Need fast help with a six unit property!!!!

General Real Estate Investing
1

Hello,

I live in Reading,pa I found another investor that wants to sell his 6 unit apartment building. He said it should appraise for 210,000 all he wants is 170,000. Here are the numbers for the building.

6-Units
Approx. 7,500 Sq.Ft.

Unit 1: $800
Unit 2: $525 - could be $575
Unit 3: $500 - could be $575
Unit 4: $375
Unit 5: $475
Unit 6: $280 - could be $375

Actual Total: $2,955 /mo.
Market Rate: $3,175 / mo.

NOTE: Property used to have a laundry, but once the machines broke, I did not want to deal with it. It used to bring in additional $60-80 /mo.

Expenses (annualized):
Taxes: around $3700
Insurance: around $1900
Main Electric: around $600
Trash: $1080
Water/Sewer: around $2640
Oil Heat: around $7000

The boiler is brand new. It was installed in September. Also, 1/2 of the roof is new rubber as well. Since I bought the place about 2 years ago, I’ve invested close to $20K in repairs and upgrades.

The seller advised he would give upto 10,000 towards closing cost.

All the seller wants is to walk away from the table with no less then 170,000 and advised he would not hold a note.

My cousin is giving my the 20% down. and he becomes a partner.

I am doing a 2,000 earnest deposit. after I get the inspection and appraisal. then he wants to sign a contract but he advised he would not sign and contract that has any contengencies

If I do the calculations right with my interest rate being 9 % on a 137,000 the property would have a dsc ratio of .75 AND A CAP RATE OF .29

I have a spread sheet I can email someone to please help me out

Thanks in advance for your help

2

First of all:

He is not a motivated seller! Anyone who tells you all these things he flatly refuses to do from the get go is not motivated! Just from this the deal is not worth your time. Move on.

second of all, the fact that he says he got 60-80 a month from washer dryer machines and just doesnt feel like fixing them is disturbing. Imagined what needs fixed that he didnt feel like doing that would COST money.

Third, you are basing this on a POSSIBLE appraisal value that HE states. I would not be at all surprised if this were actually valued at around 180-190 based on seller inflation alone.

RUN!

3

Doesn’t appear to pencil,
Is it common for the owner to pay for sewer water electric and heating oil in your area ?
Not so here in the west.
I agree seller is not motivated, Appears to be retail and that is not what to pay for a rental.
Darin

4

Thanks for your help. I was pretty sure i knew the answer but i thought i was doing something wrong. in response to someones question. ( Is it common for the owner to pay for sewer water electric and heating oil in your area ?
Not so here in the west.) Is is common for owner to pay for sewer water. common electric i.e. hallways and outside lights and heatings if its not seperated.

5

Here is the way I see this property:

Gross rents: about $3,000
NOI: $1,500
Mortgage: $1,530

Monthly Loss: $30 OUCH!

I certainly pay $30 a month to deal with 6 tenants.

Mike

6

Mike - Do you always assume NOI = about 50% of mortgage?

7

I’ve heard from several sources assume 50% and try to budget for 40%

8

Jeffelite,

Yes, throughout the United States, operating expenses on residential rentals run 45% to 50% of gross rents. Therefore, to be conservative, I always plan on 50%. There is very little you can do to lower the operating expenses, other that do a thorough screening of the tenants.

Mike

9

Just to clarify a possible typo; operating expenses of about 40-50% of gross rents not mortgage.

10

If your calculations are correct, then you already have enough information to to know that this is not a good investment.

When the debt coverage ratio (DCR) is equal to 1.0, you are breakeven. Any time you have a DCR less than 1.0, you are in a negative cash flow property. Investors like to see a DCR of 1.25 or greater to ensure that there is sufficient cash flow to cover the cost of unplanned vacancy and unexpected repairs.

With a DCR of 0.75 you are saying that your net operating income only covers 75% of your debt service. With debt service around $1233 per month, you are $308 out of pocket every month assuming nothing breakes