CRE Evaluation - Posted by Danny Teodorescu

import · August 21, 2003, 8:37am

Posted by Kristine-CA on August 21, 2003 at 20:27:54:

Julia: I can’t speak for Ron Starr, but I can tell you what landlords that buy from me in Central CA are looking for. Early in the year I sold 4 units (1 house, 1 duplex, 1 studio) for 80K. Needed about 10K in fix up. Gross rents are 1600.00. That was to an out of town investor who thought that was a great deal. Since then he’s bought some other things, has moved to the area, and now knows there are better deals if you look for them. And like many other investors here, he’d like to pay about 20-30 per house and rent for 400-700.

I know that Ron Starr can buy even lower than I can and he commands better rents. I don’t know if he has a ratio.

Seems to me that ratios would be based on where you are and what kind of investing you are doing. Like I said in my earlier post I would buy anything in Santa Barbara that was below FMV, regardless of rents because of appreciation (and because I’d like to buy a house for myself that is a good deal). Landlords here accepted the fact long ago that most properties don’t cash flow but they are benefitting from appreciation–and it doesn’t seem to be slowing down much yet.

So, I don’t know if there is one good price/gross rent ratio–everyone is different about what makes a good investment. Sincerely, Kristine

import · August 21, 2003, 8:37am

CRE Evaluation - Posted by Danny Teodorescu

Posted by Danny Teodorescu on August 21, 2003 at 08:37:46:

ok…here goes…here are two deals that I would like some “input” on…now obviously I am not going to buy or not buy based on what is said here. I just want to see if others come to the same conclusions that I did.

Building 1 is 3 units asking price $159,000

a 2/1 house (currently renting at $600),
a 2/1 apt (currently renting at $500),
a 1/1 apt (currently renting at $450).

Building 2 is 4 units asking price $230,000

two 2/1 apts (currently renting at $800 ea)
two 1/1 apts (currently renting at $450 ea)

import · August 21, 2003, 6:21pm

Pricing error - Posted by Jason

Posted by Jason on August 21, 2003 at 18:21:30:

I guess now its a definate pass… but would still be interesting to know the answer to Julia’s question

import · August 21, 2003, 1:16pm

Re: CRE Evaluation - Posted by BobJ (Md)

Posted by BobJ (Md) on August 21, 2003 at 13:16:14:

Based on the info you provided, and using a 10% cap rate and an estimated 30% annual operating expense, the values would be:

Building 1: $130,200 (asking $159,000)
Building 2: $210,000 (asking $230,000)

I’d pass on both, without even knowing anything about repairs needed, or whether the owner would participate in the financing. In my judgment, neither would cash flow. You’d be putting a little bit into them each month until you raise the rents. If the rents are way under market and you’re willing to take up the slack while you fix the rents, there might be a deal there.

BobJ (Md)

import · August 21, 2003, 11:02am

Re: CRE Evaluation - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 21, 2003 at 11:02:59:

Danny Teodorescu------------

It is not possible to analyse properties in a vacuum. In this case, you have given us no information about your goals. Are you after cash flow? Appreciation? Tax Benefits? Which is most important to you?

Kristine(CA) was suggesting that under some circumstances these are buyable deals, like being in Coastal CA. Because other investors will pay more for the properties than these asking prices. So she would buy and resell for a quick profit.

However, just looking at it very crudely, these are not excellent deals, from a cash flow viewpoint. The prices are over 8.5 times gross rents, before vacancies. Too high to be of much interest to a sophisticated investor. However, you do have to compare them to other properties for sale and those that have sold. How do they seem using that comparison. If they are priced way below the competition, it might make sense to buy them, as Kristine mentions.

Also, are you expecting tremendous appreciation in the near future, so that buying for appreciation makes sense?

Good InvestingRon Starr*

import · August 21, 2003, 10:45am

Re: CRE Evaluation - Posted by Kristine-CA

Posted by Kristine-CA on August 21, 2003 at 10:45:52:

Danny: there is not enough information here. What is FMV, what are the repairs needed? Are the rents low for the area?

I can tell you that where are I am, the landlord buyers that I work with wouldn’t touch them because the cash flow isn’t there per their requirements. But that’s where I am and where it’s not that difficult to buy 3 units that will rent for 1500-1800 and where the purchase price would about 80-120.

There is no way if anyone can tell you they are a good deal without more info. If they were in Santa Barbara, I’d be willing to pay more than double the asking price, even with the low rents.

So it all depends on what the exit is and what your goals are. Post more info and maybe some people here can give you more input. Sincerely, Kristine

import · August 21, 2003, 8:44am

Pricing Error!!! - Posted by Danny Teodorescu

Posted by Danny Teodorescu on August 21, 2003 at 08:44:08:

The price for the 3 unit building is 176,000
The price for the 4 unit building is 253,000

import · August 21, 2003, 11:20pm

Continuation of the thread - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 21, 2003 at 23:20:45:

E-mail continue of this thread:

k…good points, and I apologize for being thin in my descriptions…i am new and anxious…a dangerous combination, but I know enough to know that I need to ask for “help” so to speak…so as far as my goals, in
this situation it is to hold for cash flow…now please look past my ignorance and explain to me what the rents should be in relation to the price…you seemed rather alarmed that the price was 8.5 times the annual gross rents…again I am sorry that my questions are so
rudimentary…but hopefully you can understand I imagine all of this was new to you at some point as well…

Danny Teodorescu

---* RESPONSE ------
Danny Teodorescu----------------------

Yes, it was new to me. At that time the internet did not exist. What I did was read as many books on real estate investing as I could. I would recommend the same for you, as there is a lot to learn. I have a post for beginners with my suggestions of how to become successful in real estate investing. You can see it by putting “beginners success” into the search function of this main board of this CREONLINE.COM website.

As Kristine(CA) remarked, there is no one standard. One needs, in my opinion, to study the market in which one invests. Then one knows the range of ratios that other people seem to settle for in the area. If you can, you probably want to do better than the average investor, but that is a personal decisision. I know I do.

A ratio of price about 8.5 times gross annual rents would be, in my view reserved for properties that had some other added benefit: potential to raise rents, increased value through fix up, expected strong appreciation. Also, the neighborhood would have to be average or above.

A ratio that I like to get is 1.2% of the property value in rents each months, so on a yearly basis that would be about 14-15%. Divide that into 1 to get a ratio of about 6.5 to 7 or lower. I recently bought a property for about a gross rent ratio of roughly 1.00. Counting fix-up I paid about $3K and on Sept 1st the rent goes to $275/month. I would not expect most investors to hit a peak like that. I don’t hit it consistently either.

Good InvestingRon Starr*****

import · August 21, 2003, 3:35pm

Re: CRE Evaluation - Posted by Julia (NJ)

Posted by Julia (NJ) on August 21, 2003 at 15:35:47:

Ron-
What would be a good figure for the price/gross rent ratio?

TIA-
Julia