Could be a great deal. My lost, your gain.

General Real Estate Investing
1

I have found possibly a heck of a good deal. The thing is that I do not want it but I don’t mind putting it under contract and wholesale it for a finder’s fee.

I am going to try to lay out the deal as detailed as I can. Hopefully you, the experienced one, can tell me if I can get a finder’s fee out of it.

36 unit apt complex.
29 units are 1/1
3 units are 2/2
4 units are EFF

2008 Profit & Loss Statement…

Net Rent Income: 182,727
Electric Reimbursement: 24,028
Other incom: 7,795
Total Income: 214,514

Direct Expenses: 90,417
General & admin Expenses: 18,239
Extra Repair Expenses: 8,030
Total Expenses: 116,686

Net Operating Income: 97,828

2007 Profit & Loss Statement…

Net Rent Income: 187,641
Electric Reimbursement: 20,330
Other incom: 8,460
Total Income: 213,431

Direct Expenses: 86,506
General & admin Expenses: 16,229
Extra Repair Expenses: 0
Total Expenses: 102,735

Net Operating Income: 110,696

2 year average NOI: 104,262
Cap rate in the area: 7-8%
Value at 7.5% Cap rate: 1,390,200
Seller asking: 1,100,000
Cap rate when buy: 9.47% based on NOI of 104,262
Est. equity when buy: 290,200
Price LTV when buy: 79% LTV

Upside turn arounds:

  • Rents are way too low. 1/1 are too low and 2/2 are paying the same price as the 1/1. What the…!?
  • Can make tenant pay water and sewer bill (I live in an apartment in the same city and I pay for both electric, water and sewer so why not these tenants too?)
  • New development in the area. Possibly an increase in land values

After calculating the rental income increase, the seller is losing est. $25,000 annually. Adding 25K to the avg. NOI of 104,262 will bring the NOI up to around 129,262.

NOI of 129,262 @ 7.5% cap rate will make the property worth approximately $1,723,400 at least 2 years down the road. That mean almost $400K raised in equity if the project is turned around right.

I made a offer to the seller but i don’t know if it is accepted yet. Since I am taking the owner’s asking price, I just want to know if I am doing it right and if I would be able to get nice finder fee because I do not want to deal with any projects that are less than 100 units.

My offer:

Purchase Price: $1,100,000

First Mortgage: $880,000 all cash from a partner or private funds.

Second Mortgage: Seller will finance $220,000 at 5% interest rate, no payments, no pre-payment penalty, and due in 2 years from the closing date.

Wholesaling to someone else-

Price: 1,150,000
Finder’s fee: $50,000
Upfront Cash: $930,000

The upfront cash is 84% LTV of the asking price & 66% LTV of the est. current value ($1,390,200) calculated using the 7.5% cap rate.

I think I have one heck of a deal but what do you think? And if my offer is accepted, do anyone on this forum want it?

2

Your example illustrates that if you put enough down, you can usually make any building cash flow. This doesn’t make it a great investment.

  Total cost = $1150000

  77% Down: $ 880000 

  Net Operating Income: $97864/year

  Mortgage ($270000 @ 5% Interest only): $13500/year   

  Cash Flow = NOI-Mortgage = $97864 - $13500 = $84364/year = $195 per door per month

  Cash-on-Cash Return = Cash Flow/Out of Pocket Investment = $84364/930000 = 9.1%

At 9.1% the Cash-on-Cash return is low in my opinion, for the risks I’ll guess are included in the deal.

Monthly rent per unit is: $182727/(12*36 units) = $423 which I’ll guess is class C and/or the building is very poorly run and has a lot of turnover and vacancies. The class C market is currently getting killed now with job loss and associated vacancies. You haven’t provided the details, but in all likelihood, this is not the time to be raising rents and back-charging for utilities. Do you know why the owner hasn’t done this on his own?

There is also a 54% expense ratio which suggests either a poorly run or cold climate expense paid building or both.

In much simpler terms, you just offered $32000 per door for $423 per month in rent. To me, that seems a bit much.

Aside from the fact you haven’t mentioned its condition, deferred maintenance, the neighborhood, or the competition, it looks like you have a performing building. It’s no surprise, but with more leverage and a lower price the numbers would look better. This is especially true in an environment where investors with cash are only looking for home runs.

3

I think I would pass too!

No mention of a vacancy factor but I am guessing at least 6 to 8%.

It would not surprise me to learn there is defered maintence!

Good Luck,

              GR
4

I told my broker to discard the offer that I made on the property because I changed my mind. He said that he is going to still try to find a buyer for the property. For some reason, he thinks the property will build a huge equity later down the road.

Its a class b apt and it is, no doubt, poorly operated. Where I am at, DFW area, we are not much affected by the recession. The apartments surrounded this 36 units are paying 575 for 1/1 with the tenant paying water and electricity and the owner have been charging 500 + water included.

The owner is losing a lot of money on the 2/2 big time. The area is paying 675 while he charges 500. Yikes! :shocked What a stupid thing to do.

Buh bye deal!

5

Must say that I agree with all the other analysis points. One thing that hasn’t been said is rerun the numbers for what is currently a real value. The one real killer on the deal from my standpoint is the high level of up front capital needed. Something like this, depending on the condition of the property (now), I’d rather do 20% capital and finance the rest. Especially with financing rates as low as they are.

If you believe in the property use some of the advice that was given to create a concervative offer. then see what you can do. We buy properties as they are not based on what they will be. What they will be is the extra benifit but you must be solid as the property is.

6

Completely agree with the statement that we buy properties at what they are today. If they appreciate it is a bonus. But, remember …as we all know from the last year… they can depreciate also.

Basically, it is an old sales gimick to say it will be worth more when then deal isn’t that good.

7

Well I see an upside…for one I will have to look down deep at the expenses and see if we can cut that baby down to 30% no more than 35%. I will not offer no more than 1054120 with assignment included

1390200 x .60 834120

seller only wants to finance 15-16% fine 220,000

This way I can come in the deal with N.O.O.E.

You can make loads of money off not so savvy land lords

If the rents aren’t up to market standings and he is not managing right -he could be definately over spending in expenses. Decrease your expenses increase your income -however we can’t go by projected propaganda numbers because they are usually inflated but just based on this and the proposed numbers only.

Raise rents

36 x vac rate 8%

33.12 units x 650 * 12 =258336
Electric Reimbursement: 24,028
Other incom: 7,795
Total Income Now is 290,123

-one I have to dig deep and find out really what these expenses are to see if I can cut it down to the 30% range

But just say we can decrease or expense to 30 -35% and have the tenants pay utilities just say

Direct Expenses: 90,417 Reduced (Variable)
General & admin Expenses: 18,239
Extra Repair Expenses: 8,030
Total Expenses: 116,686
Expenses at 30% of current income 64,354
Expenses at 30% of proposed income 87037

Net income for current $225,769
Net income for proposed 203086

I did the math at a cap rate of 9.2% of offer price
and 7.0% of appraised value. Lets us them in the proposed figures above

225769 / .092 = 2454011
225769 / .07 = 3225271

203086 / .092 = 2207457
203086 / .07 = 2901228

So I say that it is possibly to pull a mil plus on this deal possibly even two -if we can get those expenses down and increase income. So i’m interested give me more info!

8

Why were you scared mismanaged properties are some of the best deals…they usually have higher cap rates than surrounding areas…rents aren’t current…expenses to high…I mean the perfect storm for increased equity instantly without appreciation…I would of stayed in and do more due dilligence. I’m not saying that I will close on this property tomorrow but i’m saying it’s worth my dilligence and who knows I might find something that completely will have me not close the deal but I think I will persue if it’s still available.