Gold River,
That’s a conservative analysis for sure. You might be exactly correct for all I know about the area rents and vacancy factors.
If the area vacancy factor was actually 10%, and the rents were already at retail, then maybe this would be the deal to pass on, as you’ve implied. Wisely, you included 10% management, too. However, most small operations can’t afford management whatsoever. I didn’t include management in my numbers for that reason. Otherwise, with your 10% vacancy and 10% management costs, we might actually be talking about a 65% expense situation, not 50% including a 5% vacancy. And then tack on the extra utilities…and wow, it might be 70%.
Do you now if the vacancy for the area is actually 10% and if the rents are where they need to be?
The management fees you list are reasonable. Frankly, on this size property again, few owners can actually justify/afford management costs, because it does eat up 10% of the gross income. We could find cheaper management fees for sure, but we’d end up paying ‘cost plus 10%’ on any repairs with most any budget management company we contracted with.
So, we just assume, as a practical matter, that until we get enough properties scraped together in one area, that we’re not going to be able to amortize the cost of management well enough to consider using professional management. We’ll just ‘home depot’ the management until we can get more income, or more properties.
Meantime, another valuation method is to determine the area rent/price ratio. In my area, “if” the monthly rent is anywhere near 1% of the sale price, including repairs, etc., this would represent a good, conventional deal. That said, any rents that represented more than 1% of the sale price would be a steal.
In the example we’re discussing, the current monthly rent is 1.36% of the sale price. Maybe we shouldn’t buy until the rents are at 2% of the purchase price?
Maybe the “potential” rents would equal 2% of the price? That’s fine and dandy, except at a price of $128k we have given away all our future profits at the get go, regardless if we raise the rents or not. This is no good.
Meantime, I know some investors on this forum who wouldn’t buy unless the rents reflected at least 2% the purchase price.
As you’ve pointed out, the landlord-paid utilities really mess up the numbers. I agree completely that this could cause the expenses to climb well past 50%.
Great post!