Inc Props vs. Rehabs - Posted by TDreamer


#1

Posted by Td on November 03, 1998 at 08:52:29:

Yeah, that’s the “lord” part of “landlord”, right? :wink:

Yes, you are quite right, though. Things do have to be spelled out between landlord and tenant, right at the time of rental. I’ve previously been victim of a rental lease that exactly spelled out what the tenant could and could not do…but said nothing of the landlord. Let’s just say that after I got done with him, I was motivated to buy a place of my own.

Another cool comment of yours; a nicer place is better, and people will pay more to live there. Same goes for the schools. I don’t have kids, but I know people that do, and some are quite particular about the schools.

Yes. Location makes a big difference. It would be easier to rent out an apartment to a working family in Manchester than it would be to a lower income family in the inner sections of Hartford. The duplexes and triplexes in Manchester are homes, usually with fair-sized yards, and sometimes garages. Hartford, meanwhile, is very much -city-; those are mostly flats.

Some more things to think about. Thanks for the extra helping of “food for thought”. Gonna be thinking about it all day now. :slight_smile:

-Td


#2

Inc Props vs. Rehabs - Posted by TDreamer

Posted by TDreamer on November 02, 1998 at 13:25:17:

Inc Props vs. Rehabs

Greetings,

I?m very new to REI, as my question below will indicate. I?m your basic newbie, having studied Sheets, as well as a few books, and other research material, such as this website. I?m beginning my OJT, as it were, on the telephone, talking with sellers.
I?m having difficulty determining what kind of properties I should try and secure for my first investment; a multifamily income property, or a rehab project.
The latter is sounding more promising all the time. There are several properties that I could look at right now that are about 65% below FMV of comparable, well-maintained, retail properties. It seems that these might turn over a nice profit if I were to successfully fix them up and resell them.
As for income properties, I?ve tried to screen sellers and properties to determine if I should look into them, but it seems to me that, especially for someone just starting out, there is not enough cash flow in them, if any at all.
I?ve used the ?Money-Making Idea? entitled ?Crash Course in Commercial Real Estate? to try and get a rough idea of the numbers, and whether or not a property would work out. What do you think, are these estimates too tight?

Property 1: 2-family, 3br each unit, rents @ $550/mo/each.
Asking price $65,000.
$1100/mo gross income.
Less 10% vacancy rate of $110/mo = $990/mo adjusted gross income.
Less 45% expenses (maint, util, mgmt, taxes, insc) of $ 445/mo = $ 545 NOI.
If financed full price, 8.9% x 30 yrs, mortgage = $523/mo. (so far, lenders around here seem to charge 8.9% for investor loans; some higher!)
If I put 10% down, financed $58500, 8.9% x 30 yrs = $442/mo mortgage.

No, not worth it for only $100/mo positive flow.

Property 2: 3-family, Two 2-br units rent @ 500/mo/ea; One 1br @ $400/mo.
Asking price $59,900.
Gross Income $1400/mo.
Less 10% vacancy of $140 = $1260 adjusted gross income.
Less 45% expenses of $567 = $693/mo NOI.
If financed full price, 8.9% x 30 yrs, mortgage = $482/mo.
If I put 10% down, financed $53,910 8.9% x 30 yrs =$435/mo.

Just about $200/mo +/- positive income.

Mind you, these figures are used just to get a rough idea about whether or not to call on a property, and then whether or not to go look at it. I realise that if I were to go look at one, I would ask the seller for detailed expesne reports, and for exact figures on the rentals, to make a more accurate estimate of the numbers.

Please let me know what you think…am I totally off-base here?

Thanks,
Td


#3

Re: Inc Props vs. Rehabs - Posted by Laure

Posted by Laure on November 02, 1998 at 23:00:19:

First of all, I would look to see how to get the rents higher. Those rents seem cheap to me. ( I am in central Illinois) Need new faucets, tub enclosure, carpet? How much do you have to upgrade to get more rent? I find that in almost everything I look at, the rents can be raised. I am pretty aggressive with my pricing.
As for you paying for utilities…ABSOLUTELY NOT !! If I couldn’t separate utilities and have the Tenants pay, I wouldn’t buy it. I have been there already, it’s not worth it.

And that is where you get your cash flow.

I would recommend a 15 year amortization over a 30-- or at least make your payments based on the 15 yr rate
Hope I helped


#4

Re: Inc Props vs. Rehabs - Posted by Td

Posted by Td on November 03, 1998 at 08:26:43:

Greetings, Laure, thanks for your response. You’ve confirmed some things I was wondering about, such as who pays the utilities.

I was relying on the “Money Making” article on Creonline, here, called “Crash Course on Commercial Real Estate”. But it seems that one is for much larger properties. I can see some utility factors coming into play for the landlord on something like a 12+ building.

As for 2-6 unit buildings, yes, the tenant should pay for utilities. I certainly had to when I was still renting. It’s a bit of a trick with utilities here in the Hartford, CT area. Many multifamilies offer heat and hot water paid with the rent. And it gets cold up here in the winter, maybe not like in Illinois, but quite chilly, indeed. Still, there’s enough properties that can be had where -everything’s- separate, including water.

Laure, how would you screen a 2-6 unit property? How would you determine whether to view a property based on an ad and the sometimes limited info you can get from the seller and/or realtor over the phone?

I’ve thought that I should know what each unit should rent for; I need to have a very good idea of gross income.

What about vacancy allowance? 2-3 family units? Is 10% a good allowance for this?

How 'bout expenses? If the tenants pay for their utilities, then what would I have to pay for? Water and /or sewer services? Just a rough figure to adjust for expenses, seen and unseen. What would be a good percentage for expenses margin?

Now for the real key…what would a lender be looking for? Mortgage would have to be under 50% gross income, I thought I heard somewhere. What kind of general profile does a bank look for?

Conventionally speaking, I just checked with a national bank in passing. They’ll loan 75% @ 8.9% fixed x 30yrs w/a whopping 25% cash from the buyer. All cash, no seller financing. -YUH!- They must not do too many investor loans.

There are mortgage companies and private investors all over the papers; I’m going to ask some questions of them soon. But just by way of preview, what would a mortgage broker look for in order to approve a loan? If a -very- private lender (few or no questions asked), what kind of percentage would they lend? Would they accept it, if seller would be financing the rest, or some combination of possible arrangements other than my putting down cash?

Yes, many questions. :slight_smile:

Of course, I’ll be on the telephone to some lenders. Also some sellers. One property is looking more promising, even figured as I previously did above. If I go see it, I might get to see income and expense reports. I’ll have a better idea of costs then.

Meanwhile, thank you, and everyone else on Creonline. Nice place to come with my morning coffee and learn about this business from you fine people.

I look forward to your advice, and hope to sometime in the reasonable future tell you about a success story that you all helped me achieve.

Regards,
-Td


#5

Re: Inc Props vs. Rehabs - Posted by Laure

Posted by Laure on November 02, 1998 at 23:09:07:

Some people think that I over-improve my rentals. I get them nice enough that I would live there. I would put my infant on the floor. That’s how I get top rent. Also, when your rents are higher, you get a better class of Tenant calling to view the home/apartment, and ultimately, a better class of Tenant, which takes care of the property. I tell them right up front that if they want a nice place to live and raise their family, get their rent paid on time. That I don’t play games with rent, and I will not hesitate to start eviction proceedings. NO FOOLING AROUND ! I’ve still got 2 Tenants that pay in the middle of the month, but they have been Tenants for over 10 years ! They have almost paid for their/ MY house…hehe … so I cut them some slack. WATCH THE SCHOOL DISTRICT YOU BUY IN… if you don’t have kids, ask around for suggestions. That is something you have no control over after the purchase.

Laure