Episode 16: Analyze An 11-Unit Multi-Family Property With Us
How confident are you on running the numbers on a prospective deal? The more deals you analyze the better equipped you’ll be when the right deal comes along. Join Kyle and Jon in this episode as they review a deal that came across their desk for an 11-unit multi-family property in real time. What should you look for in a good deal? How should you run the numbers? Good deals are not found, they’re made so toss in your earbuds and let’s get to work.
What you’ll learn:
- How to determine if a deal is worth it when looking at the numbers including cash on cash return, return on investment (ROI), capitalization rate (Cap Rate) and more;
- What should you be looking for to get a good property?
- How do you know if you should reject a property when analyzing?
- Property Analyzer Spreadsheet
- Retirement Planning Spreadsheet
- Download our Wealth Building Blueprint
- The Invested Teacher Wealth Building Booklist
Interested in Partnership Opportunities?
For those interested in potential Joint Venture (JV) Partnerships, reach out to us here.
Kyle Pearce: The numbers here look pretty decent, not knock it out of the park. But we also know they were saying there's an opportunity to raise rents on some of these units, right? SC two units are in the 500s, a few of them are in the 800s and 900s, and then a few of them are in above a thousand dollars. So right there, just looking at that as a sample size, not knowing that market very well, I'm going, okay, this could be a good deal and offer an opportunity to kind of have some growth in that return over time. Welcome to the Invested Teacher podcast with Kyle Pierce, Matt Bigley and John Orr.
Jon Orr: Hey folks, get ready to be taught as we share our successes and our failures counter during the real life lessons learned on how to build generational wealth from the ground up.
Kyle Pearce: Welcome invested students to another episode of the Invested Teacher podcast. And sadly, we are only two thirds of the crew here today because Matt is out there. He's just to the ground. He's slugging out. I know he's lugging it. He's closing deals like a madman. It is a Friday when we're recording this, which is a big day for closes, but he also has a couple other deals on the go as well. So he sends his best regards. We are actually going to bring a puppet on the show and play 10. Just
Jon Orr: Have him sit there, Matt. Yeah, just have set up somebody over here on the
Kyle Pearce: Sides, something he would say nothing. But either way Matt will be with us. Hopefully in the
Jon Orr: Next he'll be missed. He'll
Kyle Pearce: Next episode. Yes, definitely. So hopefully he'll have to listen to this and see whether we reached the mark here for the episode.
Jon Orr: So you'll have to give the feedback. For sure, for sure.
Kyle Pearce: Jon, give us a heads-up as to what we're going to be diving into today. Actually, this one works out nicely because both you and I, this episode idea sort of began as a deal, and it sort of evolved into an awesome opportunity to share the process almost in the moment a couple hours removed from the moment.
Jon Orr: Yeah.
Kyle Pearce: Give him a rundown. What happened here?
Jon Orr: Happened today. So yeah, this is actually, like you saying, a good one because Matt is not the numbers guy. He always kind of says that. We're going to talk about numbers today. We're going to dive into our kind of a, like Kyle said, almost a real time analysis of a deal that came across our desks today. We're going to kind of dive into how to look at this particular deal. It's a bigger deal. It's a multi-family, larger number of units, 11 units in this deal. So we're going to look at this deal. We're going to kind of analyze it, thinking about what do you look at when deciding on whether this is the right one for you? How do you know when you should toss it out? This is the wrong one right away. We'll talk about that. We'll kind of dive into the numbers. Then Kyle, I think one of the big ideas here is that good deals are not just found, they're made.
Kyle Pearce: Oh, absolutely. It's a great way to articulate it. This one really caught my eye first of all, because it wasn't actually on the MLS. Anytime something is not on the MLS, it's like you sort of get a more interest right out of the gate. You're like, huh, I want to know more about this. Really happened through a contact, I think it was a contact of a contact, who has a wholesale deal. Basically what that means is these are people who go out and their work is to find good deals and try to sell those good deals to other people, typically investors. So what they're doing is they're trying to essentially make money on the spread. Now, for you and I, Jon and for Matt, ideally if we had our systems in place and all the time in the world and we were dedicated and focused on that strategy, we'd probably be trying to wholesale or find wholesale deals for ourselves.
Jon Orr: Right. Seems like a good deal.
Kyle Pearce: Absolutely, absolutely. And they are great deals, and that's really I think one of the main reasons why buying a wholesale deal, regardless of how much money they're going to take off the top, it doesn't actually matter because they did all of the hard work. We don't know if they looked at 20 properties or 500 or 2000 properties before they found this one, but ultimately at the end they're going to get paid back for finding a good deal and then also finding the person who wants to buy it for a higher price.
Jon Orr: All right, so let me get this straight. So just to wrap all of our listeners' minds around the beginnings of what's happened here is you're saying that this company or this group or maybe this organization goes out and looks for or a property just like we do and just like most people do who are in property investment, people like us.
Kyle Pearce: Investors, Jon, I think they're called.
Jon Orr: Yeah, that's exactly right. And then they buy it and then they don't flip it. This is not a flip, right, Kyle? This is not like they put money into it and then they're going to resell it. They're just going to buy it and then hopefully resell it at a higher price.
Kyle Pearce: Yeah. Obviously you can do it any way you'd like, but in this particular case, and in many cases like this, they call this an assignment deal. So basically what they've done is they found a seller, they found a vendor, someone who is trying to sell the property, and typically before it hits the MLS, because then otherwise everybody else knows about it.
Jon Orr: Right. That's what I was thinking.
Kyle Pearce: So they're finding someone and they might do this by letter dropping. You may have even received one of these letters where it says, we're buying homes in your area. Oftentimes they make it look like it's a handwritten node or whatever. Try to make it more personable. Or you might see bandit signs where it says, we buy houses with a number on it. Lots of these, we say groups or organizations, oftentimes just a team of one or more people who are trying to find people who are interested in selling, and then oftentimes they're interested in selling, but there's something else going on there. Usually you'll see people, say like a hoarder who's like, I could never sell my house because no one's going to buy it. You might get someone who wants to wholesale and actually buy that property. Oftentimes, flippers do the same thing, right?
They're actually letter dropping, cold calling, all of those things. So it can take quite a bit to prospect and try to find these deals. In this particular case, these wholesalers actually have two buildings under contracts. So what has happened is they likely found either an investor who maybe just wants to get out and doesn't want to deal with the process, or maybe it might be something like these investment properties were actually inherited into somebody else's possession. So maybe a son or a daughter of a landlord who's passed away and they're going, we don't know what to do with it, and they just want to get it off their hands. It could be maybe the bank has tried to repossess those properties, maybe for whatever reason the taxes haven't been paid or something like that. Oftentimes these people who are wholesaling or flippers who are looking for good deals on properties, they'll try to identify properties even just by driving by and seeing maybe the yard's not being well kept.
It's like, hmm, there's something fishy going on here. Then they might start trying to inquire who owns the property and offering to purchase the property for X amount of dollars. So that's sort of what's landed this particular deal in our lap. We've got wholesalers who have these two properties under contract and the deal closes down the road. So in this particular case, we're in March right now, and this deal closes at the end of April. Their goal here, when you are assigning a property, your goal is to try to find someone who wants the property and then the deal will actually get assigned on closing day. So basically you'll sign a separate agreement, everyone will go to the lawyer, and then basically you will now be the one purchasing instead of this original wholesaler. So the wholesaler basically-
Jon Orr: Never owns it.
Kyle Pearce: ... is holding this. They never own it. They own the contract, they own the rights. It's like an option if you trade in stock market.
Jon Orr: That's what I was going to say. It's just like an option.
Kyle Pearce: Absolutely. And if this option expires, you're going to have to pay. It's like selling a put. For those people who have done the wheel strategy or any of that stuff before, it's like same idea. So right now they're trying to figure out it's a hot potato for them. They're like, who wants this property? And ideally, if they've done well with this particular deal, they're like, we have enough profit in there to make it worth our while and to ensure that there's someone who's going to want this property instead of us.
Jon Orr: It's like buying a call. You buy the right to buy that thing in the later thing and you're going to sell that call. Hopefully it goes up in value.
Kyle Pearce: Well, I would argue, I would say it's more like selling a put because you're going to have to buy the stock if it expires in your possession. So you're going to have to actually buy a hundred shares of that company. So here you're going to have to buy this property or you're going to take a loss on the deposit that you've put in.
Jon Orr: You're getting technical now.
Kyle Pearce: Yeah, totally. But that's a future episode. We will get into options trading, which is great, but today we'll talk about this particular assignment scenario.
Jon Orr: Yeah. One thing I want to talk about with you before we get into the actual numbers is kind of the makeup of this property. So we've got a property that's got two different buildings on site and you're buying them at group. Kyle, what do you think? What we want to do is help people understand what's a good deal, what's a bad deal? When do you shut one down? What are we thinking right now? Remember, we're trying to do a real-time analysis as we kind of just chat through whether we want to go into this or not.
But Kyle, you got two properties, one property, two buildings. The fact that I have two roofs, two foundations, two of everything, one of the selling points of us going into multi-family properties is that you only had the one roof and the one foundation, you have multiple people living in there. But now I have two buildings for 11 units. You guys own one building that has nine units. Now we're going to go two buildings, 11 units. What's your thoughts initially right now on owning two buildings for this one deal? Is there any thought there or it doesn't even matter in a sense of Well, if you are owning two different properties, you still have to budget the same way?
Kyle Pearce: Yeah, totally. The interesting part is if the numbers work, then it's worthwhile. So for us, it really does come down to numbers. But you bring up an interesting point. Would I prefer that it's like one building, one property? In some ways, yes, because like you said, it's tight, it's tidy. It's one property to own, it's one property tax bill. This is actually two buildings on two separate parcels of land. So now we've got actually two tax bills. We've got double the amount of-
Jon Orr: You're buying two properties, one that's buying three unit, one that's an eight unit.
Kyle Pearce: You're buying two properties in this particular case. Now there's also some benefits to that in the future as well that you could go, well listen, if you can get this for the right deal and you feel good about it ... and once again for us, we chatted in the flip episode about how we want to make sure that we're cash flowing. So if we can get this for a cash flow price, and then now we have the option as well in the near or long-term future to really sell one of the two properties and potentially keep one. So there is some bonus in there for sure, but once again, it really does come down to the numbers. Of course, the condition of the buildings and all of those things are really important. So what I'm going to do right now is I'm going to share my screen for those who are on YouTube, we're going to dig in.
Now, I've copied and pasted a lot of the information to just a Google doc. It's not formatted or anything like that. The only reason why is because I don't want to make it look like we're advocating to share a deal here and get people all excited about one. But this is a real deal. I've got the real information over here and I've just copied and pasted it over. I just didn't want anything identifying the actual building, who's selling it and all of those things because I don't want them to be upset if we're saying it's a good deal or a bad deal and vice versa. So here we are, we're looking at it, and when I look at this, Jon, this is the first thing that I saw with this particular deal.
Jon Orr: Purchase price,
Kyle Pearce: I saw purchase price, but there was also something else that got me interested here right away just to look a little deeper. Now, of course, I'm going to look a little deeper regardless, but right away I was like, hmm, this could be good. Do you want to take a guess at what it was?
Jon Orr: I got a couple things. So I got a wholesale price, so I'm just going to read it so that the people listening can see what we're seeing here. It says wholesale price of basically we got 1.4 million. 1,380,000 and then in brackets, assignment fee included. Then we have a two in one property deal, the 11 units and an eight plex and a triplex. So there's the two properties right there. Then we have 125,000 per unit in prime area. Now Kyle, I got two guesses out of those four different statements, I'm going to hit you with one that we've chatted about. Usually this is the one that we use as a guide in a sense of whether this is the right one or should we even dive in to this, which is the 125,000 per unit in a prime area.
Now I think it's more of the 125,000 per door. I'm going to guess that is what sucked you into this because I know that when we've looked at a number of deals and we start to look at, well, it's easy to take the price divided by how many units and come up with this number when you're first looking at a deal. So when you get one, this is going to be depending in your area. If you're in say Toronto, it's going to be a different number that's going to entice you. You might be like, Hey, 250,000 a unit might be a great thing for you, maybe not. So I'm going to guess that one, Kyle. Is that right?
Kyle Pearce: That is absolutely correct, that 125. Now keeping in mind too, I should mention that these two properties are actually not in our local area. So right away it's like that attracts me based on our local area because we know that it is hard to find even 150 per unit right now in multifamily.
Jon Orr: Yep.
Kyle Pearce: When you look at one of these is a triplex and triplexes are right now 200K a unit and things like that. Of course these prices adjust and people sometimes take less. But that right there, I was like, wow, that's really interesting. I will look past ... I'm going to just show for those who are looking, you look at these buildings, they are not purpose built. So that's something for you just to know.
Jon Orr: They're like add-ons. They're going to toss something on here, we're going to add on here. They look like a hodgepodge.
Kyle Pearce: Totally. So when it's a hodgepodge, to be honest, that's like one of our specialties is the hodgepodge.
Jon Orr: Right.
Kyle Pearce: We actually like to pick up things that other people don't necessarily like. We don't want to get the one thing. The purpose-built property, even though it's great when it is purpose-built, you're going to pay a premium for that. So I look at this and I go, there might be opportunity here, but it also raises some red flags because right away I go, is this actually legal? Is this a legal triplex that we're looking at right now? When we look at some of the other pictures, here's just the other side of it. All right, okay.
Jon Orr: Looks like a business.
Kyle Pearce: Yeah, it looks like it may have been commercial at some point on the front. So again, is this all zoned appropriately? These are things we're going to have to look into, of course, if we want to go deeper here. But again, the numbers for me is where I want to start. Here's the, I believe it's the eight unit. So this one definitely looks more purpose-built, but even just looking at, it's a very old building, maybe it's a furnace. Who knows?
Jon Orr: Oh you mean a fireplace?
Kyle Pearce: There it is. One of those things you put fire in and the smoke comes out.
Jon Orr: You put fire in.
Kyle Pearce: So I look at this one looks more purpose-built, but again, you'd still want to do some due diligence there. Again, looks tidy. Definitely older building. So again, that's something to note. I see some air conditioners there.
Jon Orr: It's like three doors in the front.
Kyle Pearce: I got three doors in the front and then it looks like maybe this side door might be a back unit of some type. So again, looks like enough parking, but just visually, you're just getting a sense here of where this is. Oh, one of the other units.
Jon Orr: It doesn't look pretty. It looks rugged.
Kyle Pearce: Honestly, the one thing that we have to always reiterate when investors come in and they want to invest for the first time ... oh, the shopping cart's a nice touch too. I always appreciate, usually when I send it in our Slack channel to Matt and Jon, I always make a comment about something in the photo. The tire is the nice touch over here.
Jon Orr: I like the multiple dishes. They're just boom, multiple satellite dishes everywhere.
Kyle Pearce: Satellite dishes left, right and center. Absolutely. So good stuff there. But we don't let that distract us. We're not worried about that. We're going to be looking and trying to figure out, okay, how does this work? Now, something that immediately gave me a little bit more excitement about this possibility was we got this deal. You see the dates up on the screen, it says offers are due on March 26th. When I got this in my hands, it was March 30th. So four days after they were claiming offers are due. I think it's actually a poor choice.
Jon Orr: They're still sending this out.
Kyle Pearce: Yeah, from a marketing perspective, it's a poor choice for them to not update that or just remove it completely because you have a due date that you're now passed. That suggests to me that obviously nothing is materialized yet. So right away I'm going opportunity here. Who knows? So as we go down, we of course read the property features, all kinds of stuff, talks about eight units in one, well maintained. All of those things are important and great.
Jon Orr: It's kind of like you're scanning those because what we're really looking for is you're going over that and going, no, you know what? I can still go back and look at that stuff later. I'm looking to see if after I know the purchase price, I know that maybe there's a little bit of a deal possibly here because of the things you've mentioned. Probably a couple things I might be scanning for, Kyle, one is I probably would scan right to whether we'll look at where the income levels are. What are the rents currently? Is it vacant? Is it not vacant? Could we set our own rent? Or if they're already rents ready to go, can we have a peak at those?
Then also, I know this is an assignment situation, but I would probably also, if this wasn't this situation, look for whether it's a vendor take back scenario or they are open to that, you kind of scan these ads or scan these listings to look for these kinds of things because we want to see the numbers here so that we can toss them in our analyzer and run the numbers to see if this is appropriate or not.
Kyle Pearce: I love it. So that's exactly what we did. We scanned all the way down. We've got the income. Now they haven't necessarily ... and I'll do a quick search because it doesn't say vacant.
Jon Orr: No, I don't think so.
Kyle Pearce: Or occupied. So our assumption here, which would be something we have to check, they're showing rents for all 11 units and they're describing them. So our assumption is that this is fully occupied, at least initially. So that's the assumption we're going to make when we start playing with these numbers. Something I really appreciated was they gave us the monthly cash flow number so I didn't have to individually plug and play all 11 in. That's annoying. But right here I look and I go, okay, $9,750 per month at current rents. Now in the descriptor they talk about how there's an opportunity for a higher ROI. So oftentimes this has to do with raising rents, which is good, that's great to have.
It's marketable, but it's not helpful for pricing because really what they should do is that the seller should up the rents and then sell because then the cash flow will be higher. Right now I look at the cash flow, I go, I'm going to base my decision on this cash flow, and with $9,700 or just over that, I think to myself, and I go, wait a second, $9,700 and 1.4 million. We're not at the 1% rule, but we've talked before about how it's hard to hit that 1% rule these days. So right away I go, well, okay, if 9750 divided by 1.4 thousand.
Jon Orr: The other way around.
Kyle Pearce: 1.4 million.
Jon Orr: Math teacher.
Kyle Pearce: There it is. What I look and I see, I'm like, okay, what do I have here? I have about 0.7%, which isn't bad. That's actually something that attracts me. So I've got a low per unit cost. I'm looking at the rents. I don't know this area or this market as well as I know the market we're in. So it's like I right now can't really make any assumptions based on whether these are low rents or not. Usually if it's local, I know right away, but I'm going, okay, I still feel good because we're close to the 1% rule. I'm like, there could be some meat on the bone here. As I roll down, I see they've even given us some comps. They had them listed and linked on MLS, 11 unit in the same area for 1.8 million and an 11 unit for 1.79 million. So about 1.8 million again. So they've got two comps there. We looked at the comps. The comps are, I'm going to argue-
Jon Orr: A little bit nicer. We did run the numbers on those too, which we can chat about after and did a little bit of comparison, but they looked a little nicer. I think they're a little bit more closer to some nicer areas as well.
Kyle Pearce: Something that immediately jumped out at us and, those who are watching on the screen, you'll see listed are the expenses yearly. Right away I noticed something. I noticed the hydro and gas is $22,000, so I'm going, hmm, $22,000 and it's actually more than that divided by 11 units. That's like 2000 in hydro and gas. So really what it's telling me is that each unit is probably ... this is inclusive in their units, so that's obviously a negative. So those rents, even though maybe some of them might look high, a couple of them look low, that hydro and gas is a red flag for us. It makes me go, wait a second, are there even separate meters, separate?
Jon Orr: I believe do believe this one did have that.
Kyle Pearce: Let me look at that. So it says two separate civic addresses. What else do we have here? Separate.
Jon Orr: No, you know what? I don't think so. That must have been on one of the comps that I was looking at.
Kyle Pearce: Then right away if it's not there, what I would do is I would quickly look at the pictures again. So I'm going to go, and actually I didn't check this because we ran the numbers and I wasn't interested.
Jon Orr: I'm seeing a gas meter right there.
Kyle Pearce: Yeah, one gas meter here. So right there that answers your question of whether it was purpose built or not, right? Because you're like, wait a second, it's one. Okay, so I don't see it in that picture either. I see one hydro on the triplex and I don't see any others.
Jon Orr: This is awesome because you're not going to have the opportunity to pawn that back off on the renter at any time. You're going to always have to include hydro and gas included. You'll never be able to split unless you go and redo them all.
Kyle Pearce: Totally. And here they're saying cash for keys opportunity in the descriptor. So they're saying, Hey, if you want to offer cash to have someone move on and then you can raise rents for somebody else. Again, that's an opportunity and that's good for purchasing a property to have as a bonus, as a benefit, but it's not something like that increases the value of the property. It's actually more of a hindrance. So there's a future benefit there. I like that. But we've lost the future benefit of potentially getting rid of the hydro and gas. It doesn't make it a deal breaker though.
Jon Orr: No, we haven't even run the numbers yet really.
Kyle Pearce: We've got some properties that don't have separate meters and when you explore adding separate meters, oftentimes it's a very big expense. So it's not a deal breaker, but does it actually work here? So that's where we're going to pull out our property analyzer, and on our episode where we shared kind of chopped down property analyzer, which is very helpful, hopefully those people who downloaded it will share the link in the show notes. Those who downloaded that one, hopefully that's helpful for you. I'm going to use one that I typically use. It's modification of a few different ones that I had found online and I apologize. If I knew who was the original creator before I started playing with it, I would definitely make sure to mention their name and their web address. But this is one that I've sort of worked with. So here's the one I'm going to look at.
I'm going to list these side by side, Jon, so that I can kind of play here. I've already pre-populated a couple things, but I just want to show people how using an analyzer can make your life really easy. So what I do, I just make a copy of the last one that I've worked on. So you could see it even says copy in that file name here, and I leave everything as is. You'll notice a bunch of gibberish sometimes to the side that may or may not even apply to this property. But what I've done is I've taken this and I'm going to put in my $1,390,000 for that and I'm going to use a 30% down payment. This is going to be considered a commercial deal, and if you're buying in a corp, it's going to be likely 70% loan to value in most cases.
If you buy personally with more than four units, you're typically dealing with commercial as well, and they usually get you down to 70 in this market. Sometimes they're even pushing you down to 65% loan to value. Interest rate I've got at about 6% and our amortization I have over 25 years. Again, if you have an opportunity to stretch that out, that's going to help your cashflow numbers. However, I know some of the lenders we work with most often typically are around 25. So that's what we use just to kind of give us a starting point here.
Jon Orr: All right.
Kyle Pearce: We've got some built in closing costs, Jon, here that are kind of estimated. I always use a larger percentage for land transfer tax. So I overshoot on this a little bit instead of using the step system and make it too complicated. So I'd like to make sure the closing costs are going to be more than covered and that's going to be around 25 or 26,000. Our down payment looks like 417 at this price point.
Jon Orr: Okay. All right. So closing cost. Kyle, you had a little calculator, a formula built in there. Is there anything that our listeners should know about what you're using there? You said you wanted to be conservative on that part, but do you want to fill them in on what you're doing to calculate that part just so they get good estimation?
Kyle Pearce: Yeah, basically I toss in $3,000 for closing costs in general, legal fees, any of the other stuff. That should be more than enough. But again, conservatively we like to just make sure we've got padding because you just never know. Then basically what I'm doing is I'm taking the purchase price, I'm using 1.65% as the number for land transfer tax. However, those who know land transfer tax, it works much like our graduated tax system where, once you hit a level, the number goes up, the number goes up. So I'm using just sort of an average number there just to kind of make sure we're covering ourselves without making the calculation too chaotic.
So we've got a total cash investment out of pocket of 442,000 or 443,000 about in order to get into this 11 plex deal. All right, I have a section down here that I'm not using, but you could play with things like adding sweat equity, improving the property, and then refinancing. We're not going to play in that area at all on this deal, but right away you can see this one spits out a monthly mortgage payment of $6,269 every month. So right away when I looked at that and I don't consider anything else. I looked at, oh wait a second.
Jon Orr: We were making nine, almost 1097 on our revenue on just what the rents were listed at.
Kyle Pearce: Absolutely. So I was super excited, watch what happens when I plug it in. So I actually got excited about it because I was like, Ooh, there's some meat on the bone here, right? So okay, I'm going to paste that in and all of a sudden I go, well wait a second, here's my rents. My rents come out here and here's going to be my monthly net cash flow if there was no other expenses, which we know is not true here. So I was like, wow, $1,800 of cash flow. The numbers here look pretty decent. Not knock it out of the park, but we also know they were saying there's an opportunity to raise rents on some of these units.
I see two units are in the five hundreds, a few of them are in the 800s and 900s, and then a few of them are above a thousand dollars. So right there, just looking at that as a sample size, not knowing that market very well, I'm going, okay, this could be a good deal and offer an opportunity to kind of have some growth in that return over time.
Jon Orr: Yeah, and not to mention some of the other bullets we talked about at this point, just knowing how much mortgage you're paying down. You're getting a benefit of a $17,000 mortgage. Our analyzer calculates that for you to see how much you're paying down the mortgage. So remember that that helps build your equity in the home or the property at a later time. So that's like part of the way we look at our investment. We got appreciation. We usually use about 3% appreciation per year. So in this first year calculations here have about $41,000 in appreciation. So that's a nice benefit. So we can use that to also help calculate how much our return in one year might look. Then our cash flow without anything else is about $21,000 a year at this time. That would give us some good numbers. That would be great.
I think you're looking at first year return on and your investment is like 18%. So that does look great. However, Kyle, we haven't included any of the other expenses yet. That's just mortgage. So we haven't talked about the taxes, we haven't talked about that high hydro and gas bill and bringing in property insurance, we haven't talked about any of those other expenses that we account for, capital expenditures or we have a property rental manager that would manage this for us. We account for that in the deal. So let's go back and kind of look at those things and see where we go from here.
Kyle Pearce: Yeah. Now one thing I will say, this particular analyzer automatically adds property management and repairs and vacancy at 7% and 10% if you add in any rent. So that does that automatically. So these numbers are based on those two expenses being included. So that's better, right? It's good. It's less pain to be had here as we move along. But what we're going to do is we're going to slowly put these in. I've lined these up as best I can. I placed the taxes, which they have down as $11,000 and change. They had hydro and gas as 22,600 and change and they had insurance at 8,300 and change. Really we're making an assumption here. Normally if it's listed with an agent, Rico says that you have to list accurate amounts or you have to state that it's estimates. Here they've just stated these and we don't know if these people are agents or who they are or whether this is true or an estimate.
So these would all be things we'd have to follow up on as well. But let me go ahead and go, okay, well let's look at our property taxes per month. We're going to take that number and we're going to spread it out over 12 months. We're going to do the same thing with our property insurance. I'm going to leave the utilities out just to kind of give us a sense here of how helpful the separate meters could really be on any property, but in particular this one. So I add in those two expenses and really the only thing left for us to add in is the utilities, the hydro and gas. So when I look at these numbers and I go, okay, we're cash flowing only $200 now per month.
Jon Orr: We were what? 1800 and now adding those-
Kyle Pearce: Yeah, let me back it up.
Jon Orr: We're now 200 and we haven't brought in the gas or the electric. So $200 a month, we're looking at 2,500 bucks-ish a year. Still not bad. Still not bad.
Kyle Pearce: Yeah, When you're looking at this, you're probably going, is this something I want to be running into? Probably not at this point, but it is still cash flow positive. So you're like, okay, maybe you're seeing the benefit in the rents being increased over time or you're seeing in there they also talk about how one of the properties actually has enough room in the back of the property to actually add, I think it was three additional units. So that might be in your mind as well. One thing that I'm not going to do is I'm not going to make any speculative number crunching and buy the property, add a negative cash flow in order to do those other things. Those are going to be maybe why I would take less cash flow.
Jon Orr: Those are cherry to top kind of thing.
Kyle Pearce: Cherry on top. Absolutely. So now we're going to take this utility cost, we're going to spread it out $1,800. Remember the old cash flow, that $1,800 of cash flow? We have $1,890 of utility costs every month. So without considering any of the other expenses originally, our original cash flow got wiped out by those utility costs and we are now losing $1,600 every month, almost $1,700 every month. Now I guess again, I guess the upside for us to consider-
Jon Orr: Yeah, let's go down with the return if you include all three benefits, right?
Kyle Pearce: Yeah. So when you look at that and you go, okay, wait a second, let's have a peak here. When I look at that, I'm like, now I'm losing $20,000 a year. So just picture this. That's not interest that you're paying or anything. That was already accounted for. This is money that you need to put into this property every single month just to keep it. Sure, one thing you are getting is you're still going to get that appreciation, assuming it grows at 3% a year. We can't guarantee that. Remember that was a cherry, that was one of the cherries, one of the silver bullets. Then the one thing you are going to get is mortgage pay down. So you're actually taking $20,000 and you are basically taking your 20,000 and then you're swapping it for less mortgage.
Jon Orr: Yeah, 17,000 mortgage pay down. It's almost like you're paying the benefit of that mortgage yourself and hoping that you eventually get appreciation.
Kyle Pearce: Right, which unfortunately the past few years, especially the way the market has been booming and all those things, this happens in cycles. That's sort of what people do in a lot of cases. They are betting on the market and over the last few years people won on that bet. But it's not a great strategy is what we'll say, especially in this particular case because, again, you are relying wholeheartedly on that appreciation hoping that a couple years from now that this property is worth a lot more than what you bought it for here today.
Now, if you were on YouTube and you actually looked at some of these images as well, let's keep in mind there is going to be some capital expenditures going into these buildings before too long. I don't care who you are, those buildings, there's some, we'll call them a little rough on the edges. Again, it's our kind of building, but not for this kind of price. We're not even in the right market I say right market. We're not even in our market. So it's really hard for us to say, yeah, we're going to dive in on a deal like this one.
Jon Orr: Exactly. So if you think about where we've started, where we came from, this came across our desk. We're kind of looking at it in real time here, but obviously the numbers aren't working here, Kyle. But this is where that statement about good deals are made and they're not just found. If you stopped here on every deal, you might never get a good one. Every time you analyze and you're like, nah, the numbers aren't working, the numbers aren't working based off the purchase price, based off what you're seeing. So let's dive in here and see what can we do to sweeten this to make it work.
There's only so many things you can actually change about the scenario. You're not going to be able to at this time change any of the taxes and the insurance. Some of these numbers that are quoted on the screen, we talked about that. We can't all of a sudden just say, you know what? We're going to come in and we're going to make sure all the rents go up. We're not going to be able to change that kind of stuff. But we do have one number we can play with.
Kyle Pearce: Yeah, totally. The obvious one to play with would be price. But before we do, I just want to show the impact of rising interest rates because a lot of people look at it and they think like, oh, the interest rate went up quarter of a percent. Every time it goes up, it's going up a quarter percent. It doesn't seem like a lot, but we're now in an environment where interest rates, and this isn't for rental property rates, but for just residential primary residences, there were people sub 2% and now they're in the fives. Even for a little while there, it was into the six. So I've got a 6% interest rate here. Imagine if we were to pop this down to 3%, what that immediately does to our payment, to our mortgage payment. Look at that. It goes to $4,600 and our cash flow is almost breakeven.
We halved the interest rate. Now of course, that's not something we can realistically change unless you have an opportunity for a vendor take back, which Jon you had mentioned earlier. In this case, this is an assignment deal. So these people actually don't own this property and we have no idea who the actual seller is at this point. So a VTB is probably not in our cards, but that would be where I go on a VTB is like, Hey, if they can be flexible on the interest terms, because for a lot of people on a recent deal they were selling because they just wanted to get out of real estate and just put it into some safe stuff. They were retired. They were like, we have a nest egg that's big enough to support us. We just want a predictable return every year. So I'm like, well, can we give you a predictable return?
We'll give you that predictable turn for 3% and then therefore you're going to get a higher price and it's going to work. They were okay with that. It's not always going to be the case, but that's one thing you could adjust. The other thing is if you have a lender that's willing to do a longer amortization period. So I could go, Hey, if we could do a 40-year amortization, that's going to spread it out. Your debt is going to get spread out, of course, over time. Doesn't quite have that same effect as the interest rate. I'm sure if I doubled it instead of only increasing it to 40 years, if I go to 50 years, we're still at $500 of negative cash flow because that interest, that high interest cost is just so high. So that's not going to really help us a whole lot here either.
Nor do I know of too many lenders out there who are openly willing to do this longer amortization period, at least at the current time. So we're going to go to price and we're going to start playing with price, and we're going to go, how far off are we? I love that 125 per unit number, but I'm not liking where we're at. So usually what I want to do is I want to get down and see where's my break even point. If I go 1.1 million and benefit obviously is our down payment goes down and closing costs are going to ... everything's going to go down here. It's great. I come down. My mortgage payment's much lower at 1.1.
Jon Orr: We're close, we're close.
Kyle Pearce: We're still in the hole $300, but that's a lot better than where we were before. I'm going to go right down to $1 million. When I go to $1 million, my closing costs including a $300,000 down payment and land transfer and all that, that's about 320,000 out of pocket. When we go down, oh, I am now in the positive cash flow territory. I'm at $78. So now in my head I'm going, how do we work within this environment? We can still touch base with the seller, get a sense of where they are. Then usually what we do is we just share the fact of where we're at. So this is the message that I sent this morning. Instead of, like you said, just moving on and never having an opportunity, I'm going to be very cordial about it. I'm not going to be rude. I said, "I just ran some napkin numbers and it doesn't cash flow at these numbers." They said, "Okay, bring your best offer."
It works. Then I went on to try to push them and say, "Well, I think the numbers where it cash flows. So we don't want to bring a formal offer until we can at least get somewhere close that neighborhood. Is that something that you think would be worthwhile for you?" It sounds like that's something that's on the table from their end. So we're going to dig into this further. We don't know if it's going to go anywhere. But ultimately what we just did, and you and I did it in a much lengthier approach, it usually takes me 10, 15 minutes to do this, is I get to play with these numbers. Basically this is the underwriting of a deal. I can't remember where I heard it. I heard it somewhere on a podcast where they said, free to underwrite as many deals as you can.
So the whole goal here is don't just look at a deal and then go, eh, it doesn't look good. No. Underwrite the deal, play with the deal. Try to be creative with the deal so that maybe there's an outside chance that something could happen here. Now, because this is out of our area, we're not going to get all emotional about this. We're going to see where they're at. They're going to figure out where we're at, and we're going to see is this even worthwhile? I anticipate where it goes, Jon, is I anticipate that they go, no thanks, and we go, no problem, let us know. Then sometimes our 10 plex that we have near your place there, Jon, sometimes people get in a pinch and then all of a sudden it's a different ball game.
Just like the person they probably bought these properties from or have signed agreements from, they may have been in a tight pinch. Well, these assigners may find themselves in a tough pinch. If everybody is looking at the deal the way we're looking at it, it doesn't actually make sense unless let's say you had $1.4 million of cash in your bank and now you don't have a mortgage payment and you're just looking to put it in any old property. That might be the deal for that person. But if they can't find that person, they now have our contact, they now know where we stand, and there may be that opportunity where they come back and say, "Hey guys, listen, we're two weeks out. We got to make this happen. Let's revisit your original offer."
Jon Orr: Yeah, and maybe in a future episode we'll revisit and see what the scenario happens after this. Because as we said, this came across our desk just today, but we wanted to share it with you to give you a sense of some of the thought process that we go through when we're looking at deals, how to structure it so that it can work and reach out and see what's possible. That's why we want to do that for you. So you get that sense and also kind of that experience. One of the things we're going to say and recommend is that the more deals you do that with, the more ones that come across, the more ones you search out on MLS and run the numbers just like we just did here and see what is possible and reach out to say a realtor or whoever this deal ... This one is a different scenario, but you'll get a better sense. You'll get more confident in with what you're doing and you're going to be one step closer to changing your financial future when you start to go down this pathway of real estate investing. So that is why we wanted to share this particular one. Kyle, I think we said we would just do this in about 20 minutes, and it's been more than double that.
Kyle Pearce: That's the way it always rolls, my friend.
Jon Orr: Hey, we wanted to make sure you got your money's worth here on listening to this podcast, so let's get wrapping up here, Kyle.
Kyle Pearce: Absolutely. Well, I think just in what you had said, it was sort of a big takeaway for you and something for the audience to think about. I think the big takeaway I hope everyone gets from this is, again, that every deal is possibly a good deal. Not out of the box, right? It's never going to come out of the box that way, because guess what? That box is going to be empty by the time it reaches you if it's that good of a deal on paper. So just keep that in mind. The more times you look at this stuff, one thing you don't want to get yourself caught up in is getting stuck on any one of these, we'll call it a metric. Any one of these numbers, the 1% rule, it's not a rule, it's a rule of thumb, it's a target, it's an idea. It's a starting point. It may be a benchmark, but ultimately, if we looked at this right away, doesn't meet the 1% rule, I could throw it away. Well, then that deal is never going to see the lighted day.
The other piece is I'm going, wow, 125 per unit. That is good for our market. I could say, we got to buy this property because it's 125 per unit and we can't find 125 per unit if life depended on it around here. So then we go all in, getting all emotional thinking that this is the deal for us. But in reality, there's so many other factors here where maybe 125 in that market, maybe it's not that great. The comps we see are suggesting otherwise, but those are only two comps. So once again, don't let a deal just float by just because one thing looks out of place, or don't go all in on a deal simply because one metric or one number looks really good.
So hopefully you get that from this episode. Friends, if you are finding this helpful, it is incredibly helpful if you help us out by leaving a five star rating and review on Apple Podcasts or any other platform that you might be on. Every time that you do that, it tells the algorithm to share it with more people just like you. They know who you are. They're like, people like this, they're into investing. Oh yeah, they liked this, so these other people will like it too. So do us a huge favor and help us out that way, and we look forward to bringing you awesome content and tips and hopefully some deals that you might want to partner with us on in the future.
Jon Orr: All links and resources and transcript for this episode can be found over at our show notes page. Investedteacher.com/episode 16. That's investedteacher.com/episode 16. And like Kyle said just a moment ago, folks, if you are interested in getting involved in real estate investing and are not sure exactly how to kind of get your foot in the door, or you're wondering, is this the right spot? Is this the right deal? And you would like to have someone who's been there before help you out be your guide. That's what we do. We partner with people just like you, help them get their feet in the door to get involved in real estate. So we would partner with you. If you're interested in doing that, reach out to us at investedteacher.com/JV. Again, that's investedteacher.com/JV.
Kyle Pearce: I love it. Jon, until next time, class is dismissed. Just a quick reminder, the content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
Download the free Build Wealth Blueprint
Enter your name and email address below and I'll send you the Build Your Wealth Blueprint
We believe that anyone can build generational wealth with the proper understanding, tools and support.
Grow Your Wealth Building Skills
Many believe that you are either a money person or you are not.
This fixed minset approach to managing money is limiting your ability to accumulate wealth and restricting your financial freedom. Break free from this deficit thinking habit and begin your journey to grow your wealth with us.
REAL ESTATE INVESTING
Learn why investing in real estate is where we began our wealth building journey and why we believe it is the best place to start.
Learn about us and why we began a journey to better manage our money, how to invest and begin to build wealth for our families.
STOCK MARKET INVESTING
Overcome your fear of the stock market by learning about the markets, implementing proven strategies, and minimizing risk.