Would you make this deal? - Posted by Tom (PA)

Posted by SCook85 on December 07, 1998 at 14:24:23:

I think that the way you want to structure the deal is being creative and can work well. My concern is your expenses. First of all 8.5% is not high for management expenses. It could be 10% or more. 8.5% is reasonable for only 2 properties. Your estimate for maintenance costs breaks down to $100 per unit per year. Unless everything in this place is new you are going to spend a lot more than that if you keep your properties up right. One phone call to a plumber in January can eat up you manintenance budget for all 5 units for an entire year. I would be extremely concerned about a major mishap within the first year or so. What would you do if a furnace went down this winter?

SCook85

Would you make this deal? - Posted by Tom (PA)

Posted by Tom (PA) on December 07, 1998 at 03:03:48:

I would appreciate any advice on the following deal:
Tired landlord owns two investment properties in good neighborhoods, and was asking for five thousand above each of the existing mortgages. I have figured in vacany rates of 8.5% (high for area), management fee of 8.5%, structural reserve of 5%, maintenance of $250 a unit, water/sewage ($370 per building-actual), insurance at $370/year per building, and advertising/misc. fees of $250 per year/per building.

Building #1:
3 units
existing mortgage: 49K,
Appraisal 70K
Gross rents: 13,620
Taxes: $1827
Heat/electric(actual): $1400
Total Operating Expenses: $6720
NOI: $5810

Building #2:
2 units, 2 small commercial units
existing mortgage: 53K
Appraisal 74K
Gross rents: 14,760
Taxes: 1844
Heat/electrical: $2350
Total Operating Expenses: $7920
NOI: $6840

So here is what I offered. The guy is currently making $900 in mortage payments for both buidings. After talking with the owner, we can to these rough terms:

  1. $950 a month net rent for the two properties (he wants $1000)
  2. he wanted $4000 down - I am going to ask for $1800 in prepaid rent instead
  3. $12000 above existing mortgages(for both buildings) at the end of two years- I am going to try to add an optional additional year to the lease purchase

The rents tend to be a little low for the area, but not by much. And while the buildings are in good shape, the units could rent higher with a new coat of paint and some other finishing touches. I know that the aprraisals are, for the most part, irrelevant. I think that I have covered myself well on the costs, although I realize I must verify them. I need to do some rehab work ($500) on the one unit, but I do not anticipate a multitude of surprises. There is not a lot of cash flow per building, but I do have a fairly high 8.5% management fee ($1065 and $1154 for the two buildings), and I think I will be able to save money among the various high costs I have built in. I have not had any landlording experiencing, but have taken Don Beck’s seminar (excellent course by the way!) and know how to cover my a@# and know that I am up to the challenge. I apologize for the Bible-like length of this post and would appreciate any and all feedback.

Thanks, Tom Nagle (PA)