Birth of a Tool
Posted on November 20, 2006 - Filed Under Business |
After the Texas property attempt, something was required to ensure that a similar mistake in the future didn’t happen.
I’m a recovering engineer. Following instructions and checklist is something I do well. Yes ladies, I have even learned that the toilet seat must remain down.
The best tool to use is a spreadsheet. Not only would it be a checklist but it could give an indication of whether the deal warrants a phone call.
The first part in any analysis tool is to figure out what the "givens" are. These are typically numbers that a seller places in their ad. In addition, there are numbers that can easily be looked up, asking Lord Google. These are called "assumptions".
Here’s my starter list.
| Givens and Assumptions | |
| Purchase Price ($) | |
| Down Payment ($) | |
| Interest Rate (%) | |
| Loan Term (years) | |
| Rent ($ per month) | |
| Property tax rate (%) | |
| Insurance per year ($) | |
| Vacancy Rate (%) | |
| Management Percentage (%) | |
| Maintenance (%) | |
Really, only three pieces of information are required: Purchase Price, Gross Rent and Location. How can I say that?
I’m glad you asked.
Let’s break down the other components on the list.
Down Payment: This is typically 10 or 20% of the purchase price. This is purely at my discretion. Depending on the deal, I could find 10% or more for the down payment.
Interest Rate: Whatever the banks are charging for loans. I leave this at 7.5% which may be high. I’d rather figure high than figure too low.
Loan Term: I based this on a 30-year fixed rate. I’ll explain why in a future post.
Property Tax Rate: This is a question for Lord Google. It’s typically between 1 and 2% of the purchase price. It’s also dependent on location.
Insurance per year: This one is tricky. If an exact number can’t be found, I estimate it at $2000.
Vacancy rate: This also depends on the area. Typically it’s between 5% and 10% of the gross rent. If the area has anything higher than 10% then I probably don’t want to buy there.
Management rate: If the property is located in my neighborhood, this would obviously be zero. But I’m looking to buy out of state. Property management companies charge between 5 and 10% of the gross rent. I figure this one high (10%).
Maintenance: As I found out the hard way, money needs to be set aside for problems that may arise with the property.
With that being said, data was pulled from a real an ad I found.
| Given and Assumptions | ||
| Purchase Price ($) | $193,000 | |
| Down Payment ($) | $19,300 | |
| Interest Rate (%) | 7.5% | |
| Loan Term (years) | 30 | |
| Rent ($ per month) | $2,400 | |
| Property tax rate (%) | 2% | |
| Insurance per year ($) | $2000 | |
| Vacancy Rate (%) | 5% | |
| Management Percentage (%) | 10% | |
| Maintenance (%) | 10% | |
To be continued, yet again . . . .
In the meantime, watch this.
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4 Responses to “Birth of a Tool”
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Why are you looking to buy out of state? I did last year (because I could buy…nothing…where I am, and lots where I bought) but have been less than pleased with the experience.
Hello. I use this online spreadsheet…
http://www.mortgage-investments.com/Mortgage_and_real_estate_Calculators/investment_rental_real_estate_profit_predictor.htm
You might find it useful…CHEERS!
BM, I am curious as to why you’re less than pleased. Horror stories regarding property management companies have been sitting on my desk for a while. But the number of happy investors outweighs the horror stories.
Cheryl, you’re my hero of the day! That website is great!
I think because it was such a different experience from owning a rental locally. Here, if the AC doesn’t work, I can spend 15 minutes running over and flipping the “on” switch. There, if the AC doesn’t work, I spend $50 for a service call for someone to go out and flip the on switch. Leaky faucet here? $1 max for parts & a hour (if I’m slow) for me to run out and fix it. There? $70 for…what…I’m not sure. And then it leaks again a couple months later…
I am a hands on person. I hate paying lots of good money for something I could do better and less expensively myself if I were there. And then there’s me making the mistake of thinking that I don’t have to keep quite as much track of things as I would have without a management company. Actually, I should have been keeping MORE track. Not paying attention is a mistake. Going into it thinking it would work the same as my local rental was a bigger mistake.