Hello. I am a new investor and am looking at a property. Can you analyze this first property for me? Possibly tell me what I should be looking to offer. Also they said the owners may consider seller financing for me. What offers should I bring to the table? I will need a 0 down deal for my first deal. Can I keep them in with a deferred down payment and let them an equity partner in the property? Please give me some ideas if you can.
http://listing.loopnet.com/14960872?sourcecode=1aetdt0004a00056&linkcode=14450
That is the link to the listing. The address is 875 -877 Branch Avenue, Medina Ohio
This is the way I see this deal:
Gross Rents: $13,416 per month
Operating Expenses: $6,708
NOI: $6,708
Mortgage ($1,095,000, 25 yr, 7.5%): $8,092
Monthly Cash Flow: $1,384 per month LOSS (OUCH!)
I wouldn’t touch it with a ten foot pole!
Mike
Two big problems with the agent’s analysis -
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Operating expenses at 25.34% of gross income? It will be much higher unless you want to manage all those tenants yourself.
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His calculation for the annual debt service shows the down payment as free. Wouldn’t that be nice?
He shows a cap rate of 10.25%. It’s more like 7% - 8%. You can be sure that if a owner just put a ton of money into renovations and has listed it with an agent that the property is going to overpriced. It is best for you to ALWAYS completely ignore an agent’s analysis and do your own.
I recommend starting with something smaller if this is your first property. A four plex will give you a good idea as to how frustrating tenants can be…
Thank you very much for the advice. They were the first people to get back to me that would consider owner financing. Can you take me through your process of breaking down this deal so I can further understand what to look for in properties. I will keep you informed on any other deals that may come my way.
When I search potential properties, here’s what I look for in the beginning:
Total monthly rent
Monthly expenses (what utilities will I pay as the owner and divide up the taxes and insurance to see what amount that is per month)
Next I calculate payments for the asking price for 15 years at 8%. I add that amount to my monthly expenses and then compare that number to the total monthly rent. If it’s way negative, I’m probably looking elsewhere. If it comes close to breaking even, that’s a starting point that gets me interested. I picked up an older building really cheap and renovated the two empty units. Before I was done with renovations, I had two people already lined up for tenancy. Now that the six unit building is full, I have positive monthly cash flow of $400 on a 15 yr note. So I can either use that money to pay extra on the note and have it paid off in about 6-7 years or use it to build toward other properties.
Note: Those are just the numbers I use. If I was looking at a newer building, I would calculate for 20 yrs at 8%. I use 8% because I think it’s a pretty fair rate.
How do you calculate estimated taxes and insurance for properties?
Thanks for your idea on examining a piece of property in the beginning. I built my own cashflow spreadsheet and calculated an asking price that would at least breakeven. If it is below 75% of the asking, then I would think the owner would never go that low. Additionally, I am using 7.5% since that appears to be the norm.
What I know could be off on my spreadsheet are the taxes and insurance. I don’t have much guidance for estimating those two.
It’s most likely a Pro-forma. Which means these figures are usually a property’s potential #'s. Not the actual #'s. Make sure you do due dilligence ( as always). If done correctly, it’ll uncover the true financials of the property. If it’s making money GOOD DEAL. If not BAD DEAL!
That’s really the wrong way to look at it.
Firstly, This is no Pro-forma, this is garbage. $1700/unit/yr in expenses?? yeah right, that is rediculous. These are just imaginary numbers the broker plugged in for exposure, attempting to get a few bites. The typical, Inflating the income and deflating the expenses.
I love the part about it being Government Subsidized yet it’s in a “highly desired area”…that’s classic.
Secondly, regarding "If it’s making money GOOD DEAL. If not BAD DEAL. "
This is not always the case. There are amazing opportunities on mismanaged properties. These properties aren’t making near their potential and they are leaving money on the table. Which is good for a buyer because it will/should be undervalued. Once you reposition it, it will grow to it’s true potential and cashflow/value will increase.
As an investor, you should know what the market rates are for income/expenses for a certain asset class in your submarket. This is when you can create a true proforma and realize what the value is.