Posted by Rich Hyams on September 17, 2003 at 20:13:33:
Several reasons, one, I knew enough, probably even more than you, two, I really wanted a re-hab before the summmr to have some work for my guys(summer is my slow time).
Then I heard a few horror stories. a few here and a few at some REI meetings. I then decided that a little humility, a lot more legwork and lots more reading would probaby serve me well.
I have my mom to thank for the humility, you for the legwork and all the vets here for the wealth of reading.
Please Advise, Should I buy this property??? - Posted by SeanB
Posted by SeanB on September 14, 2003 at 18:28:06:
All,
I have just had a contract accepted and want to make sure that this is something that I want to pursue.
The property is a converted 4500 Sq. Ft. home. It has been converted into 8 rental units. All in average shape. No maintenance needed in the near future.
I am in a college town and because of this vacancy rates on rentals is quite low. 5% is the maximum I will see in this venture.
Here come the numbers. All expenses come from a 3 year average from seeing the sellers Schedule E.
Offer is 212,000. Property will appraise for 227,000.
Offered new first mortgage for $202,429.80, Seller to take back second mortgage for $8500 at 6.25% for 5 years.
Debt service will be 1650.68 per month. After 5 years it will decrease by 165.32.
Rental income is 2805 per month.
Expenses are 545.84 per month.
I can convert a storage unit in the back to an apartment for 6K. This will increase monthly rental income by $350 per month within only 3 month’s.
Looks like a winner to me but of course, I’m new to this and hope that you experienced investors can lend me a hand on this analysis.
Those expenses look low to me. For typical apartments you want to figure about 30-45% of gross rents for all expenses except debt service. The low end is if you do your own management, the high end is with hiring others to manage for you.
Gross scheduled rent: $2805
Gross rents at 5% vacancy: 2665
Minus debt service -1650
Expenses - 950
Net Monthly Income 65
So, how excited are you about earning $65 month on average? How excited are you going to be if you have to spend more for repairs and utilities, and taxes and so on in a month than you have coming in?
These expenses may be a little high, on the other side, they may be a little low.
Have you looked at at least 50 other similar properties? If not, I suggest you are not ready to be buying. This does not look good to me.
There are statistics available on the cost of operating apartment complexes. A part of the NAR in Chicago has them available, the IREM–the Institute of Real EState Management.
I used a modest figure. Not real low, not particularly high. One should always use conservative figures when calculating cash flow on properties, in my opinion.
Posted by SeanB on September 14, 2003 at 22:30:18:
OK,
Keep in mind that this is not your typical 8 unit… It is a converted 4500 sq. ft. home. Each unit is a one bedroom that college students rent. All fairly new and I have verified the Schedule E for the last 3 years…
Well, perhaps you will have similar figures. Can you be sure? Perhaps he has let stuff slide? Maybe in the two years before those three years he did a whole passle of major work, with a lot of expenses?
Could you find similar properties in the area and ask the owners of those properties about the expenses?
I’m not even saying that this seller is being dihonest. Just that the numbers are far below what most apartment complexes cost. When you say a unit is one bedroom, do you mean it does not have a kitchen and does not have a bathroom? If those are in not there, the expenses can be lower. Are there separate heating and cooling units or one big unit for the whole house?
Did you include the taxes and insurance? I’m assuming that your figures for the loan payments are strictly P & I. I checked and your monthly debt payment figure would be right if the first loan were ar 8% for 30 years and the second is as you mentioned.
So, are you including the T & I from the schedule E? Have you talked with insurance people? Insurance rates have gone up dramatically in the past couple of years.
Again, I ask have you looked at a lot of investments so you know that this one is a very good one? Even using your expense figures, this would be a poor money-maker, in my opinion. Less than a hundred dollars a month per unit positive cash flow. Unless you expect significant appreciation, this is definately on the low side.
If you are a beginner, please realize that very few properties being offered for sale on the open market are good deals. Most are not. This sounds like one of the “most” to me.
Posted by SeanB on September 15, 2003 at 01:13:28:
Ron,
Thanks a million for the information.
Each one bedroom unit does have a kitchen and bathroom, all new within the last 3 years. There are separate heating and cooling units as well, all new within the last three years.
I did include T&I. I’m in Arkansas so taxes and insurance are low… this is taxed as a single family residence, not an 8 unit multi-dwelling. I checked with the assessor and it is grandfathered this way due to it date of build.
I respect your opinion immensely and appreciate your feedback on this one.
One question however… you mentioned that there are few properties being offered for sale on the open market that are good deals. Most are not, and that this sounds like a most… what are some of the other locations to find properties if not on the open market?
Ok, then, so this is one of the scenarios I mentioned which would give you distorted expectations for expenses. The property had great amounts of money sunk into it just over three years ago. There is a lot of new equipment, there was a lot of new paint, carpet, and other items which will cost you money to replace when they are worn out, get too dirty to clean, and so on. You will find your expenses going up over time. It will be considerably higher than the history that you have looked at. This property, unless rents go up pretty strongly, will be a poor income producer in a few years. The price is too high for me to ever consider paying it. You? Well, you make your own decisisions.
Again, I ask the question, “Have you looked at at least several dozen income properties?” I’ve asked it twice before and you have not responded. Makes me think you have not. You are eager to buy and are not doing your homework. Well, you do things the way that you want. See what your results are. Then adjust your approach to provide you more of what you want. One hint: if you want positive cash flow, at this price, this is not the property.
“…what are some of the other locations to find properties if not on the open market?” There are way too many to want to spend all the time listing them. WHen you get to know other investors in your area you may have properties offered to you. There are a host of methods to advertise for sellers. Once can mail solicitations directly to target owners. For instance, I am considering moving from single family to multiple family investments. I use the newspaper listings only to get an idea of the market values of the properties. More accurately the asking prices. I will send a solicitation to the owners of properties which meet my criteria.
There are many ways to find good deals. Looking in the MLS and newspapers it usually an inefficient way to find them.
Posted by SeanB on September 15, 2003 at 10:20:46:
Thanks a million Ron!
You’ve helped put this in perspective. Ha ha, and no, I haven’t looked at a dozen properties, this is only the second that I’ve found. Got excited about it because I could buy it literally “No Money Down” and am glad I have this board to go to for advice because I am now going to re-evaluate the entire scenario and not sign the contract today.
Thanks for being a great mentor to me and the others on this board!
Please note that I said “several dozen” properties. You need to look at a bunch before you start thinking about actually acquiring, in my view.
As I said before, if you expect decent appreciation, then this might make a reasonable investment. However, I doubt it is one for you. I feel you are not yet ready to buy.
Good Investing**************Ron Starr*************
Posted by Rich Hyams on September 17, 2003 at 12:42:24:
At first I took Ron’s advice to see 100 houses before making an offer on one and his prediction that I would make ten offers before getting one, not very seriously. I slowed down and looked at houses on lists and spent some time, maybe two months, just looking with no real intent of offering, I saw about fifty properties before putting in an offer.
These lists were foreclosure and invertor property lists, some ten pages single spaced. The area here is incredibely competitive. The first three offers I put in were slightly below the ask. Each of them went for higher than the ask. I put in a couple more offeres and after getting soundly whipped, I started mailing, calling and knocking. Put in a few more offers before having my 8th or 9th offer accepted.
So far, the vast majority of info I have seen here from experienced investors has been right on…although I must say nyah, nyah a little bit becuase I did get an offer accepted before my tenth.
I think the experience of seeing a large number of houses in the market I wanted to be involved in and tracking the ones I made offers on to their final sale, was invaluable.
I lurk alot more than I post and wanted to thank Ron for that piece of advice, thanks!
Good for you getting an offer accepted. You did the right thing, learning your marketplace.
But why do you say “At first I took Ron’s advice … and his prediction that I would make ten offers before getting one, not very seriously.” “…not very seriously… ?” indeed. What is wrong here, don’t I have an honest face? Did I have my tongue in my cheek?