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Deal Analysis

Thursday, May 7, 2020   /   by AJ Shepard

Deal Analysis



Hi, my name is Chris Shepard. I am one of the owners of Uptown Properties. I'm a licensed real estate broker and a property investor. One of the most important things about being an investor is looking at deals. Today, I'm going to share how I analyze a deal. You can find deals in a lot of different places. I like to look at the RMLS. There's just a ton of available deals. I started off looking at multifamily deals, and I like three to four-unit properties. Yeah, let's have a look. I set my filter to stay on the west side of the Willamette River, mostly in Southwest Portland. We've got a deal here in West Linn and this is a three plex. It's got a two-bedroom, one bath, a two-bedroom, one bath, and then a one-bedroom, one bath. These are pretty large units. This is a pretty unique property.


My guess is that it's owner-occupied and someone is living in this first unit and then renting out the
other two units. I'm not 100% sure what this first unit is going to rent out for, but it is 2,200 square feet. I'll give them the benefit of the doubt and say that it will probably run out for $2,200 a month, a dollar per square foot. That's not a bad estimate. The smaller in square footage you get, the more valuable each square foot is. If it's a 500 square foot unit, it's probably going to run out for more than $500. But once you get to more square feet, then marginally each square foot is worthless. One of the first things I like to test the property on is what I call the 1% rule. The idea is that one month's gross rent should equal about 1% of the purchase price.


In Portland, this rule is not... It doesn't really work just because property values are higher. Once you get to bigger, more expensive cities like if you looked at say, New York or San Francisco, this rule is totally out of whack in regards to the 1%. It'll probably be more like a quarter of a percent rule in those places. Let's add up what we think the gross rent is going to be. My guess is that it's going to be 2,200 a month in the first unit, 1,300, and then we'll round up to 1,100. 2,200 a month plus 1,300 plus 1,100 then we're going to divide it by the purchase price, which is 699, multiply by a hundred, and then we are at 0.66 of a percent. That's not a bad deal. Let's keep going. Let's look at Southwest 17th Avenue. Looking at the 1% rule. This is three plex. These are little townhouses.


We can look at the photos here real quick. Units look a little dated, definitely, the '90s remodel. They're a little bit larger than normal units. I would say they're probably going to run out... If you did a little fix-up, they would probably run out for a little bit more than 1,350. My guess would be 1,495 a unit. After doing a little bit of fix-up, I would say maybe $15,000 a unit. We can do it at what I believe are the future rents or you can do it at the current rents. Let's do it at the future rent. The purchase price is 649 and then we would invest about $45,000 into each of the units. Not into each, in all three units, $15,000 per unit. That would give us 695, so that is 0.645. Just not quite as good as the deal in West Linn, assuming that all of our guesses are correct.


This property on Southwest 17th, it's pretty close to the freeway, but it's kind of in the Burlingame
neighborhood. That's a relatively desirable neighborhood. It's pretty good. Okay. Moving on to
Southwest Valley. Let's just quickly do the napkin test. This is a fourplex. I'm relatively familiar with this area. These are a little larger size units. I think that they're going to rent for about $1,100 each. Let's multiply those out and then divided by the purchase price of 649. This one being a fourplex is slightly a better investment than these other two just looking at the 1% rule calculation. Okay. Here's a property that I'm very interested in because we manage the property down the street. I think it's a few houses down, and I have very good detailed information about it.


We're going to take a little further in-depth review on 12285 Southwest Longhorn Lane. Let's have a
good look at the photos and just kind peek through that. That roof looks pretty decent. These are taken 2018. It's on the market currently. Nice little gardens, vinyl windows, so that's nice. That fireplace looks pretty decent. Recently tiled, new sliding glass doors, that's got new laminate in it. Those cabinets look a little tired. Baseboard heat. That's not exactly my favorite, but that's okay. It looks like newer appliances, newer cabinets in the kitchen. It looks like a pretty decent unit. That bathroom looks a little older. This unit looks pretty decent as well. Recently updated. The landscaping looks nice. Got a nice enclosed yard. It looks like there's storage available for some of the units.

Nice little garden. It looks like there's a couple of garages available as well. Those are added little
bonuses. The property that we manage doesn't have a garage, so that's very interesting. It makes it like it might be worth a little bit more. Going through the 1% rule, I know that the units rent for about 1,250 a month, and I would say fixing them up... Those units looked pretty good, so I would say they can probably get 1250 a month. Multiply that by four, $5,000 a month divided by 699 of the purchase price, that is 7.1 or excuse me, 0.71 of a percent. That is much better than these other three properties. That makes me interested and I want to take a little deeper look at it. The second test I've got is called the napkin test.

It's called the napkin test because potentially you should be able to get these figures, get them written
down on a napkin and do it while just either while you're in the car. With a calculator, you could
potentially be able to do this on a napkin. If anybody wants this Excel sheet, just write a note in the
comments and I can get you this Excel sheet. Taking a look at the property, this is in its current state.
We've got $1,000 for three units and 1,195. That was in the MLS listing. That's total current revenue. I'm assuming they're billing back utilities because that's what we do at our property.

If we're not billing back utilities, then we can send out an easy reminder or we can send out an easy
notice and get that fixed so that utilities are getting billed back to any tenant that's on a month to
month lease. Landscaping is $140 for each unit that we... No, excuse me, for our property. Then we're paying $1,000 a month in insurance and it's about $6,700 a year in taxes. Did I say a thousand a month in insurance? It's $1,000 a year in insurance. Management fees are $400 a month, and then I just like to throw in vacancy as a little bit of a buffer. Looking at vacancy, that's 5% of the gross income. We've got our total expenses at about $1,400, our annual net income of 36,000. This gets you your cap rate. You take your annual net income divided by the purchase price.

That's a little bit lower than the gross rent, but we can get the 1% rule if we take our gross revenue and then divide it by the purchase price. Let me quickly format that so that we get a few more decimals. Okay. We'll multiply it by a hundred and then we'll get that it's 0.6%. We can copy that for the other unit. We have two and a 699. Okay. That will show that we're getting 0.71 with these future rents. Looking at these future rents, I'm getting these from actual data that I have at our other property. If we take a look at the income statement from our other property, these are the rents that we're getting. This is actual data of what we got from October 2017 to September of 2018. Averaged out, that is 1,277 a month per unit. We did have a couple of turnovers.

We had about $1,200 in turnover expenses. All in all our repairs or $2,500 a month. But looking at
everything, our gross income came out to be 51,000. This does not include taxes or insurance. Insurance was $1,000 and then taxes were $6,700. If we take that minus these two numbers, we can get our cap rate. Our unit is fixed up pretty nicely with a granite counter cop. To put that in, I would say that it's probably going to be about $40,000. That would get the unit price up to 739 or the property breaks up to 739,000, which is what I think it is. Our cap rate on our property is about 6%, maybe a little less than six. Looking at the napkin test, this being at 6.6% doesn't include maintenance. That $2,500 in maintenance, we can just add that in.

At 2,500, it's going to be about $210 per month, and then that net income... That brings it back down to about 6.2% cap rate, which I think is a great cap rate for a rental property. That's the napkin test. If you don't have that data of an actual income statement from a unit down the street, you have to do a little more research. I can go into how to fill out your napkin test when you don't have actual data. Also, in this napkin test, I did a quick construction analysis on what it might cost to fix up the unit to how we have our units down the street. This was a little guesstimate in the capital required and I estimated that we needed to fix up three units and that is what went into the cap rate analysis.

If anybody wants to reach out, get set up on receiving leads or deals to analyze from the RMLS, feel free to contact me. My name is Chris Shepard. Excuse me. I'm the owner of Uptown Properties and a real estate agent and an investor. Have a great day.

Uptown Properties
Chris Shepard
3526 SW Troy
Portland, OR 97219
503-941-0276
Fairway Independent Mortgage Corporation
Mike Maier
5410 SW Macadam Ave, Ste 100
Portland, OR 97239
503-545-9879

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