Should I? - Posted by Zack W

Posted by Monique on March 10, 2001 at 05:02:26:

There is lots of discussion there about buying multi-family units.

Here’s to your success!

Should I? - Posted by Zack W

Posted by Zack W on March 09, 2001 at 21:20:38:


I have an opp to buy a 7 unit for no money down. Here are the deatils and please provide some feedback. I have to give an answer before Monday 3-12-01.

Pur Price 136,600
Down Pyamnet $0.00
Financing Private 9.5% amort 20yrs due in full in 5yrs

GRI 24,120
Vac 1,206
EGI 22,914
Tot Exp -9,072 [inc. 10% mngmnt fee paid to me]
NOI 13,842
Cash Flow -1,437

Above it shows a neg cash flow, however that is with only 5 units rented. There are 7, 2 need rehabbed. I plan to invest $7,500 into 1 of them and rent that for $480 month. That adds $5,760 in addtl income which would bring the property into a pos cash flow. My expenses also call for a 10% management fee which gets paid to me as well. Also in Nov 2 of the units leases are up, when that happens their rents will be increased a total of $220/mnth which will add an addtl $2640 in income.

My question to you is do these num’s make sense. I have the expenses accurate, and the num’s make sense to me I just want others opinions. The property is in ok shape and will need a little cosmetic work.

Zack W

Be careful with projected numbers - Posted by ray@lcorn

Posted by ray@lcorn on March 10, 2001 at 10:36:56:


The deal looks good with the information you have presented, however I note that you are not using real income numbers. Anytime I see allowance for vacancy I know that the income is not the actual gross income, but a projection. It seems in this case you may be using the current rent roll with 2 vacancies for the income calculation, and that is better than starting with 100% of potential rents. I would dig into the owner for actual operating numbers showing the actual income collected. When you buy properties valued on their income, be sure to verify that income. Believe it or not, some Sellers will lie.

You say you are sure about the expenses, and since they are not itemized I can only hope that everything is there (ins., txs., maint., util., etc.) Since you plan to invest $7,500 in capital improvements, that more than covers a regular deduction for capital improvements, and may or may not correct any deferred maintenance. Be sure that you include those costs, as well as lease up costs in your cash return figures. Not sure what you intend with the other unit that needs rehab… when, how much, etc., but it of course needs to be accounted for just like the first unit.

As a rule I would pan a deal with projected negative cash flow. This one however is an example of a deal with considerable upside potential, and the negative cash flow is actually produced by the inclusion of a prudent market-rate management fee. In effect, you are the recipient of the cash that will be needed. Return wise, the deal should show an excellent cash-on-cash return in about the second year, assuming that you have done your market research and know that the projected rent increases are in fact doable, and with the qualifier of the cost/benefit effect of the second rehab unit.