Posted by Shawn J. Dostie on July 14, 2003 at 18:07:03:
Yes, and in 20 years that is $176,400.00 in todays dollars in rental income. Will my Social security cover my taxes?
Thanks,
Shawn(OH)
Should I or not? GL,Ron Starr,Buy &Hold folks - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on July 11, 2003 at 11:14:16:
Thanks in advance for you opinions. I currently own 11 rental units, some 2 unit some 3 unit some sfr and a MH. They currently cashflow at approx $1500.00 per month or $150.00 each. I paid approx $17,500.00 per unit for these and did “all right” All have good appraisals for whatever that’s worth. I am in negotiations with a fellow that wants/needs to sell his 31 units. He owes a balance of approx. $17,993.00 per unit (but who’s counting). The reason he is getting out, is according to my calculations and his income figures, he is losing approx $1500.00 per month.
$557,800.00 includes closing costs
$10,065.00 gross income
10% vacancy
10% maintenance
Taxes ins escrowed ($1228.00) month
utilities, advertising etc…
I have pored over the numbers, have talked to my banker (we have the same banker) and he is offering to finance at 6.5% fixed for 20 years with no out of pocket expense to me. I’ve always operated this way and that part doesn’t bother me. The things that bother me, are, I know the problem is strictly mismanagement just from a comparison to my own which are similar type, condition, and neighborhood. I have it figured down to a basically break even deal at takeover. First off I am going to 42 units instead of my 11. That will be time intensive on my part. (I also run a car lot as my day to day) I know that it will probably start as a negative cash flow if I go in and raise everyones rent, although I intend to do it all gradually. Am I willing to work that hard for the year or so it takes me to straighten thins out? I need to know if I am being rational or as Ray so aptly puts it, feeding my desire to acquire?
Thanks for your input,
Shawn(OH)
As I See it - Posted by Bill PA
Posted by Bill PA on July 13, 2003 at 23:50:34:
I have recently went to a work shop with Terry and Ed. The two biggest thing that i got from the work shop is that 1 Why should I pay some one else for my work (Buy for what they are worth now not in 6 months after you have it)
2 You have to make your money when you buy. what happens in 6 months if you need to sell are you going to be able to sell for a profit quickly.
is the current owner behind on mortgage payments if so you may be able to talk to the banker to see if he will sell the notes at a discount and still have him finance the deal. and make him see how it is not a sound investment at this time and show him what you are going to do.
Hope this helped never tried this yet but am trying to find the properity to do it with.
Two cents and nothing more… - Posted by rm
Posted by rm on July 12, 2003 at 15:18:29:
Why not re-negotiate so you CAN get a solid cash flow on these?
I think it was you who posted in reference to high-end properties, “What’s the scrap value?” or, in RE parlance, “What would it rent for?”
Just because you’re buying in bulk doesn’t mean you have to lower your standards.
In fact, because you’re making it easier for the seller to sell (as opposed to selling one at a time), you might see that as added value to the seller.
For whatever reason, I’m lately being approached by landlords who’d like to cash out. It’s always the same old saw: “Well, it rents for X, but I could probably get Y for it. I haven’t raised the rent in 5 years.”
My reply is always the same: I have to buy based on the current rent. I’m in this for profit, and I can’t buy based on assumptions. If I raise the rent and lose the tenant, then I’ve got to clean up and get a new one. I’m not willing to take that risk at the price you’re asking. If you’d like to raise rents and call me back in a few months, we can discuss it at that time.
My views… - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on July 12, 2003 at 24:18:00:
Shawn J. Dostie–(OH)------------
Good Going Guy.
This is quite a big step up at one time. You’ve gotten some good advice, I feel from JT(IN/OH),and GL(ON).
I feel that managing about 45 units is probably close to a full time job, if you do most of the physical work yourself. I think it makes sense to think about hiring either a full-time or part-time helper here. Either a manager who does repairs or a repair person. You make the decisions.
I like the idea of reselling the less profitable to less desirable properties. Perhaps after holding them for a couple of years to see how they perform–and get long-term capital gains treatment or do 1031 exchanges.
You have prepared yourself for this by managing the properties that you already have. Still, it is a pretty big shift at one time. I suppose you will want to immediately raise the rents on the properties which are in decent shape and have low rents. The renters usually expect a rent raise when there is a new owner. Would you want to disappoint them?
Then start working on the ones that need immediate attention. And raise rents fast. If it were one big complex I would not advise this, I’d advise in that situation to raise 10% of the units per month. But, for the 5, 4, and 3-units I’d suggest spread them out over about 4 months. One person at a time in the complex. That way, they don’t all have a complaint at the same time and start a rent strike. Interestingly enough, the San Francisco rent control was instituted because ONE PERSON raised rents all at once on something 1400 units he owned and rented out. What a stupe.
You don’t indicate the condititions. If they were in really poor shape, I would expect it to take you about two to three years to get every unit fixed up and holding good renters.
If you have some poorer renters–pay late, don’t treat the property well, raise them early on, so you can get rid of a lot of them. If they don’t move out, at least you will be paid well for putting up with them.
You might also think about your long term goals here. How many units do you really want to end up owning? What types and locations? I’d suggest that the number you will have, 42, is probably about right. You should be able to get a living income from those and not have to work too hard. You could probably do nothing elxe to make money, if you desire.
Good InvestingRon Starr*
GL,Ron Starr,Buy &Hold folks - Posted by GL - ON
Posted by GL - ON on July 11, 2003 at 21:08:43:
Are we talking about a 31 unit apartment complex or 31 SFH’s? The reason I ask is that you state the price per unit to be higher than what you are used to paying for houses and duplexes, yet you also say it is a bargain price.
Apartments usually go for less than half as much as a single family home.
10% for vacancy and 10% for maintenance are very high. I don’t know what vacancy factor you are used to in your area but 5% should be more like it. Maintenance should be no more than 5% even if you hire everything done.
Values and rents are very low compared to what I am used to. What is the going rate in your area? You will have to figure out what the properties will be worth in top shape, and deduct the cost of putting them in shape. Obviously you have to buy for less than that or it isn’t worth the bother - you might as well go buy good ones to start with.
So if you can wind up getting them for less than the going rate, after fix up, and you can get in for nothing down with a positive cash flow, why not go for it?
Re: Should I or not? GL, - Posted by GL - ON
Posted by GL - ON on July 11, 2003 at 19:40:12:
Shawn, I know you know how to analyse these deals from a dollars and cents standpoint. Have you done a comparison between what the place is like now and what it will be like in a year when you have cured the management problems, fixed up the physical problems and got the rents where they should be?
You should be looking at strong pos cash flow at that point if it cash flows OK now.
But you are buying it as is, where is and you should only pay what it is worth now. In fact if it has “issues” then you should get a deal. You deserve to be paid for your efforts.
The difference between what it is worth today and what it is worth fixed up should be substantial. I can’t say more because you don’t give enough details.
However I can say this. The figures you give of $557,800 price and $10,065 per month income indicate a GRM of 4.6. This is very good, break even is usually around 6 to 6.5. You should have a good cash flow right now at that rate. Especially with a mortgage at 6.5%. I don’t know how he can be losing $1500 a month unless it is half empty.
Based on what you have told me I would be very interested if I were you. Perhaps you should go over the figures again in detail, you should have some good cash flow there as it is, and you say it will get better with a little work.
You are also reaching the point where you should be putting a management system together and delegating the work.
At a certain point you can go on auto pilot if you have enough business to support it, and just supervise your team.
If your long term goal is to a) have a real good income from the rent and b) eventually cash in the giant jackpot of appreciation, in 10 or 20 years I think you are on the right track.
In that case, you should buy anything that has decent potential in terms of location and physical plant (no war zones and no dumps) and can be bought for little or no money down, and a positive cash flow. There is no limit and no reason not to.
I hope you get my drift, sometimes I have trouble expressing myself clearly.
From a different perspective… - Posted by JT-IN
Posted by JT-IN on July 11, 2003 at 19:08:05:
Shawn:
Since you haven’t gotten any hits from the folks that you are seeking advice from, let me give you my ideas… I am not typically a buy and holder, but a churner and burner… (although I have accumulated a dozen properties that I receive monthly checks from).
The key sentence in your post about your current experience is:
“They currently cashflow at approx $1500.00 per month or $150.00 each. I paid approx $17,500.00 per unit for these and did “all right” All have good appraisals for whatever that’s worth”
What this says to me is that you have decent cash flow but more importantly, you have some equity sitting in these 11 properties. You bought right, and because of it you have made (unrealized) money/profit, in the form of this equity. This is one of the elements of this business of acquiring properties the way that we do in the REI biz.
Now, if you imagine that you boght this 31 unit bldg. now, and forecast out another 5 years. What would that picture look like…? My guess is that it would be cash flowing (decent) due to some management enhancements, but the value of the property (equity), and the ability to capitalize on it would be NOT comparable with your current matrix of properties. While the multi-unit may cash flow, the equity will NOT look anything like your SFH or small unit business. This is just inherent in the multi-fam business, it seems. They are a different animal, more of a business to run… and are more illiquid than your other mix of properties.
Not that comparison is the only thing to look at, but many times folks who are in one line of business sort of change directions, such as the difference between small and larger unit bldg’s, and we tend to ignore the differences. We expect the performance to be the same… Kind of like driving a BMW… then sliding into a 15 passenger minivan, then wondering why it isn’t reacting just like the Beemer…
Simple comparison, but I think that it is worthy of your analytical time to imagine just what it will be like managing this building and what are the upsides… If the vision looks good, do it… but be objective in this exercise, and it will lead you in the right direction.
JUst the way that I view things…
JT-IN
Re: Two cents and nothing more… - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on July 14, 2003 at 18:04:28:
Thank all of you for your input. The gist of it is, that the cost per unit is only $500.00 per unit higher than the 11 I currently own, including the closing costs. I have already negotiated down to the balance owed. I don’t believe that the seller has the resources to take a hit. I have already negotiated the rate down 2 points. I am buying pretty close to 80% of appraised (poss. market) value. I could put down 20% and this wouldn’t even be an issue. My dilemma is purely, do I wish to put in a years worth of effort and heartache to put me where I know these properties can perform. Which is highly leveraged 80%, Positive cashflow, paid off in 20 years. I would have preferred 15 years, but you gotta do what you gotta do.
Thanks,
Shawn(OH)
Re: My views… - Posted by GL - ON
Posted by GL - ON on July 12, 2003 at 11:20:14:
You bring up some good points. Going from 11 units to 42 is definitely a new plateau in terms of management systems.
I assume Shawn already has a good accountant, possibly a secretary or assistant in connection with his car sales business. In other words is already familiar with delegating work, running a business, dealing with the public, with contractors etc. and has accounting and management in place.
With the properties scattered around it is difficult to employ a live in manager. But perhaps that is all in my head - if you had a good manager there is no reason they could not look after all the properties.
One suggestion. If you hire a manager, I recommend a retired person who has some experience handling people. I also suggest you not give a free apartment in compensation. Charge them market rent, and pay them a salary. It amounts to the same thing in dollar terms but psychologically it seems to work a lot better.
Re: GL,Ron Starr,Buy &Hold folks - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on July 11, 2003 at 21:23:13:
It’s a 5 plex, 3 Quads, 2 triplexes, 3 duplexes, and 3 sfr. I already own a triple, 2 duplexes, a mh, and 3 sfrs.
Sorry to both you and JT for the confusion.
Shawn(OH)
Re: Should I or not? GL, - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on July 11, 2003 at 21:16:48:
Thank you. Sometimes I question whether my motives are to acquire the property, or to make sound business decisions. This is one of those that if I didn’t already have a strong income, could break me. But, I think I know what I can do and it’s one I probably should do, but I’m giving myself time to think about it. There is no one knocking down his doors, so the deal can’t be THAT good, But… Nobody else is quite as creative as I am… at least not in this town.
Thanks again,
Shawn(OH)
Re: From a different perspective… - Posted by Shawn J. Dostie
Posted by Shawn J. Dostie on July 11, 2003 at 21:11:21:
Actually, I may have miscommunicated JT. This is a mix of SFR, Triplex, Quads and a 5 plex. All are very similar to what I currently have. I am guessing that a net $500.00 per unit is not a big deal. I’m just debating whether or not I want to work that hard. I should be able, if my previous experience is indicative, to make that block of properties cashflow at approx $3200.00 per month. But I’ll not be able to work 4days a week on my golf game and my handicap is dropping steadily. Oh well, I guess I better work hard now so that in 20 years I don’t have to.
Thanks,
Shawn(OH)
Re: Two cents and nothing more… - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on July 14, 2003 at 22:10:33:
Shawn Dostie–(OH)----------------
You can always pay extra principle payments if you want to pay off the mortgages earlier.
Good Investing*************Ron Starr**************
Re: Two cents and nothing more… - Posted by GL - ON
Posted by GL - ON on July 14, 2003 at 21:06:33:
Shawn, we have discussed this question very thoroughly. To me there are only 2 questions left.
One is, does owning 42 rental units fit in with your long term investment plans?
If so, you might as well quit fooling around and scoop them up while you have the chance. It’s not likely you will get another deal like this handed to you on a plate very soon.
The other is, can you handle the responsibility? 42 units is not really that much for someone with sufficient capital, who can work at it full time. I realise you have your car business to look after. But if that means you have a good accountant and some good support there, you may already have the nucleus of a management team and the ability to delegate the work of the car lot to your help.
My philosophy still is, if you want to get rich, buy rental real estate with positive cash flow and manage it as if you mean to keep it forever. You will make a fortune that most people only dream of.
And the more you procrastinate selling, the richer you will get.
But first you have to step up and buy something.
Re: GL,Ron Starr,Buy &Hold folks - Posted by GL - ON
Posted by GL - ON on July 11, 2003 at 21:46:16:
Better and better. If you are going to solve all those problems in one go you should be able to negotiate a real good deal.
And if you ever want to sell some off they should be a lot easier to move than one big building.
A deal like this can really move you ahead fast.
Re: Should I or not? GL, - Posted by GL - ON
Posted by GL - ON on July 11, 2003 at 21:57:19:
By the way do you realise that $150 times 42 units is $6300 a month which is $75,600 a year?
God bless America.
Re: From a different perspective… - Posted by JT-IN
Posted by JT-IN on July 11, 2003 at 23:06:58:
Shawn:
The fact that they are not all one bldg is a plus, in my book.
Here is what I would do… Analyse these as if they are all seperate properties… Then decide which ones you purchase, and which ones you wouldn’t… if they were being offered individually. Then determine if you bought all of them, what you could do to spin off the ones you wouldn;t buy, if they were being offered individually. Could you come out on those properties…?
Also look at what the sum total of these would be worth after you were managing them for a 6 months period… It seems that if that number would/could be appreciably higher than what you would be paying, then that would make the decision easier.
It seems that this could be a pretty sweet deal, especially if you can enhance the c/f on these properties, and maybe sell off any dogs, if they exist.
Good luck on the decision… Let us know.
JT