Okay, here are the quick numbers.
Six-plex.
Rents average 660 per unit. Gross income $47500.
Stated expenses are $12,600 per year.
NOI monthly = $2910.
Their asking price is $350,000.
Thoughts?
I am a newb but I’d like to test myself here. Your gross monthly income is aabout 4000 and your monthly P&I is going to be around 2500. Does not sould like a good cash flow to me. I assume you are buying for cash flow and not appreciation.
Where I lie a 350k house has 9k property tax. That would be $750 a month.
You forgot vacancies and collection losses. Your expenses look pretty low to. Even if you’ve verified fom their tax records that they paid $12,600 the previous year for operating expenses, that probably “forgot” somethings. Does that include a reserve for replacement so your not stuck with a bill for 15k when the roof fails. When you evaluate a deal you really want to use conservative numbers just to be safe. Depending on the area, I’d assume a 5% vacancy rate and 5% collection loss.
PGI- $47,520
Vacancy/ Credit loss @ 10%- ($4,752)
EGI- $42,768
Operating Expenses @ 50% - ($21,384)
NOI- $21,384
A price tag of $350,000 is just not going to work. You may make a few hundred bucks a month for a while but your first vacancy will eat up any money you’ve made up to that point. Then when you have a big capital expense like repaving the parking lot or a new roof you’ll be in trouble.
More info…
Taxes = $3450
Insurance = $3300
Gas and Electric for common areas = $2400
Maint & Repairs = $2400
Trash/Sewer/Wateretc = $3350
Rent actually averages $695.
Annual Gross Income $50,000
Annual Expenses $14,892
At what price does it become a deal?
210000-220000. Depends on area too. I find in the area I am in that I can get a property for around 35k and collect 1100 per month gross rent. Although I live in new york where property taxes are through the roof because its a liberal welfare state unfortunately
Again, your forgetting vacancies and collection losses. Then you’ll inevitably have evictions which mean a loss of rent and legal fees. The tenant will be pissed off so expect significant damage. You don’t have a management fee, which will include everything from office supplies to gas/ mileage on your car. The big one is still reserve for replacements.
Reserves:
Let’s say the roof is good for 20 years. Since it was put on 8 years ago, you have about 12 years left on that roof. In 12 years, the probable cost of a roof given inflation, rising costs of material/ labor, etc. will cost you 30k. Unless you don’t want to get hit with a bill for 30k all at once, you must take a set aside some money every month to pay for this roof. 30k divided by 12 years divided by 12 months equals $208.33 that you’ll need to set aside every month to pay for the roof in 12 years. You will have to do this for every major component of the property. HVAC, parking lot, appliances, etc.
A lot of investors don’t dig this deep when figuring out a reserve for replacement and just assign a boilerplate percentage to set aside. When you get into big properties it’s expected that you’ll figure out the likely price of things as small as roofing nails in 10 years, based on statistical data.
What is full market value of a house you pay 35k for?
Okay. Understood. We need to set asside $210 a month for a new roof.
Parking lot = $20000 / 15 years / 12 months = $111 (round up) = $120 per month.
Appliances = Dishwasher, stove, refridge X 6 units. Avg cost for each = (say $500 each) = $500 x 3 appliances per unit = $1500 X 6 units = $9000. Figure they’ll get beat up and last 7 years on average.
That’s $9000 / 7 = $1285 per year = $107 (round up) $110 per month.
So reserves =:
Roof = $210 per month
Parking lot = $120 per month
Appliances = $110 per month
If I’m not forgetting anything, that puts me at $440.
Okay, so new numbers are as follows:
Gross Income = $50,000
- vacancies & credit loss $5000
That puts me at $45000
Expenses = (Quoted = $15000 approx, safe estimate = 50% which = 45000 x .5 = $22,500) so we’ll go with $20,000 for easy figuring.
Reserves = $440 a month (Call it $450). $450 X 12 = $5400 per year.
So take the $45000 - ($20000 + $5400 = $25,400) = $19,600 to cover debt service and cash flow.
What have I forgotten and what’s my offer?
Hi stoopitnewb full market in this case is about 70k. Didnt get the final number from the appraisor yet but my research and knowing the area tells me its around 70k
dd564,
You are making this way too complicated. Throughout the entire United States, operating expenses run 45% to 50% of gross rents (let’s say 50% to be conservative). Operating expenses include everything except the mortgage payment (P & I). Therefore, if the gross rents are $50,000, then $25,000 would go to operating expenses and $25,000 ($2,083 per month) would be left for the mortgage payment and profit (cash flow).
I like to buy properties so that the maximum offer would allow gross rents of 2% per month of my investment. I am assuming that no repairs are needed. If so, to determine the purchase price, simply divide gross rents per month by .02. Monthly gross rents are $50,000/12 = $4,166. $4,166 divided by .02 = $208,300. The ABSOLUTE MAX I would pay is $208,300.
To test our theory, we need to know the mortgage payment. The mortgage payment on $208,300 for 30 yr at 8% is $1,528. You monthly cash flow would be $2,083 - $1,528 = $555 or $92.50 per unit.
If you want more cash flow (and I definitely would), lower your purchase price accordingly,
Good Luck,
Mike
Thanks everyone. Good feedback so far.
Basically what this tells me is there is nothing even close on MLS to what could be a good deal. These numbers don’t become a good deal until purchase price is 40% off MLS asking.
I’ll have to duck if I make that offer, won’t I? I think our market up here must be oversaturated with too many investors that don’t play by the right rules. I’ll have to hope they all lose their butt so I can pick up the pieces in a year or two.
Hi Dd I hate to say it but so far I have yet to see a property from a real estate broker that is priced “right” The way I would want to buy it. Real estate brokers work for the seller dont forget so they are going to price that property as high as the market will allow so very,very rarely will you find a broker that will actually find a good deal for you and if you do make sure you keep him/her on speed dial. You are better off trying to find an honest investor that wholesales properties. Someone that has good contacts, someone that has experience and is known by the banks to be an investor in the area, someone the bank calls when they have a property they forclosed on and want to get rid of cheap, and that same someone that does not want to rehab but just flip the property quickly for a couple thousand profit. You have to buy below market well below market and make sure you make money the day you buy it in one way shape or form.
I have bought a bunch of deals through my real estate agent. The key here is that you must find the right agent, someone that is hungry and will work hard to find you the great deals. These agents will only work with you if they know that you are a serious investor who WILL close on deals if she bringg them to you. Try to find a young agent who is just out of realtor school and really wants to work.
Good Luck,
Mike