Investment Property Analysis: 1155 Romano Avenue
About 2 weeks ago, a friend of a friend brought to us a fairly unique proposal. My friend (and co-founder) Mike was talking to a friend of his, Nick, regarding a property was looking to invest in. This property, located out in Bellmawr, NJ, was a $135,000 listed duplex with a nice deck, built in 1941.
Mike gladly offered to do some rough calculations in order to establish how valuable of an investment this property was. What we found was solid enough for us to determine our worth of the property, which came in about $40,000 under asking, at right around $95,000.
House Hacking: Laying the Foundation
Before we get started it is important to note that house hacking in this property (or any property) will not make you a millionaire next year, but it does provide an example of a sound investment in an asset and not in a liability. If you don’t know the difference, then I highly recommend that you start with the book Rich Dad Poor Dad by Robert Kiyosaki and thank me later.
The importance of house hacking is in the foundation that it provides your portfolio. As you get started in real estate, you most likely don’t have a lot of money to get involved so you feel trapped on the sidelines.
But then you get ready to look into real estate deals and start to think about how you need 20% down ($20,000!) if a house costs $100,000. That seems almost impossible as a new investor, right!?
It is important to understand what your strengths and weaknesses are when you begin to invest in real estate and consider making an offer on a property like 1155 Romano Avenue.
As a new investor the weaknesses are bountiful. The two that we will focus on are the one’s that we hear the most, which are:
- “I don’t know enough yet”
- “I can’t afford to invest”
When someone says that they don’t know enough yet, it is important to remember that real estate investing is a long term game and you will be learning something everyday for the rest of your life. So while it may be true, it should not be viewed as a deterrent. It is important to understand what you do not know and have resources in order to help you if those situations arise. If real estate investing is for you, then you will look for every opportunity in your day to learn more about it and you will prepare yourself adequately over the next few months.
The second issue is probably the more common excuse. Not having a lot of money to invest is a problem that almost all new investors face. Notice I said not having a lot, if you have no money to invest then it will be even more difficult to invest in real estate as a newbie (although, not impossible!). I would recommend that you spend a few months learning and improving your finances in order to save some money to start investing in real estate.
After you have saved some money, then we will utilize some of your advantages in order to purchase your foundational investment! As a hungry new investor who is interested in real estate, you have to be willing to live in your first investment in order to get started.
House hacking will allow you to purchase the property with a down payment of less than $10,000. This will allow you to learn the business sufficiently as you run a rental and live next door. This investment teaches you much more than that $100,000 student loan that you took out! Believe me, I know all to well about that investment too.
In order to run these numbers, we will utilize the property that my friend had sent to me as a potential investment.
The Property Details:
The first move we made was the first one almost every person would, which was to check the listing details and get comps from the surrounding area for price points. Well, to be honest, the first thing we did was dive into the street view on Google maps the property to see what it was really like, and then we did all of that responsible stuff.
As you can see this property, is located just across the bridge from Philadelphia and to the south west of some more well known areas in southern New Jersey like Haddonfield, NJ.
After being sure that the property was in fact real, we decided to do some quick math to see if this property warranted further investigation.
This property is a multifamily (duplex) property in Bellmawr, NJ that consists of one two bedroom/one bathroom apartment and one one bedroom/one bathroom apartment. Armed with this knowledge, we looked for comparable properties in the area. We found that two bedroom/one bathroom apartments rented for about $1,300 so we assumed $1,200 in order to ensure that there would be some demand for our property.
In reality, we would test different prices and see what demand looked like in order to find true market value of our apartment while also remembering that we must account for vacancy costs while we experiment. The one bedroom/one bathroom apartment did not have any comparable properties in town, but the next town over had two similar apartments for rent for $900. Therefore, we assumed rent would be approximately $2,050 per month ($1200 + $850).
So, chances are that you have heard of the 2% rule as a general rule of thumb for quick property analysis, but we have found that the 1.5% rule works better in our initial analysis of our local market (you need to know your market!) to make sure that we don’t miss out on any deals. For example, properties in Texas are simply cheaper to buy than properties just outside of Philadelphia, so if we were looking in Texas, we might shoot for 4%. However, since Philly investment properties are on the higher side of the cost ledger, we decided to use 1.5% as our measuring stick in order to decide if we should investigate properties in more detail.
The 2% rule states that the monthly rental income should be equal to at least 2% of the purchase price. In our example, the rents equate to 1.55%, which means that we should check this one out!
First, we run the numbers by using the asking price, which we would not want to pay because we are deal finders! Usually, we aim to pay about 70% of the listing price in order to make sure that the margins will allow for profit even if there are some unforeseen circumstances, but for our initial run through the numbers, we want to get a baseline investment analysis.
The asking price for this property is $135,000, which with an FHA loan requires a down payment of 3.5%, or $4,725. We usually assume the closing cost is approximately $10,000, but you may want to check in your local market to see what the closing costs usually are. We usually don’t pay this much, but we want to estimate the highest costs possible initially in order to be conservative when running these numbers! Closing costs could also be a point of negotiation during the purchasing process!
You also want to do some research for some average numbers in your specific area. These numbers will include the interest rate from local banks – make sure to ask local real estate investors which bank they often utilize. You also want to make sure you have a good assessment for both the property taxes and the cost of insurance in your area. To find property taxes, you can search for your local town’s public tax record and you should be able to find some good estimations for this.
It is easy enough to go to your local bank and find information on loans, but in order to find property tax information, we will utilize the local government websites (yes, they are as fun to navigate as they sound!) and we will be able to see exactly how much taxes were. By utilizing this source, we were able to find that taxes were about $6,500 last year, so let’s use $7,000 to be safe.
In our example, we used an estimation for insurance costs, but prior to closing this would be a very important number to verify. In order to do this you should call some local insurance companies and get an actual quote on the property. Make sure to adjust your numbers based on this information.
With all of this information, we can begin the calculations. We enter the numbers into our calculators and we are able to see that this property will not be cash flow positive at the asking price.
This is why it is very important to make sure that you have numbers that you can trust and a way to calculate the numbers in order to see if you should purchase a home. Information is power, but the key here is synthesizing the data that is publicly available to look for profits.
So now we just continue looking for a deal, right? No! This is the point at which we recommend running the numbers and finding the price that this property makes sense. You already did all of the hard work collecting the data so why not at least see what number makes sense for you.
It is important to remember that this is a people business and it will behoove you to genuinely want to help motivated sellers. When you work in this business, you have to be a deal engineer in order to creatively structure deals so that you are able to get what you want while also helping the seller get what they want. Don’t worry, you don’t have to be a mathematician or an engineer!
Finding Our Investment Price
Let’s assume we get the property for 70% of the asking price because we are looking to help those people who want to make a sale! If we are able to purchase the house for $95,000 then we are looking at numbers like this!
That looks a lot better! After all, we did get into this business to make money, right? An annual before tax cash flow of almost $2,200 on your very first deal. Congratulations!
Now you may be saying that this deal is unrealistic because you are getting the house for 70% of asking price, but as we stated earlier, this method of real estate investment is not for those who wish to get rich quick. But it definitely is for those who want to become wealthy!
We believe that it is important to make a lot offers in order to close on a property. We are not searching just for a property to purchase, but instead we are focused on finding a deal.
Deals can come to you in many different ways and it is important to put out a lot of feelers in order to identify deals for your portfolio. If you’re only looking for properties on websites like Zillow, or Realtor.com then you will definitely find properties, but you will miss out on the opportunity to find deals.
Deals will require good timing and good preparation, so that when the deal presents itself, you are able to pull the trigger.
If your first offer gets accepted on a deal, then you should not be jubilant! Instead you should be thinking, ‘Darn, I missed a deal here.’
This mindset shift will be an important tool in your arsenal as you get ready to move out of your house hack next year and do it all over again! House hacking can be repeated multiple times as you are able to utilize another FHA loan next year. There are multiple steps to do this and we will cover that in another property analysis.
The Last Word
I cannot emphasize enough, that we are not preaching a get rich quick scheme here. This is difficult work and takes a lot of time, but I can tell you that we are going to help you set yourself up for a comfortable life where you are more in control of your finances then you are right now.
Utilizing these strategies will be the framework for your financial independence as you continue to model your financial decisions with a clear goal of monetary independence in sight.
House hacking is a great way to begin investing in real estate and it will give you knowledge and experience to grow in real estate while minimizing your risk as a new investor.