I haven’t seen any places down my way for that per unit cost…in an area I’d want to be in that is.
Keep up the good work and please keep more of these scenarios coming!
Carey