Posted by phil fernandez on January 30, 2001 at 17:04:51:
Hi Steve,
In my area the vacancy rate is something like 1% right now. We tend to use a vacancy rate of 5% and the local appraisers and banks also like to use the 5% vacancy figure. Of course that number will vary from market to market and over time may change. I’d hate to be in a market where vacancies would be above 5%. It would make me nervous about getting and keeping good tenants.
As far as the 40% operating expense figure. This number is just a rule of thumb. Every property will be a little different. Your 20% - 30% figure to me seems low. Within my 40% figure I include what is called a reserve for replacement. So when the roof need replacing, the furnace and hotwater heaters need replacing, that money will come out of the cashflow, not out of my pocket. Many people disregard the reserve for replacements. I include that in my expenses.
Triplex
Asking Price: 139,000
Owner says price is concrete terms are jello because he is making money by keeping it and he wont sell unless he gets his investment back…
Rents
1 br 1 ba - 575
2 br 1 ba - 650
2 br 1 ba - 675
Last year NOI was 22,040 says the agent
Owner pays utilities right now…
Area is fantastic, 5 mins from major university…
We would do owner occ. in the 2br $650 one and when leases are up , go to tenant pay utils…
We live in a apartment now that rents 500 and from what we figured our out of pocket each month in the triplex would be around 200 instead of 500 rent that we burn a month…
We have $2000 cash to work with but would prefer not to use any…
If you can finance this, or you know someone who will or just have a suggestion please reply…
Posted by phil fernandez on January 29, 2001 at 18:42:00:
I didn’t even have to read the below respondents.
gross rents 22,800
5% vac factor -1,140
40% operating expenses - 9,120
NOI 12,540
mortgage 9%, 30 yr. $137,000 - 13,224
negative cash flow 684
Ask your agent again what the NOI is. Then tell him the NOI is $12,540 not $22,040.
Let’s go a step further with this and apply a cap rate to the NOI. I don’t do deals in todays market for a cap rate under 12% so let’s apply the 12% cap rate to your deal.
NOI $12,540 divide by .12 cap rate equals what the property is worth = $104,500. The property under the above cercumstances is worth $104,500.
I will bet that the realtor meant that it was gross rents. Typical is 40% of the gross for taxes, insurance, management, maintenance, vacancy, etc. What is left is you positive cash flow and debt service. Sure, you can do the management-evictions, tenant screening, advertising, etc. You can do the maintenance to. But then that makes it your part time job.
On to financing-You have to have him tell you what cash he needs and what he is willing to carry. If he wants all cash then it isn’t a great deal. You make your profit going in. If he will carry 20-30% or more then you can sell his owner financed note to get him the cash he wants. Most conventional lenders want you to have some cash into it. The 2K will probably not cover your closing costs.
You can also lease option it. Give him reduced rents for no maintenance or management responsibility. He just gets cash flow until you buy. Then there is also the scenario that he refi’s and you take over the loan. You could even do a PACtrust with 3 units. Find out what he is willing to do and let us know more details.
Thomas, Someone’s not on the level about expenses on this property.
I wish I had a 3 unit property with only $760 per year in expenses, but, frankly, I think the taxes would be more than that, not to mention the utilities, etc. And that’s with NO vacancy or collections. Wow!, I’d like a few of them. Really though, if you calculate a real world return on this property, you’ll get a different value for it. You will probably find you only have around $13500-14,000 to service the mortgage. Finding a loan on a property might not be real hard if you have good credit, but you’ll probably need more cash. You might get it from closing around the third and using the collected rents as well as your own cash, but you’ll probably be in negative cash flow unless you can either get a lower price, control expenses real good, or put up a larger downpayment.
Bill W.
Posted by Steve (OH) on January 30, 2001 at 12:33:23:
Phil, where do you come up with a 40% operating expense? This seems (albeit conservative) rather high? I usually use 20-30% for expenses AND vacancy…too low??