Posted by rehabber on April 29, 2007 at 12:11:11:
let me add this though - Are there tenants currently
in the place??
If so: if you raise rent to $400 AND have them start
paying their own heat, (at least) 3 of the 4 current teants will move out. So factor in any intial vacancy
rate while finding new tenants to your numbers.
If this still pans out, go for it.
Would you buy this 4 plex? - Posted by batpro
Posted by batpro on April 26, 2007 at 08:52:43:
An old brick building on a main street in a small town 5 miles from a larger town (turning into a city, growing rapidly) went up for sale a week ago.
It is a 4 plex. 3 - 2 bedrooms and 1 - 1 bedroom. All apartments are really spacious. The entire building has brand new electrical. The tenants pay electrical. The building has a new natural gas water boiler for heat but the landlord pays this (ouch). The property is in N. Minnesota so the heat bill really cuts into the profit potential. Is there any way to meter off the heat without having to buy 4 separate boilers? All windows are new within the past 2 years. It has a flat roof, I have not checked that out yet but the owner says he has never had a problem with leakage, the basement was dry and seemed the foundation was in good shape.
The building was built in 1907 and from what I can tell was a hotel before. It is a combination of plaster and drywall. It is fully rented now and the owner says he always has it rented but his rents are really low so I can see why he has no problem renting it.
The apartments pretty much all need new floor coverings, paint, and drywall/plaster repair. The one bedroom could be made into a two bedroom with about a months worth of work. Other then that it did not seem in too bad of shape for the price.
Interesting is 1 block away a another 4 plex (same size lot, same size building) went pending at $158,000. However that one has all new drywall, paint, completely remodeled and the tenants all had their own heating bills.
Asking Price for the 4 plex I’m considering: Only $79,000
Income monthly year
rent $350/unit $1,400 $16,800
Proposed rent $425/unit $1,700 $20,400
Operating expense
Landlord pays heat, garbage, water&sewer, taxes, insurance.
Expenses yearly
Heat $4,500
Garbage $1,140
water & sewer $2,928
Taxes $1,200
Insurance $600
Vacancy 5% $840
Repairs estimated $1,200
expenses total 12,408
current rent NOI $4,392.00
Proposed rent NOI $7,992.00
Now if I offer $65,000 and put it on a 30 year fixed this is how it looks for my profit after paying the mortgage every month.
offer mo/payment yearly
$65,000 $440 $5,280
Amount received after expenses & mortgage
Yearly Income year
current rent
gross income - (expenses + mortgage) = -$888 - (it is negative at current rents)
proposed rent
gross income - (expenses + mortgage) = $2,712
Cap Rate current rent 7%
Cap Rate Proposed rent 12%
If I could get the heat bill into the tenants names then the cap rate at a $400 ave. rent/unit would be ~17%. However, it could cost maybe $10,000 to change the heat system.
Ok, what do you experts thing, should I make an offer on this place? How does it look?
Re: Would you buy this 4 plex? - Posted by rehabber
Posted by rehabber on April 26, 2007 at 12:16:47:
Looks like you did your homework with your numbers.
Are you positively, absolutley sure your market
will suport a rent increase from $350 to $425 (which is
22% incr). Also, even if you could meter the heat,
People paying only $350 per rent are typically
money tight. Not sure many such markets could support
a $169 increase (a whopping 48% increase).
Also, did the present owner tell you why he/she is selling?
Re: Would you buy this 4 plex? - Posted by Joe Kaiser
Posted by Joe Kaiser on April 26, 2007 at 11:20:35:
“Asking Price for the 4 plex I’m considering: Only $79,000”
No need to put “only” in there. That’s typically a form of rationalization
that’s not recommended when working numbers.
You appear to be assuming that putting the heat bill into the tenant’s
names can be done without offset to the rent. That’s not going to
happen.
We often make the mistake that we know more about a property then
the seller does, including what the rents should be. I’d be extremely
careful there.
100 year old buildings are notorious for being expensive to own and I
suspect that number is no where near $100 a month.
“Make an offer” is the old way of doing business. Much better to sit
down with the seller and see if the two of you can figure out a way to
make this happen at a number that makes sense and works for both of
you.
In the process, you learn more about the property and more
importantly, what’s motivating the seller . . . important clues to help
you make a really good deal.
Joe
explanation - Posted by batpro
Posted by batpro on April 26, 2007 at 13:23:59:
I was not considering increasing the rent to $519 in fact I was thinking of only increasing the rent to an average of $400 per unit. Like $425 for the nicer bigger ones and $375 for the smaller ones.
Therefore, the rent increase is only like $50 more per month. The tenants however would get there own heat bills. I am having some contractors look at the heating systems and getting bids on converting to electric heat since the entire building has new electric and separate meters.
The owner is selling because he is old and wants to move south.
Now based on the new information of increasing rents about 14%. How do the numbers look?
Re: Would you buy this 4 plex? - Posted by batpro
Posted by batpro on April 26, 2007 at 13:32:28:
Joe, could you explain your statement? $100/month?
I am not sure what you are referring too? If it is the heat. In Minnesota heat is usually on Nov.-March. Therefore for the other months the there is no bill and it averages out to about $100/mo. per unit.
I am considering increasing the rent ~$50/unit and converting the heating system.
The $325 & $350 rents currently charged are really low in the area, especially since the heat and all utilities are included except the electric. I never see those rates advertised in the newspaper. I currently rent 7 houses which range from $525-700/mo.
Apts. are usually $400-500.
The building advertised with a realtor. I did call the owner yesterday and had a long talk with him. He seems to be an honest man. He had 5 rental apartments in several towns and he has already sold 3, the just put this one up for sale last week. He will give the last one to his son.
Any thoughts on the deal now that you now more?
Also, this is the same size building as the one that is pending at $158,000 which is 1 block away on the same side the street.
Re: explanation - Posted by rehabber
Posted by rehabber on April 29, 2007 at 12:07:36:
OK - but tenants aren’t dumb - whether you add the heat
to the rent or bill them separately, bottom-line - it’s
more money they have to pay each month.
Anyways, let’s assume a $400 rent with their separate
heat bill will work:
Gross rents=400x4x12=$19,200 yearly.
Costs (rounded)
Heat is now zero (or do you have heat some common areas?)
trash: $1100
water+sewer:$3000
insurance $600 ??? (seems low for a 4-plex)
taxes: $1200
vacancy (5% is myth-use 15%): $19,200 x .15 = $2900
repairs: $2,400 (double your estimate to be safe)
expenses total=$8,800
= $10,400 net (without debt servicing)
= apprx 13% cap rate = a good number
Now, actual cash flow:
mortgage $70k at 6.75% - 30 years = $454 per month
mtg = $5500 per year.
$10,400 net - $5500 debt serviceing = pos. cash flow
of $4900 per year. Another good number.
Gross rent multiplier test:
Price / grs rent = $79,000/$19,200 = 4 times gross rent
for price - another good number.
Just double, triple check your numbers, assume worse
case, get the place inspected by a professional
building inspector/engineer, do your diligence, but
at least on the surface numbers look ok - good luck.
Re: Would you buy this 4 plex? - Posted by Brian_wa
Posted by Brian_wa on April 26, 2007 at 20:55:47:
I think he was referring to the monthly repairs.
Brian