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,