Well by the numbers you’ve got it obviously has great cashflow. I would make sure that you’ve got a good feel for the reason this person is selling the property. Is he hiding any problems that he’d love to pass on to you? Also, see the terms on the tenants’ leases. Make sure they aren’t going to bail on you as soon as there is a new owner. If it is professionally managed that probably wouldn’t be a problem. Otherwise, the deal numbers are great.
Gross rents: $2,700 per month
Operating Expenses: $1,350
Mortgage: $1,369 per month ($170,000, 7.5%, 20 year commercial loan)
Cash flow: loss of $19 per month.
This is a bad deal. I certainly would not buy a building that loses money each and every month. The expenses numbers you listed are simply garbage (sorry to be so blunt). You didn’t list the vast majority of the expenses including insurance, vacancies, advertising, maintenance, entity maintenance, legal fees, office supplies, evictions, damage done by tenants, court costs, lawsuits, etc, etc, etc.
My insurance is never over $500 to $550. This insurance also gives me income replacement while repairs are being made up to 6 months. Remember it is not home owners insurance it is only on the structure.
this is might worthy of further investigation in my book. as mentioned what is the real value and perhaps the bigger questions is what is the condition of the property (i.e. age of roof, age of kitchen, condition of exterior…the big ticket items). Also what is the desirablity of the units as a rental (i.e. is it easy to rent). What is the ability raise rents? (are you under market)?. These are all things to figure out when structuring a deal and decided whether the deal makes sense.
As mentioned, the owner has provided you some number to start with but you need to figure in some repairs and other costs. Also realize that 5 units pushes you into commerical loan which the mortgage is going to be amortized over 20 or 25 years and very like will not be 100% financed. Likely, they will do a 80%LTV loan ($136k) at about 7.5%-8%. If you have some owner carr-back, most banks will be OK with it as you have sufficent gross rents to meet their lending standards but it can push your rate higher.
the insurance figure looks a bit high. you need to figure out why.
also electricity cost are high. is the owner covering electricity for all tenants?. I really hate (and pretty much won’t do) properties with heat, electricity etc paid by the owner. My experience is don’t recover all of those cost in terms of higher rents, it make subject to abuse by tenants and also presents a situation where you can not fully control your cost if utility rates continue to escalate. I just did an in-depth investigation in a deal with a highly motivated seller, but all electric common for 8 units. It was an absolute cash flow killer for that deal. This $700/mn electric bill could be the real deal killer for this deal as well.
as always, try to bargin the price down and push for some owner carry back to mininize cash out of pocket.
Sorry no offense rich (your post are some of the best). I just think that you were exaggerating abit to include some of those “extra” costs. I think its clear though that the mortgage payment missing is the real oversight.
$209 left over if we IGNORE vacancies, repairs, trash removal, snow removal, lawn mowing, etc. So even if we are IGNORING other obvious expenses its still only $209 a month for 5 doors, $41 a door. Not even living up to $100 a month per door without all expenses accounted for.