Run this through your cranium. - Posted by Randy -IL-

Real Estate Investing
1

Posted by Redline on March 12, 1999 at 13:59:09:

I agree with Jim (good work by the way!)

You should talk to the seller before you hurt your brains with these numbers. If he’s not flexible then you’re wasting your time because you dont want to/might not be able to go to a bank for this one.

RL

2

Run this through your cranium. - Posted by Randy -IL-

Posted by Randy -IL- on March 12, 1999 at 12:06:50:

I found a small multi-unit in a kinda seedy portion of town. Thats probably why its been on the market for a while. See what you think:

6 units at varying rents. totals $1370/mo.
Insurance: $1000/annually
other expenses: $161/mo.
$2000 annual incidental expenses
$2932 annual vacancy (I’m thinking worst case here)

NET= $11508 income annually

Asking price $74,500.
in this market the average joe gets 10-12% off of asking price. So with $60-65K purchase price it works out to be about 17-19% return.

With that said, run your calculators and thoughts back to me. I’m looking for ideas on:

  1. If I missed anything.
  2. How to handle management in a seedy area.
  3. financing an animal such as this with close to zero cash.

Thanks for your input.

Randy

3

Re: Run this through your cranium. - Posted by Jim Beavens

Posted by Jim Beavens on March 12, 1999 at 13:39:46:

Here’s how this pencils out:

Gross income: $16,440
Vacancy: -$ 2,740 (1/6th of gross, ie one unit always vacant).
Effective Gross Income: $13,700

Expenses:
Your numbers: $4,932 (36% of EGI).
40% of EGI is more likely: $5,480
50% might be more prudent: $6,850

Using 50%, the NOI is $6,850. Even with a $60K selling price, the cap rate comes to 11.4%; not very impressive.

Questions to ask:

  1. Are rents below market?

  2. Are there repairs needed?

  3. Has the area shown any improvement lately? Does the city have any plans for demolition of condemned buildings or development in the area? You only want to buy in these areas if they’re on the rise, or at least stabilizing.

  4. Are there good property managers that work in the area? Look for other multi-units that appear to be in good shape; recent paint, lawn mowed, no broken windows, etc. Either ask a resident who their landlord is (if you feel safe doing so), or try to find the owner from the public records and ask them who they use. If you can’t find anybody but slumlords, then stay away. But if you can find a competent manager who can look at the units and give you a confident estimate of what they could rent it for, and can show you other buildings in the area where they’ve brought the rent up to what they’re promising you (hopefully with paperwork to back it up), then you might want to proceed.

Since these are more than 4 units, any bank will treat them as commercial properties, and the lending criteria stiffens up considerably. You’ll probably have trouble getting bank financing with anything less than 20-30% down. Seller financing might be the only way to get in with no cash.

If any of the above questions aren’t answered in your favor, then I’d stay away. And even if they are, alot of things have to go your way before this is a deal. Good luck with whatever you do.