1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Arthur on August 24, 2003 at 05:23:18:

No, 20-25% is what alot of people use,although alot of people will go with 10%. its always better to take a worse case senario, that way, you won’t get burned in the future.

When a place becomes vacant, it may take 2 months to get it fixed up, and get it rented (remember, you have to advertise for the tenants, get them to fill out forms, run checks on them etc.

I’ve read a few books on investing, and a few of the “gurus” first used 5% when they started and they had a nasty shock.

Not sure if the 25%+ some people use includes repair costs, but remember, 5% means on average, each unit will be vacant 2.5 weeks a year.

I’m in a lucky situation where i can get a property ready for rental in anything from a few hours to a couple of days, but i am in the situation where i do this full time and therefore can go to the property the minute i get the call, and also lucky enough to be dealing in emergency housing, so get paid rents 52weeks of the year, vacant or not.

Good luck.

1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 21, 2003 at 16:44:25:

Hi-
I am looking at small multi-unit (3-4 unit) apartment buildings in a small northeastern city. Property values are relatively low, as the local economy has been in the tank for quite a while. The area I am looking in is older buildings (1900’s to 1920’s- many with original details) in a nice area fairly close to a couple of colleges. For my first deal, I am looking for cash flow and tax advantages. Appreciation would be nice, but I don’t think values are going to pick up for quite a while.

Found a seller who is selling 2 4-unit buildings, as a package (no realtor). Have seen a few of the apartments- they are in decent shape, and should not require any immediate repairs.

Building 1: 2 2BR, 1 1BR, 1 studio
Annual income: $20,040
Annual expenses: about $8,300 (not inc. mgt fees)

Building 2: 4 1 BR
Annual income: $24,480
Annual expenses: about $9,000 per year. There is an assumable FHA mortgage on this building for $76,000 @10%.

The seller is offering 2 “selling plans”. Plan 1 is the seller will sell both buildings for $82,000 each ($164,000 total). Buyer can assume $76k mortgage on building 2.

Plan 2 is seller will sell building 1 for $87,000 and hold a $5,000 mortgage for 5 years. He will sell building 2 for $78,000 with buyer assuming FHA mortgage.

Do these buildings look like a good deal? I admit to being a little intimidated by the formal “selling plans” offerred when he showed the buildings (he has been investing in RE for a number of years) and don’t know what/how to make an offer and sound like I know what I am talking about… :frowning:

What would you do? Any advice appreciated.

Re: 1st deal- Please look at these numbers - Posted by Vic

Posted by Vic on August 22, 2003 at 19:34:00:

Julia,

If the numbers you posted are correct, your decision to buy or not will be determined by how much profit you want per unit. This is a personal decision.

Running your numbers real quick, if you bought both buildings it looks like you would net approx $1050 for your efforts. That’s a little over $125/mo. per unit. Is this number satisfactory to you? IF so, go for it.

Another way to look at it is this. You don’t say how much cash you’ll be needing to come up with out of pocket to buy these. You need to factor this into the equation to get your cash on cash ROI (return on investment). Just take your net income & divide it by the amount of cash that you put up as a down payment. When you do this you will get your cash on cash ROI. Do this & if the number is high enough, go for it. In my area I probably wouldn’t do a deal unless I could get at least 35% cash on cash return. Most of the time it is significantly higher than this, as most of my deals involve very little money of my own. I buy, fix up & then refinance.

It all boils down to how much money do you want to make per unit for your efforts. Only you can decide that.

Vic

Re: 1st deal- Please look at these numbers - Posted by John Katitus

Posted by John Katitus on August 22, 2003 at 01:42:38:

First, you have to assume one vacant unit per building. That cuts your rental income by 20% - 25%. Adding the mortgage payments to the expenses puts you at about break even. Renting apartments at break even is a lot of work for nothing.

So how to make this a profitable deal. On Building 2, he is willing to give you the property for what he owes. He is probably tired of the break even free work. If you want to nurture the property and wait for rents to go up and property values to rise, you could take title subject to his mortgage - basically taking over his payments. That is probably what I would offer, if I wanted to get into the situation, on both properties.

You wouldn’t want to assume his mortgage, though. It’s just not necessary. And forget his profit on top of what he owes - he should be happy to get out. Plenty of info around on subject-to. Make sure you want to work for little, though, for the first few years.

Re: 1st deal- Please look at these numbers - Posted by Arthur

Posted by Arthur on August 21, 2003 at 20:44:16:

Figures look good, but don’t forget to factor in vacancies. I guess the option you take would depend on what financing you could arrange, but 10% sounds very expensive to me.

p.s. how come they are both the same price when one makes $3k more? use that to haggle the prive down on one of the buildings.

Re: 1st deal- Please look at these numbers - Posted by Sterling

Posted by Sterling on August 21, 2003 at 20:17:55:

Julia,

Based on what information you have provided. I would say the monthly net income would be slim in the area of $342.00/month. Any major repairs that may crop up could blow your cash flow for the entire year.

I would carefully scrutinze all carrying costs and cross check their estimates e.g. contacting PSEG to obtain the utilities charges for the past year for each unit and common areas.

Regards,
Sterling

Re: 1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 22, 2003 at 13:29:06:

John-
Another poster pointed out an error in my thinking about the vacancy rate.

If each apartment is vacant one month a year (so 4 months vacancy out of 48 possible “rent months” in a calendar year), that equates to a vacancy rate of 12%. I am curious where you got your 20-25% figure… that sounds like 1 unit vacant all year, or each of the units vacant for 3 months apiece.

Re: 1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 22, 2003 at 09:34:21:

John-
Thanks for your comments. I was figuring 5% vacancy rate, but that should have been 5% per unit, not for the entire building. :frowning: I will revisit my numbers and see how it looks. Thanks again.

Julia

Re: 1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 22, 2003 at 09:28:15:

Sterling-
Thanks for your comments. Can I ask how you came up with your numbers? My figures show monthly after-tax cash flow (figuring 5% vacancy) of $352 on one building and $544 on the other…

Regards-
Julia

Re: 1st deal- Please look at these numbers - Posted by John Katitus

Posted by John Katitus on August 23, 2003 at 02:02:14:

My 20-25% vacancy figure comes from my actual experience. Of course, yours may be different. But tell me, would you rather base your future on non-experience low estimates or on real numbers?

Please take into account the responses from wannabes. When you pay those bills they are in real dollars. Also, when the rent doesen’t get paid, it doesen’t get paid by 100% - not by 5% - sometimes for months.

Re: 1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 22, 2003 at 14:20:03:

Oy- no wonder I didn’t do well in math! 48/4=12=8.3%, not 12%.

Re: 1st deal- Please look at these numbers - Posted by Arthur

Posted by Arthur on August 22, 2003 at 12:37:33:

5% per unit x * of units is the same as 5% for the whole building.

Re: 1st deal- Please look at these numbers - Posted by Julia (NJ)

Posted by Julia (NJ) on August 22, 2003 at 13:22:57:

D’oh! Of course- that’s what I get for doing math before I have finished my coffee!

In that case, isn’t the other poster’s estimate of 20-25% vacancy awfully high?