Found 12 unit property...need help - Posted by Scott Phillips


#1

Posted by Carol on February 23, 1999 at 07:23:57:

Ed’s % is pretty universal, and in fact, conservative as he said. Doesn’t much matter what the bldg is. With much less experience than Ed, we generally pencil things out at 45%, no matter what the seller says. Last thing I want to do is get into trouble with an “income producing” unit!
Carol


#2

Found 12 unit property…need help - Posted by Scott Phillips

Posted by Scott Phillips on February 22, 1999 at 09:43:53:

I have found 2 6-plexes that bring in $5760.00 per month before expenses. They are 100% occupied and all tenants are under lease. They are being sold by owner/builder and are under 3 years old. He is asking $625,000.00 but I think I can get him down to $600,000.00 with no problem. He is burnt out with them as he owns 85 properties altogether.

My main problem is that I have problem credit thanks to an unemployment period. Although I have tried to fix this, I am still showing a spotty credit file. I also do not have very much money of my own.

Anyone who has suggestions to help obtain financing for this, please reply. I see the potential for this property, but have no way to obtain it.

Thanks,

Scott P
Joplin, MO


#3

Re: Found 12 unit property…need help - Posted by Ed Garcia

Posted by Ed Garcia on February 22, 1999 at 10:24:17:

Scott:

I?m sorry but this deal doesn?t pencil out.

If I were a bank, I would figure at least 33% expenses which is $22,809,
5% for vacancy, which is $3,456. That would give you a total of
$26,265 and trust me these numbers are conservative. Now I take my
$5760 Times 12 equals $69,120.

My gross income of $69,120 minus my expenses and vacancy which is
$26,265 leaves me $42,855. At a 10 cap, on a good day the property
would be worth $428,550. Even at a 9 cap, the property is only worth
$476,166.

Sorry Scott, this is just not a deal.

Ed Garcia


#4

Re: Found 12 unit property…need help - Posted by John Butler(stl)

Posted by John Butler(stl) on February 22, 1999 at 10:09:16:

Doesn’t to seem to be too much of a deal. You should look at his actual expenses, but in general on a multi-unit property expenses and vacancy will be 45% of gross rents. Using your numbers, gross annual income would be $69,120. Subtracting 45% for vacancy and expenses leaves a NOI of $38,016. This gives a CAP rate of 6.36%. Normally an investor should be looking for properties with a CAP of 12% or higher. This means you shouldn’t pay more than $316,666 for this property. Read some of the how-to articles on commercial property valuation if you don’t understand what CAP is. I can almost guarantee you will have a break-even or probably negative cashflow even if you got this property for $500,000. HOWEVER, these %'s I have given are rules of thumb and you should verify the actual numbers from the current owner’s Schedule E and this could impact the actual value.

Another way to look at it is to take the gross rents of $5760/mo. If you somehow got a bank to finance all $600K, then your note at 8.5% would be $4613/mo. This would leave you a little more than $1000 to pay ALL repairs, vacancy, taxes, insurance, common utilities, management and any other expenses.

Take a good look at the numbers before you decide to proceed.

Don’t mean to rain on your parade, but don’t want you to pick up an alligator,

John


#5

Re: Found 12 unit property…need help - Posted by Rick Gunter

Posted by Rick Gunter on February 22, 1999 at 21:01:18:

Ed:
Would you apply 33% expense percentage to a triplex selling for $150,000 with annual income of $18,000?

Is 33% too high for three units in a brick building that is three years old?

Thanks.

Rick


#6

Re: Found 12 unit property…need help - Posted by Ed Garcia

Posted by Ed Garcia on February 22, 1999 at 10:38:50:

John:

Your right on. My numbers for Scott were conservative because I was
trying to show Scott, that even if I reached for the deal, it?s not there.

I hope things are going well on your new acquisition .

Ed Garcia