Posted by JPiper on January 20, 1999 at 14:31:11:
It may be that these property taxes referred to are paid in advance in this particular county, as opposed to arrears as it is in my area. There are some areas of the country where this is true. In any case, taxes for the first 6 months of 1999 need to be paid, but the rental income for the first 6 months has not been earned. I don’t see how this influences an expense rate of 50%.
Again, the utilities evidently have not been paid. Does this mean they are not included in a 50% estimate of expenses?? Or does it mean that the owner did not pay them, instead putting the money in his pocket?? I don’t know the answer to this, nor I suspect do you.
Here’s what I do know. I have seen few buildings with expense rates exceeding 50%. I would prefer to analyze this building based on what I know to be true from experience, rather than based on supposition.
Even if we raise the expense rate to 60% there is still a modest cash flow. The income is not what makes this building a bad deal. Nor are these extreme assumptions of expenses. What makes the building a bad deal perhaps is the existing financing.
What we don’t know here is the value of the building, and whether the rents are market rents. Either of these factors could change the whole appearance of this deal.