Financial Analysis

This page is an overview of a financial analysis I have completed to see if a rental property that I am interested in has the potential to generate income. Curious about why I picked this subject? Read the blog on my main page.

This analysis reviews a property here in my hometown, which I am interested in purchasing, rehabilitating and keeping as a long-term investment. The steps I followed were:
1. Documented my current finances and our assets available for the project, this was in the form of a monthly budget and an overview of liquid and non-liquid assets (emailed directly to instructor)
2. Estimate repair costs on the purchase property—have to know how much it will cost to fix it up to know if this is even a possibility
3. Analyze if the project even has the possibility to be a good investment (will it generate income after the cost of the wok, paying off an investor, etc.)
4. Document the investment that will be needed from another source
5. Output results into an Excel Spreadsheet that can be used to show investors.

Financial Standing
After looking at our monthly budget and assets it became clear that, no matter what we bought the property for, we would:
1) need a temporary investor for the property, as the property is not currently lendable and we don’t have the cash to do the whole thing
2) our assets could only cover a limited amount, child-care for the 6 month duration of the project and, what will be come a monthly payment to a yet-to-be-determined investor.

Repair Costs
After completing an analysis of my current financial standing, both with assets and a monthly budget, the next step was to take a look at what the repair costs for this project would be.  To this end, I proactively contacted the owner and had the opportunity to look through the home.  Having completed other projects similar to this, I called on my previous experience to estimate the project costs.

As is the case with any project, it’s easy to be aggressive on your “guestimate”, so I took the liberty of creating an “aggressive” or low-cost approach, as well as a “conservative”, or high-cost approach. As I have found with other projects, the final number will most likely land somewhere in the middle.

The repair costs are in the form of a PDF file, which is a snapshot from the Excel spreadsheet I created for the analysis. View the Repair Estimate.

Analysis of the Project
With the repair estimate complete, showing an amount of $66,475 needed on the high-end and $40,725 needed on the low end, it was time to put these numbers into the “bigger picture” to see if it would even pencil out.

I suggest that you open the Project Overview document first, then read my analysis as you view the document.

There are a couple of things I need to point out before we begin. First of all, because this house isn’t currently “on the market” the actual price of the home is an “X” factor. To this end, I have put the purchase price in the first column of the spreadsheet with sliding value from $60,000 – $90,000 (in increments of $5,000). I designed the spreadsheet this way so that, depending on the price that is finally negotiated, I will be able to see if the project is still profitable.

Because I wanted to see both a conservative and aggressive overview of costs, the spreadsheet is broken into two distinct areas. The first area, on top is the breakdown with the “low-end” repairs (you can see that the flat $40,725 in the repairs column), and the second area is the conservative plan, which takes into account the “high-end” repair estimate of $66,475.

This analysis document serves several functions.

  1. Based on the total calculation of cost of repairs, purchase price, and back-taxes, which have to be paid, what would it cost us to get an investor involved. You can see this calculation in the Investor Return on Investment (ROI) column, which we calculated at a fair, 7.5% and the dollar amount in the Investor ROI $ column.
  2. With all of that summed up this gives me a total dollar amount so that, once the project is complete and is lendable (I’ve figured 12 months), I know what the total loan amount will need to be to pay off the investor. This figure is in the R & K Loan Amount column. The following columns then add in the other monthly costs that we would be incurring after the property is financed: the loan payment, property taxes, property insurance, all of which add up to the “Total Payment”.
  3. Now that I know the Total Payment I can begin to look at the income the property could generate vs. the expenses I will be paying. The property has two units. I used my knowledge of the area, what we are getting on our current rental as well as watching the paper to look for “comparable” rentals to determine a conservative estimate on the rental income. All told, I’ve estimated the income at $1,400/month.
  4. This takes us to the all-important and determining number, the Total Net. Total net is simply the Total Payment less the Total Rent. I am happy to report that, in this case the numbers are positive!

What does it all mean?
So, I’ve looked at the numbers and now it’s time to talk about what all of this means. First, the analysis of the expenses and income show that even if the project costs run high and we pay the highest amount for the property, it could still have a positive cash-flow, which is great news.

Secondly, it lets me know that I need an investor with a lot of liquid cash. Because the property is not lendable in its current state we would need to borrow anywhere from about $110K – $170K.

Third, the biggest X-factor is what the seller will be willing to accept for the property. It is possible that he won’t even be willing to take the $90k – the highest number I analyzed. If it’s above that, this project ceases to pencil out anyway.

Next Steps
Going forward, now armed with this great analysis, an overview of the costs and an understanding of where I’m at financially, my plan is to being contacting possible investors. Once I have an investor in place, I will contact the owner and see if we can negotiate a deal! Then it’s only a ton of work and a great sense of satisfaction from there as I work to put the plan in place!


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