22unit---advice needed - Posted by Rick in Erie

Posted by Rick in Erie on October 07, 2003 at 20:13:28:

Johnboy----Thanks for the advise, I am re-thinking my bid now----the one thing is I think I can find a fixed rate locked in for 10 or 15 years with a 15 or 20 year amort. That would definitely be the way to go, since I don’t see rates going anywhere but up. Again, appreciate the insight-------Rick

22unit—advice needed - Posted by Rick in Erie

Posted by Rick in Erie on October 05, 2003 at 10:41:59:

Venturing into first big deal—here’s the details: 22unit townhouses, 2bdr. 1.5 ba. each. Built in 1974. Good condition overall, mostly brick. Monthly income of $10,200 (below market rents, that # could increase to $12000 in a few years easily) $1250/mo taxes, $365/mo insurance, tenants pay all utilities. Good area, about 5 mi. from the city, and the area is growing. Basic set up—2 bdr w/ full bath 2nd floor, liv. rm and eat-in kitchen w/ 1/2 bath 1st floor, full basements that are dry, and can be used as addl bedroom/office/etc Most units remodeled with newer carpet, paint, linolium, etc. Asking price of $850,000—planning on bidding closer to $700000----unlisted, owned by a realtor and her husband who haven’t lived together in 5 years (kind of divorce sale). They will consider owner financing (up to 100%)—I would like to get the property in my and my partners name, so was thinking 80% bank 20% owner. Looking at the #'s I figured about $1700/mo profit using current rents and 750k/7%int/15yr----(may be able to do 100% bank financing). I have one 2-unit now, my partner has 6 (all sfh’s and 2-units) We have been researching the market for about 2 years and are familiar with the area.— any ideas, thoughts, questions would be greatly appreciated. Thanks in advance, Rick

Re: 22unit—advice needed - Posted by JohnBoy

Posted by JohnBoy on October 05, 2003 at 13:48:11:

BTW,

Based on your numbers, you are only allowing for 17.243% expenses. That is awfully low.

I’d be curious to see a complete breakdown of current expenses they are showing.

Re: 22unit—advice needed - Posted by JohnBoy

Posted by JohnBoy on October 05, 2003 at 13:27:58:

You don’t give a breakdown of expenses.

But using your numbers and 40% - 45% expenses I come up with this:

$10,200 x 12 = $122,400 gross income

40% - 45% expenses = $48,960 / $55,080

That leaves $73,440 - $67,320 to pay the mortgage and leave a profit.

$750k @ 7% ammortized over 15 years = $6,741.21 per month or $80,894.52 per year.

$73,440 / $67,320 - $80,894.52 = ($7,454.52) / ($13,574.52) negative cash flow per year or ($621.21) / ($1,131.21) negative cash flow per month.

Again, you don’t provide a breakdown of expenses and we don’t know if they include deferred maintenance or not.

So we would need a lot more info in order to comment further.

Looks good to me… - Posted by randyOH

Posted by randyOH on October 05, 2003 at 12:52:50:

Rick,
From your description, this looks like a winner even at the asking price. You are talking about a quality property at 5.9 times the gross scheduled rent (850/144 = 5.9). You could not come close to that in my market. A junker maybe, but not a quality property.

Of course, you would need to verify the condition of all the units. The building is almost 30 years old and the numbers could change significantly if you have to update a lot of the units.

Sorry, I cannot advise on the financing.

HTH,
Randy

Re: 22unit—advice needed - Posted by Rick in Erie

Posted by Rick in Erie on October 06, 2003 at 16:31:13:

I have seen a few people use 40-45% for expenses. My question now is why. I have asked the current owner for her expense report, and she is putting one together, and also getting her tax returns for the property. My question is where do these large expenses come into play—vacancy shouldn’t be a problem—great area with well below market rents. In my other figures I included taxes and insurance, and I/my partner will manage and maintain the properties ourselves. They are in good condition overall—new roofs on all buildings, 100 amp service with 3wire copper wiring, copper plumbing in good shape, and most are renovated (newer carpet/paint/limolium) We both are handy and could handle most problems ourselves. The only expenses I see are the tax and ins. and the tenants all pay their own utilities (including sewer, water, garbage) What other expenses should I expect beyond these?----also rents should be raised to 500/unit minimum per apt within the next 2 years–at least $12,000 income by then----thanks again, Rick

Re: 22unit—advice needed - Posted by JohnBoy

Posted by JohnBoy on October 06, 2003 at 22:16:34:

Here is a breakdown of things you need to account for:

INCOME

Gross Scheduled Income

Other Income

TOTAL GROSS INCOME

Vacancy Allowance

Deferred Maintenance Allowance

GROSS OPERATING INCOME

Total Gross Income - Vacancy & Deferred Maintenance = Gross Operating Income

EXPENSES

ACCOUNTING
ADVERTISING
INSURANCE (fire & liability)
JANITORIAL SERVICE
LAWN/SNOW
LEGAL
MISCELLANEOUS
PROPERTY MANAGEMENT
REPAIRS & MAINTENANCE
SUPPLIES
TAXES (real estate)
UTILITIES

TOTAL EXPENSES

NET OPERATING INCOME

Gross Operating Income - Total Expenses = Net Operating Income

LOAN PAYMENTS

POSITIVE CASH FLOW

Loan Payments - Net Operating Income = Positive Cash Flow

Re: 22unit—advice needed - Posted by JohnBoy

Posted by JohnBoy on October 06, 2003 at 21:45:43:

You need to account for replacement costs on all major items like, roof, appliances, carpeting, HVAC, etc.

The roofs are new. OK, a roof last about 20 years. So lets say a new roof will cost $5k. That will be $5k you will need to pay in 120 months from now. So divide $5k by 120 months and that comes to $42 per month to cover the replacement cost of a roof. You need to take $42 of the rent income to set aside as deferred maintenance cost so you will have that money when the time comes.

You do the same thing on all other major items that will need replacement eventually. You don’t ignor these things and wait until the time comes to worry about where the money will come from to replace them with. You need to have enough rental income to set this money aside so the money is there when the time comes.

If you manage it yourself you still need to account for management cost. Only you just pay yourself for this. You don’t work for free, do you??? Is your time not worth anything? If you don’t pay for management then you pay yourself the same it would cost if you did pay for management, unless your time is worth nothing.

As far as raising rents in two years, that is fine. But you NEVER pay the seller a price based on what you can do later. So that future rent increase is YOUR profit and should have nothing to do with how you base your purchase price on what you pay the seller. You base your price on what the income is today. What all costs are going to be based on current rents today. Anything you gain later from YOUR hard work is YOUR profit. Never pay the seller for YOUR future profit you can make from your hard work.

Always allow at least 5% for vacancy. One tenant moves out you could lose a couple months rent easily. Plus advertising costs to find a new tenant. Plus cleaning, painting and repair costs when the tenant leaves. These thing cost money and you need to account for this.

You are cutting yourself short here by reaching for a deal that may not be a deal at all.

Vacancy, management, and deferred maintenance alone could cost 15% - 20% of gross rents. Ad that to the 17% of costs you show now and that brings your costs up to 37% of gross rents. So you are not accounting for more than half your costs that you should be accounting for. Add that in and adjust your numbers to come up with a fair price to pay for the property in conjunction with a cap rate you need to make this worth investing in.