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Author Topic: Need quick advice  (Read 4239 times)

Offline wstewart003

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Need quick advice
« on: October 12, 2005, 08:03:13 pm »
I've stumbled across an 11 unit building that was built in the early 1900's. Funny even the county records do not show the exact re-build date. The mix is 11 two bedroom apartments and 1-1 bedroom apartment. Currently the landlord has 4 vacancies, but currently pulling credit and interviewing. The rent breakdown is as follows:
3 apartments - $495/mo (new rent rate)
4 apartments - $375/mo (long term renters)
1 apartment - $350/mo (long term renter)
Seller has been hesitant about raising rents with long-term tenants.

Seller has done some updating,

After taking a look at the units there are 3 that need to be totally redone with paint, appliances, etc.  The inside has never been cleaned and there is LOTs of space that can be used for things later.  The owner is in the process of replacing all windows and at this point not exactly sure of other updates.

A few facts:
  • Seller is very motivated and willing to consider any and all offers
  • Seller is willing to consider owner financing, depending on price negotiated. However, I could not get her to even name a ballpark price.
  • In my research have been able to determine previous owners two years ago were in their early to mid 70's and let the property go. Owner is currently performing all of the upkeep.


From my drive by of the units, it is definitely low income rentals. From the outside it looks as if there is quite a bit of work to be done. I'm trying to not think in terms of where I would live so will not make any rash judgments until I see the inside. I've calculated a cap rate with the price they are asking and the rent/income information. Here is the breakdown:

Current asking price - $650k

Average cap rate in this area is 8%. The closest metro area is Richmond, VA and with the expenses currently paid the only way to get that cap rate is for them to sell at $425k.;

Current County assessed value is $162,300 for 2005.  With the way housing is going in this area, it should be closer to $250 by January or higher, depending on the itemsfixed during rehab.  After all rehabbing is done, the building should fall into the assessed $650k range easily.

Expenses I've calculated:
water - paid by tenants
electricity - common area paid for by landlord ~$100/m
Oil - propane is currently paid by landlord ~$225/m. With rising gas prices, I am almost doubling it for this winter (oil prices have made huge leaps);
RE Taxes - $1307 (2005 costs)
Insurance - $1500/yr (guesstimate)
Property management (currently performed by owner - 10% of rents is $2500/yr .  However selling agency will manage it for 8% of rents.
Repair and maintenance (current owner says almost none but , I see why)10% is conservative $2500/yr until I can get it completely rehabbed;
Dumpster for garbage on property is $1380/yr
Snow removal ~$500 (guessing)

Questions to anyone:

  • 1. Are my calculations correct or should I consider other expenses?
  • 2. I have three proposed pricing ranges which would generate anything from a 10 to% to an 8% cap rate. In this area 8% is the average. My assumption is I would offer the lowest price to take the property as is, including vacant apartments and complete the renovations. Does this sound reasonable?
  • 3. Do I get the renovations priced before settling 100% on the purchase price?  Some basic things like cleaning up and painting I can do myself or use family members.  It is the small plumbing and electrical work Iwill need help with. Also the replacement of kitchen cabinets and appliances in 3 apartments.
  • 4. Are there other suggestions that could help seal the deal?
  • 5. The owner is willing to finance if she gets a decent price. This is an area where I could really use suggestions on how to structure a second or third offering using seller financing.


Thank you for any and all information. This will be my first apartment deal if I can make this happen.


Offline kdhastedt

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Re:Need quick advice
« Reply #1 on: October 13, 2005, 07:16:54 am »

I have two words (they're all caps, in bold, and underlined!):

OUCH!   ALLIGATOR!

Here's what I see:

Income (at full occupancy):  $3335

Outgo:  $4985

- P&I (figuring 20% down @ 7% for 30 years) = $3460
- Taxes = $109
- Insurance = $125 (doubtful!)
- Utilities/Expenses = $482
- Management (10%) = $334
- Maintenenace = $208 (doubtful for 11 units)
- Vacancy (8%) = $267 (currently at 36%)

Net monthly cashflow = (-$1650) or (-$19,800) per year

This is based on paying full price, finding a 7% commercial loan, coming up with $130K downpayment, remedying the vacancy rate, finding insurance for an 11-plex for $1500 a year, keeping maintenance down, etc., etc...Lotsa "if's".

I think:

(1) The complex is SIGNIFICANTLY overpriced ($350K is way more realistic)

(2) The rents (which apparently include heat, cooking fuel, and possibly fuel for the water heater) are significantly underpriced.  I have seen tenants that will use $350 per month in heating costs!

The good news is that TedJr is actively seeking "alligators" this morning apparently as a tax dodge and may want in...(LOL, just kidding Ted!).

Keith
I have CDO...it's like OCD but in alphabetical order - the way it should be!

Offline 4EEM

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Re:Need quick advice
« Reply #2 on: October 13, 2005, 07:59:01 am »
Keith is right.

I would even try and go a little lower on the price if you can.  $300K would be the ideal price.   I would not pay more than Kieths $350K.
That gas needs to be sub-metered out.  That's going to cost you one way or another.

I would throw the $300K number at the owner.  If they don't want to play ball from there...walk.

Just my $0.02
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline wstewart003

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Re:Need quick advice
« Reply #3 on: October 13, 2005, 08:13:52 am »
What if I can get owner financing for $350k?  She owns the property free and clear.  Because of the updates and cleaning that is needed to bring the property around, I'm going to ask her to accept a smaller down payment and monthly payments of PI for 5 years.  The realtor who owns this listing says she is willing and open to work financing.  Would that help?

Also, even though there are long term tenants in the building (3-4 years) they are on a month to month.  She has not changed this and many had chosen month to month during the last year the previous owner had the property. They did not like the fact he was not making repairs and considered moving out.  These apts have been updated and even have recently had window replacements.  Would it be unrealistic to immediately bring the rents into line with the rest and have them sign a years contract?  The rent should be $495 for the two bedrooms.  If I can quickly get the 3 apts up-to-snuff and rented (there is a waiting list), that would give me 11 apts at $495/month and the one bedroom at $450.  

Does this sound like I'm dreaming....THANKS FOR THE HONEST ADVICE.

Offline kdhastedt

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Re:Need quick advice
« Reply #4 on: October 13, 2005, 08:26:35 am »

I think that if she would owner-finance at a low interest rate and would accept $350K, you would probably just about break even.  Then, you can make some changes and get positive.  The first thing would be to follow Pat's advice and see about getting the units separately metered (you might want to get an estimate on this first!) or change the leases' structures to have the tenants pay a percentage of the total heating bill based on what percentage of the whole that their rented space represents.  I think with the rapidly escalating heating fuel costs, this could be a deal breaker!

Keith
I have CDO...it's like OCD but in alphabetical order - the way it should be!

Offline propertymanager

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Re:Need quick advice
« Reply #5 on: October 13, 2005, 08:39:51 am »
Keith is right.  Your numbers are FAR off!  In my opinion, you will absolutely get killed with this deal even if the purchase price is $300,000.  Your expenses are only a fraction of the true expenses.  The rent is assuming full occupancy for a low-income building, which is very difficult to obtain.  

As a rule of thumb, I  insist that the gross monthly rents be AT LEAST 1% of the purchase price before I'll even look at a building.  In reality, you need the monthly gross rents to be more like 1.5% to 2% of the purchase price if you're going to make a significant profit.

As an example, I recently bought a 6 unit building for $85,000.  The monthly gross rents are $2,070.  After all expenses, that building only generates about $1,300 per month, which is less than $200 per unit!  The tenants pay all utilities except water/sewer/trash!

Not to throw a wet blanket on your deal, but I'm concerned that you're not ready for a deal like this.  The very fact that you don't know whether this is a deal or not is a sure sign that you're in over your head!

Good Luck,

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline 4EEM

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Re:Need quick advice
« Reply #6 on: October 13, 2005, 09:17:27 am »
LOL.  Mike you need to be quiet about that 6 unit.  I only make "less than $200 per unit!"  

You know that building is a Betty.  Especially since it is a recent purchase.


See this... :'( I'm sheading tears for you Mike.

 :P
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline propertymanager

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Re:Need quick advice
« Reply #7 on: October 13, 2005, 09:20:12 am »
OK, I'll Bite - What is a Betty?
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline 4EEM

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Re:Need quick advice
« Reply #8 on: October 13, 2005, 09:26:54 am »
 ???

What's a Betty?

Come on man! Betty Davis!  

Betty....Betty Davis...HOT! :o
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline kdhastedt

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Re:Need quick advice
« Reply #9 on: October 13, 2005, 10:01:07 am »

Wow Pat...that was REALLY obscure!

BTW - it's Bette Davis and she's dead, not hot!

LOL!

Keith
I have CDO...it's like OCD but in alphabetical order - the way it should be!

Offline 4EEM

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Re:Need quick advice
« Reply #10 on: October 13, 2005, 11:24:08 am »
....She's been dead longer than I've been alive.  She's still hot.....In the past tense kind of way. :-[
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline kdhastedt

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Re:Need quick advice
« Reply #11 on: October 13, 2005, 11:52:31 am »

I hope not...she died in 1989...I hope you're older than 16!

Keith
I have CDO...it's like OCD but in alphabetical order - the way it should be!

Offline 4EEM

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Re:Need quick advice
« Reply #12 on: October 13, 2005, 12:00:39 pm »
15 Actually.  I told my mom and dad that I wanted to get into real estate and they thought it was a good idea, so they signed off on my work permit.  I'm only allowed to work 4 hours a day....
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline 4EEM

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Re:Need quick advice
« Reply #13 on: October 13, 2005, 12:02:01 pm »
Keith,

I was just using a figure of speech.  It seems that you are the real deal fan. lol
Patrick S. Lawson
Highland Lending, Inc.
Phone  (407) 877-0093
Fax      (866) 476-1133

Offline kdhastedt

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Re:Need quick advice
« Reply #14 on: October 13, 2005, 12:16:39 pm »

<< was just using a figure of speech.  It seems that you are the real deal fan>>

Nope...just an overflowing warehouse of absolutely useless information...but not as bad as Ken Jennings!

 :rotate:
I have CDO...it's like OCD but in alphabetical order - the way it should be!

 




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