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
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:
Are rents below market?
Are there repairs needed?
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.
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.