What about this deal? - Posted by chill

Posted by chill on March 15, 2000 at 18:27:11:

Thanks for the input. By the way, the property has a well. It is in an area with a long cold winter. I will take a harder look at this before I think of making an offer. Thanks again to all that responded. LOL

What about this deal? - Posted by chill

Posted by chill on March 13, 2000 at 20:39:17:

I am going to look at a 5 family with 4- 2BD 1BA 1 - 1BD 1BA. Owner pays all utilities. Total expenses are approx. $16000/a year. Gross income is $22500/yr. I was given an income & expense statment with the above figures. They are asking $55,000 for the property, they were asking $60,000. I was thinking offering $48,000 expecting to pay $50,000 - $52,000, depending on the condition of the property. The owner is willing to carry a second morgage for 10% of purchase price for two years with a ballon at the end. We have not worked out all the details of the 2nd yet. My question is, does this look like it has a positive cash flow of $540/month or am I missing something? If it indeed has a positive cash flow of $540/month is this an acceptable return? I will have about $6000 of my money in it @ 20% down. Is it possible to get financing with only 10% down? Please help.

Re: What about this deal? - Posted by GIO

Posted by GIO on March 14, 2000 at 20:57:00:

how about any rent guideline laws in your state ???

Re: What about this deal? - Posted by YankeeBob

Posted by YankeeBob on March 14, 2000 at 11:04:04:

Missing something? A lot, methinks. 1.) cost of money
2.) repairs and upkeep (condition of heater, hot water, electric, roof, infestation check, etc. 3.)state and local license and inspection violations. 4.)tennant history 5.) tennant leases 6.)neighborhood - stable, appreciating, or declining? 7.)all things mentioned by Doug Pretorius 8.) cost of converting to seperate utilities (could be 5 to 8k per unit)
If all the aformentioned tenants are satisfied - Offer 42K if you’re paying utilities. Good Luck!

Re: What about this deal? - Posted by ray@lcorn

Posted by ray@lcorn on March 14, 2000 at 10:14:36:


Something isn’t right here…

The expenses are way out of line (too high… 71%) should be more like 40%. Were there vacancies during the period in the statements? Or by chance is interest expense included in the statement?

Will you post the monthly rent per unit and the line item annual expenses? That could give us some insight as to what is going on.

You may be getting ready to steal a property. $10T per unit is cheap in anybody’s market.


100% finance program for investment properties in VA. (nt) - Posted by Dwayne R.

Posted by Dwayne R. on March 14, 2000 at 06:05:59:


Re: What about this deal? - Posted by Doug Pretorius

Posted by Doug Pretorius on March 13, 2000 at 23:04:39:

Looks right to me. Just be sure to get more documentation (i.e. tax returns, utility bills etc.), don’t trust his income statement alone. Look into getting it switched to seperate utilities, you’ll be able to make more money (by cutting expenses more than rent.)

You should be able to get 90% financing, but try working the seller a little more, see if you can get him/her to give it to you with nothing down or spread the downpayment over several months. You might even be able to get them to delay the downpayment money until you install seperate meters, thereby increasing your cashflow to cover the downpayment installments.

Just a few ideas…

Re: What about this deal? - Posted by chill

Posted by chill on March 14, 2000 at 20:29:41:

Here are the rents and line items from the statement I received.
Rents :
2 units @ $400/month
2 units @ $375/month
1 unit @ $325/month
Expenses :
Electric $1375/yr
Gas $1522/yr
Sewer $280/yr
Trash $850/yr
Maint. $550/yr
Taxes $643/yr
Insur. $2170/yr
Misc. $1500/yr
Advertise $313/yr
Sub Total $9203/yr
Est P&I $6800/yr
Total $16000/yr
I hope this sheds some light. I am to meet on Thursday with the owners to see the inside of all the units.

Re: What about this deal? - Posted by chill

Posted by chill on March 14, 2000 at 06:05:20:

Thanlks for the info. I am going to follow up with the owners today. I’ll keep you posted.

Re: What about this deal? - Posted by ray@lcorn

Posted by ray@lcorn on March 15, 2000 at 11:49:32:


As I suspected, you included the P&I in expenses. When stating expenses for a property, debt service is not included. While your cash flow will still work out to what you thought, someone like me will be continually confused when told about the deal. In the future, state the expenses separate from debt service just so we all are working from the same playbook!

Your income numbers are pro forma numbers. That means the revenue figures are the total potential rent, not the actual rents collected. The way I know that is because if you multiply the rent amounts for each units times twelve, it comes to $22,500. It is highly unlikely that this was the actual amount collected because of tenant turnover, vacancy and collection loss, late fees, etc. In short, the actual numbers could be more or less than $22,500, but I will bet my last dollar that it wasn’t $22,500. You need the actual numbers to really evaluate what you’re buying. I usually ask for bank statements and the Schedule E from the owner’s tax return to verify the income. If you are valuing a property based on its income, then you MUST verify that the income is actually there.

The expenses look as thought they may be actual, or at least based on actual performance. I don’t like units where electric is supplied to the tenants. It makes me wonder if this is a large house that has been converted to apartments? If so, then the reason the owner is supplying electricity is because the wiring was not separated into separate meters. Same story on the gas. I suspect the building has a central heating unit. The problem with joint utilities is that you are always at the mercy of the tenants as to what your expense level will be. If rates go up, their usage won’t drop. They won’t care, and you probably will not be able to raise the rents fast enough to prevent some seasonal negative cash flow. If this is located somewhere that has winter, I would guess that this building probably runs negative in those months anyway. And if you try to set the furnace to a maximum level, all the tenants have to do is plug in one of those electric heaters, because you’re paying the electric too!

Maintenance cost looks low, though without knowing the character of the building its hard to tell. $200-$250 per unit per year is more likely, again depending on the turnover and the general condition of the building. The owner is probably doing the repairs himself, and the $550 reflects only the cost of materials. That’s fine if you plan to run it the same way, but be aware of that going in. If you have to hire the work done that the previous owner was doing himnself, then your expenses will be much higher.

I see sewer expense, but no water. What’s up with that?

Bottom line, I would not make any offers until I could verify the income. If you deduct even a 5% vacancy from the pro forma rents, then your net cash flow goes from $540 per month (assuming your debt numbers which I don’t entirely follow) to $450. If there are 10% vacancy and collection loss, then the cash flow falls to $350 per month. If there are any additional expenses such as maintenance or water to be deducted, then you have a whole different ball game than the one you thought you were playing.

That reminds me of a thought a friend of mine told me once… When you think you’ve got all the bases covered, remember that you aren’t playing baseball. It’s real estate, and a missed base is usually money out of your pocket.

Hope this helps,