Thanks to everyone, my first rental purchase went great and my two unit is full!
ok second property
Here are some quick numbers
4 unit fully rented
purcahse cost 125 (comps around 175k…this units falls into high middle in quality)
comments please.
my expenses for the year on this property are: 15.2k ( mort, taxes, water, insurance, $150 a month various, I pay heat)
Income.Income
9 Months $19,440
If Rented 10 $21,600
If Rented 11 $23,760
If Rented 12 $25,920
What are the annual costs for common area cleaning and maintenance, lawn care, landscaping, trash removal, outdoor lighting, dumpster rental?
What is the historic vacancy rate over the past two years? This complex may be fully occupied now, but if those leases expire next month, you might have some vacant units.
How much are you going to allow in your budget for repairs and replacements? Is there any deferred maintenance? Any major systems need replacement soon?
How about property management? Will you outsource management, and what is the cost?
What is the seller’s motivation? Why is the seller giving nearly a 30% discount to FMV?
Garbage haulaway provided by the city and I will handle all the grass cutting, gen mainten (sweat equity)
newer roof, heating 10 years old.
I factored in 150 for general repairs a month…too low??
No Outsourcing I will handle the property
90% rental history last 5 years
seller has two units right next to eachother and selling both (Father passed away and they want to leave the area)…they were almost sold last spring for 165 each…
THANKS SO MUCH. DAVE T you are an angel!
This would be an ok deal if the utilties were paid by the tenant. But you pay the utilties so it is not an ok deal.
$ 2,160
1,080 Expenses (50% rule)
1,080 Net Income
875 Mortgage on $125,000 at 7.5%
$ 205 Profit
You pay utilities. 4-plexes in my area have Utility bills around $5,000 a year. This means an additional $417 a month in expenses. It seems like you pay all utilties except electric. If this is correct then anticipate $300+ a month of extra expenses.
$ 205 Profit
300 in utility expenses
$ -95 a month loss
Your utility expenses maybe different then the two state I invest in. But I would NOT underestimate the expenses of utilties. Last month I had a tenant leave the water on and cause a $1,400 water bill for me. A lot of successful investors will not buy properties that do not have the utilities seperated. If I have to pay utilities then the deal better be REAL sweet. This is not REAL sweet. I would bid low or walk away.
I will buy properties that are great deals and do not have the utilities seperated. BUT it really has to be a great deal for me to want to buy it. You really have to know how to cut utility costs if you want to profit from a property that is not seperated.
Put plastic on the windows. I put the wrap on the windows around Nov. 1st.
Always call tenants when the utilities are high for that month.
Go into the attach and make sure there is a ton of insulations.
If it is an old building then you will want to have insulation blown into the walls.
I like thermostates that are programable so good tenants can keep it colder while they are at work or sleeping.
You always need to be talking to tenants about the utility usage being reduced.
I’m going to revise my cash flow analyses. You are receiving higher rent due to the fact you pay utilities. So I would take that utility costs off the rent amount right away, then cash flow the property.
$ 2,160
300 (Utilities)
$ 1,860 Income after Utilities
930 (50% rule)
$ 930 Net Income
875 Mortgage, 30year at 7.5%
$ 55 a month profit or 55/4 = $13.75 profit per unit.
Rich was right on the money when he said the utility cost can increase faster the rental increases.
I know in my area we’ve seen electric hikes of 25%+ PER YEAR for the past few years. Yeah, I didn’t typo, that says 25%. Gas prices soared as well. Also as you know home heating oil is high too, in my area probably about $2.50/gal as compared to $1.25 or so a few years ago. We just hit a record oil price yesterday of about $88/barrel…where are oil prices going to go now…up right? The only way that rents could increase that fast in any town is if there was a new huge employer coming into town, a huge foreclosure boom (worse than what we are seeing), massive interest rate hikes like what we saw in the 80’s, or somehow a large portion of the rentals/homes in town disappeared overnight (like in NO following Katrina, supply and demand). Just think of 100% increase in a few years for heating oil, ever see rents rise like that?
I agree with Rich. I never buy properties in which the owner pays the utilities. Not only are gas and electric prices unpredictable and volatile, the tenants can and do show their displeasure for a landlord by cranking up the heat and opening the windows and doors. One angry tenant can cost you a fortune!
I’ve actually seen that happen first hand, someone in my brother’s building cranked the heat, opened the windows, and barracaded the door to keep the LL out.
Also, please note that I’m not saying don’t ever buy a property with utilities included. Just take it into account. A tenant cranking the heat is probably no worse than trashing the unit in terms of cost. The prices of utilities spiking is also a concern as I mentioned, your rental income has to more than account for any possible extra cost in the future. For me to consider it the moon would have to be full, Haley’s Comet would have to be passing and my lucky rabbit foot would have to be doing an irish jig. 99% of the time I would run away from owner paid utilities, but 1% I would consider if it the deal was right. That 1% also includes properites discounted enough to give me enough of a deal to include the extra cost of splitting utilities.
Example:
Property worth retail: $100k
Monthly gross rent: $1k
What its worth to me $50k
Cost of splitting utilities: $10k
Purchase price: $40k
For a little hassle I would walk away with $50k equity and a cashflowing property with seperated utilities. Sure I’d have to sink $10k in to split it but with that extra cost I still am at my buy target. Maybe the previous owner is getting out due to negative cashflow and high utility bills, this might have given you a good opportunity to buy it cheap. Maybe the guy couldn’t afford to split the utilities or maybe he just didn’t know it was possible or how to do so.
I was just responding to you and propertymanager’s posts. It is not intelligent to say to never buy a property with the utilities not seperated. Your last post saying to ONLY buy it if it is a great deal is exactly what I always follow.
One way to offset the expenses of seperating the utilities is to buy a property where there is freeze damage. There was a ton of these in my area last year. Then all the utilities are distroyed anyways, so you can get a huge discount on the property and have the utilties seperated.
I knew you were not directing it at me. I like your idea of getting a good enough deal on a property so that you can seperate the utilities right away. I’ve tried this on large apartment buildings, but it is just too expensive.
So…a good way to cash flow the above property might be as follows.
$ 2,160 Rent
1,080 50% rule
$ 1,080 Net income
975 Mortgage ($125,000 pur.+ 15,000 to seperate=145,000)
$ 105 a month profit or $26.25 a month profit per unit.
I think the only time you’re really going to get a good deal due to it is when the owner is getting KILLED by the property, I’d guess their lowest counter offer hits somewhere around mid to late Februrary. It’s when they are writing those checks to pay the utilities that the pain hits them, especially if this year is anything like the previous years with ever mounting costs of utilities across the board. I stole this data off a post on another board, these are the increases nationally for 2007:
HEATING COSTS RISING
Record winter heating bills are expected.
Fuel type/ Average winter cost/ % gain from last winter
I guess Geography plays into this. I love in the Cincinnati Area where the Insane heat months ( I pay heat only) are Dec/Jan/Feb the bills on the unit and over the last two years is around 289 a month (even billing).
So if I put down 25k down. and finance 100k over 30 years.
I am gleaming from the group…I should walk away from this deal…or wait til Feb…lol…
THANKS AGAIN TO ALL! KEEP THEM COMING!
Also if it matters here is the link
I still remember the -25 (minus twenty five degrees!!!) I spent in Cincy (my hometown) just a week before moving to sunny So. Cal. a few years back…Hope you don’t run into one of those winters again!
Look at the different ways we cash flowed the property. The second way was cashed flowed with you paying the utilities and having a $300 a month utility bill. The third was cashed flowed based on having an estimated costs of $15,000 to seperate the utilities. The third way shows you will making more money if you pay to have the utilities seperated. You probably can’t seperate the water and sewer. So the heat and electric will probably be the only thing you would have seperated. So neither of the cash flow methods are completely accurate because you will not be able to completely seperate the utilties (only works on SFH). Your immediate cash flow will be basically the same if you keep it the way it is or if you seperate the utilties. BUT because utilities will increase faster then the rent, you will be better off long term if you seperate the utilities right away.
You can seperate all the utilities now, but you will still have to pay all of the utilities until the current tenants move out. Then one by one as the tenants move out you can have the tenants pay their heat and electric. Also you will probably not be able to have the $289 even billing when you buy it. Most utility companies require you to own the property for 1 year before going on the program.