Is this a deal?

Rehabbing, Fix and Flip, Rental Properties
1

Dear Members,

I like to get some advice and comments if this is a good deal to go in.Looking into rental income and future capital appreciation.
This is our first family investment,any suggestion what type of entity to set up?

24units apartments in central east Austin.Nearby the near children hospital-redevelopment area.
per unit price=$23,000,total purchase price=$552,000
Will be managed by ourselves.

Section 8 rental income of $450 per unit.95% rented.
Build in 1972.
Able to come up with 20% deposit and 80% loan from bank.

Looking forward to hear from you

2

Hi Red,

There is alot of info missing here that is needed to help determine if this is a good deal. What are the yearly operating expenses? What condition is the building in? What is market cap for the area? Also, what is the propery appreciation rate for the area +/- and by how much?

But if you go ahead an make some assumptions such as
Annual Gross potential rent = $450 X 24apts X 12 months = $129,600

vacancy rate of 5%

annaul operating expense = $40,000 (guesstimate)

put 20% down and finance at 6.5% fixed for 30 years with an annual debt service of $33,494.55

you’ll have a before tax cash flow of $49,625.45 thats a 44.951% cash on cash return on your 20% down payment investment your first year. Thats a beautiful thing. And if this were the case I would say YES, this is a deal. But just remember these calculations assumes nothing major is wrong with the building. But even if there are a few major things wrong with the building, the cap rate is soo high, it still might be worth buying. You really need to do a much more thorough evaluation of the propety. What I reccommend is putting this property in contract with contingencies that allow you a way out if you find major problems with the building later on. This way you can secure the purchase of what looks like a gold mine, but you also have a way out incase the property is deceiving.

But please note, Im not a professional investor…not yet anyway… im just learning… I haven’t even bought my first investment property yet. But I think I’m on the right track with my line of thinking above. And hopefully other, more seasoned, investors can add to this posting and let us both know if the advice is sound or if a different course of action should be taken.

3

Thanks for your post.
What are the yearly operating expenses?
previous owner has a amangment company that incur high cost of 70,000.They terminated the mangament comapny.
What will be the estimated operating cost?I do not know,just have to guess?

What condition is the building in?
Overall well kept,but need to do repair for 7 units,estimation$2,000 per unit.

What is market cap for the area? Also, what is the propery appreciation rate for the area +/- and by how much?
How do I check this?

Market price of neigbouring property;-
build in 1962 aprtment complex selling for $48 per sq ft.
The apartment we bought is build in 1972,bought for $47 per sq ft.
Fourplex-selling for $32 per sq ft.

Bank rate for 80% laon is 6-7%?commercial loan?

Hope to hear comments and advice,Thanks again

4

Red,

Sounds like a fairly big project with the amount of units and dollar amounts. I was just wondering if you had any prior commercial property management or ownership experience.

The due dilligence on a commercial property is no where near as simple as a SFH with an appraisal, inspection and title work. You will need to see P&L statements, Balance sheets, rent roll, insurance policies on the building and title, lease agreements for each unit, environmental and survey paperwork, etc. ALOT!

Being you were asking about some basic terminology used in commercial real estate I was just wanting to make sure you had already done some sort of real estate investing previously. Some newbies like myself want to just run out and grab the biggest thing out there thinking about all that fat rent money coming in minus just the mortgage payment. When there are a ton of other expenses to consider.

Also, take note of the fee charged by the previous management company. You will always want to pay yourself for your job as prop mgmt even if you are the owner. These 22 units might equate to a FT job so make it worth it to you.

Good luck.

5

Howdy Red13:

I live in Austin and owned over 40 houses on the East side for years with many section 8 tenants. All the advice from the previous posts is right on. A lot of the expenses are fixed like water, sewer, taxes, elec, etc and will vary only slightly. Every one asks for two years statements but the past 12 months should give you a clear picture of the costs unless they were almost all vacant like the 31 units I just bought. You are paying retail for the property in my opinion without even seeing the place. I would make sure the seller repairs the damaged units or gives you credit at closing for most or some of the repairs if possible. The units I just bought the seller had to bring $6500 to the table to sell them and could afford no more and had other buyers on my tail.

Make sure you go into all the units. There may be hidden stuff that you can uncover and have the seller fix or pay for. It cost me a grand on the last house I sold because the buyer wanted the roof replaced when we had repaired the problem and would have suited most buyers.

Let me know how else I can help

LOL

6

This deal is OK, but it could be a lot better if bought cheaper. This property will cash flow but you need to know HOW it will cash flow.

You’ll be getting a loan of $552K, the monthly mortgage payment is going to be about $4050 (30 years @ 8.0% interest) or $169 per unit.

The rents are going to be $450 per unit.

REAL WORLD OPERATING EXPENSES around the United States range 45% to 50%, we will take 50% to be conservative. These expenses range from taxes, insurance, maintenance, management, vacancies, evictions, legal fees, gas for your vehicle and MUCH more!

Therefore, in order to calculate cash flow accurately, take 1/2 of gross rents, the other half is used to pay the mortgage payment, the remainder is your cash flow.

$450 / 2 = $225
$225 - $169 = $56 POSITIVE CASH FLOW

$56 positive cash flow per unit or $1344 as a whole.

This property needs to be bought cheaper or maybe a lower interest rate can be negotiated in order to gain cash flow.

Good luck, but unless bought cheaper I wouldn’t purchase it.

7

You really need to check with the banks on the loan rates. This is definitely a commercial loan. Most commercial loans like big down payments like 25%. You can do 20% but the rate is more like 8.375% on a two year plus you pay points for the loan. Rates are even higher if you want a fixed 5 or 7 year loan, it floats after that. It’s hard to find a bank that will do a fixed 30 year commercial.

Also with commercial property, the bank cares more about the cash flow than your credit score, but it sounds like it’ll meet the criteria.

Also the last poster mentions a $552 mortgage, but that’s the sale price, after the down payment it’s a $441,600 mortgage and a monthly payment of $3240.30 assuming you can get an 8% interest rate.

There aren’t many buildings like this in Boston because all the ones that use to exist were converted into condos during the boom years. Maybe if it’s in a good area, that’s a potential exit strategy down the road, but if it’s section 8’s in there, it may take a while if ever.

8

As some have already noted, you need to get a firm handle on the operating expenses on this property in order to determine final cash flow (NOI) and ultimately if this is a good deal.

I have a few comments from a lending perspective:

a. With this property type, you can achieve up to 90% financing (up to 95CLTV with a seller second).
b. Although they are available, the majority of commercial loans are not based upon a 30 year amortization schedule (the bulk of programs are between 20 and 25 year amort.).
c. Although they are available, the majority of commercial loans are not based upon a long term fixed interest arrangement (the bulk of programs are based upon using an ARM with 6 month-10 YR fixed period).
d. With a 20% deposit, it is possible to get a rate in the 6s if you are agreeble to a 5-10 YR ARM program.

Regards,

Scott Miller

9

Here’s my take on this deal.

Gross rents are (450 X 24) $10,800 per month.

Assume operating expenses at 50%, or $5,400.

NOI = $5,400

Since you’re doing the management yourself, add back in 10% of gross rents or $1,080. Therefore, you would have $6,480 with which to pay the mortgage and for cash flow.

Debt service on $441,600 for 20 years at 8% = $3,693 per month.

So far, you have a monthly cash flow of $6,480 - $3693 = $2,787 INCLUDING THE $1,080 THAT YOU ARE EARNING AS THE MANAGER.

Even with you managing the property, you are only making $116 per unit, which is low in my opinion. If you use the true NOI (without adding back the 10% for management), then you are only making $71 per unit. This math does not include any closing costs, points, appraisal, rehab costs, etc.

It is not a bad deal, but it isn’t great. If you will be doing the maintenance also, it would be better.

If you could get the price down a little more, it could be a very good deal!

Mike

10

This thread is 2 yrs old…lol…

11

Wow what a waste of my time!

12

Naa…I bet this was helpful to a lot of people. Thanks for the input.

13

LOL…that is funny.

14

What’s really interesting about this thread is that all of the original posters are gone. What does that tell you?

Mike

15

I started scrolling down the thread and seeing TedJR tipped me off that it was an old thread.

16

Mike,

You trained your parrot well… “REAL WORLD OPERATING EXPENSES around the United States range 45% to 50%”.

17

When you’re right, you’re right. He’s right and if he applies it, he should do fine.

Mike

18

Good thing I learned to because the first REI book I read didn’t say ANYTHING about proper cash flow analysis! It also basically said that you could make money in REI buying things at retail. Some book huh?

19

You can make money buying at full market value. SFHs and small multi-family properties it is much more difficult though as your competing with homeowners and idiot investors. A cash flow analysis is just a profit check, how does money flow in and how does money flow out. In the rental business, it’s even easier because your cash inflows are contracted rent and your outflows don’t flucuate much. It all boils down to making a profit. You’d think that simple concept wouldn’t be overlooked so often.