What do you think about these numbers from my investment analysis?

Asking Price $169,000.00
Down $16,900.00
Mortgage Fees $2,000.00
Unknown Fees $7,000.00
Total Initial Equity Outlay $25,900.00

Lease Income $12,540.00
Debt Service $9,840.00
Expenses $1,200
Gross Income (Before Taxes) $1,500.00
Taxes $420.00
NOI $1,080.00

CAP 0.076
Payback Period 13.53 Months
Debt Coverage Ratio 0.152
Cash on Cash ROI 0.041

ALL of these numbers are based on buying at the asking price and I counted for $7,000 in extra fees that I do not know about. Any negotiation on price would better these numbers.

Also, the expenses are hard to determine because it is a small building that is used by a regional chain of dry cleaners, other than talking to the current seller, I am not sure. The property is solid black top at an intersection across from a Walgreens and Marathon Fuel Station, in a an area that is growing and in the path of future growth.
The current business tenant wants to stay and keep leasing the building.
What do you think? Am I missing any numbers, fees…etc?

$12,540.00 Lease Income (Gross Scheduled Income)
-$ 6,270.00 Less ‘all’ Expenses (50% of GSI)
$ 6,270.00 NOI

$ 9,840.00 Less Debt Service
-$ 3,570.00 Equals Cash Flow

CAP 3.7%
Payback Period Never
Debt Coverage Ratio Negative by at least 2x’s
Cash on Cash ROI None
Gross Rent Multiplier 13.4 (Why not just just walk over a cliff?
It’s less painful.) :banghead

Yea, I realized after I posted my debt coverage was pathetic, im looking at my spreadsheet to see if I made a mistake. On the other hand, you factor 50% of rent for expenses in commercial properties as well.

To make this work I would have to put 59% or $99,710 down to get a Debt Coverage Ratio of 2.00. That would be $3600 in debt service a year. Id be left with $8940 and a cash on cash return of .089%. So the only real way to profitably acquire this property is put down $100,000?

Use this to analyze income property.


Do you focus on single family or multifamily?

I do different things with each. I flip houses, and hold on to apartments.

Thank you for the form. Do your apartments provide you with an income stream?

Yes, but not necessarily at the time of purchase. To make “real” money in real estate, we’ve got to find a problem to solve.

Under performing properties are the most likely to have a variety of problems to solve. Mainly however we want management problems, not financing, or structural problems. We can make money from the latter, but it’s easier with the former. I think the common denominator with management problems is the failure (not always) of the owner/landlord to apply consistent, professional management to the project. There seems to be some ‘emotional’ (unprofessional) element causing a dysfunction in the operation.

I’ll give you an example. I come across landlords (or managers) that always seem to be putting out fires, chasing rents, and otherwise, spending way too much time “managing.” Why? Because they become too emotionally involved with the whole thing. Tenants push their buttons (once they find them), and then the overreactions begin; with fits; meltdowns; paranoia; lawsuits, small claims, or just plain old fashioned tests of wills. (Shaking head).

Well, multiply that by 20 units, and see what “management intensive” could actually mean. It’s silly. These are the same people that become motivated sellers. These are the kinds of sellers I like to find.

The solution in these cases is to first create uniform lease terms and conditions, and begin enforcing them consistently. It’s also, as important, that each tenant have something to lose by failing to conform to the (new) lease terms and conditions.

For us, the easiest way to attract tenants with something to lose, is to market to the prospects with credit hiccups. These are the ones that can’t rent a nice place without our help. We can command five to ten percent above retail in rents; get larger (the largest legally) deposits; often require cosigners; always charge confiscatory late fees; and only offer two-year lease terms.

All this in return for renting a nice place to someone who is getting turned down by the lazy, less profit-oriented landlords around us who can’t seem to figure out why their tenants “always” go bad.

It does take a month, or two, to train new tenants to pay on time (and live by the rules). It can be traumatic for existing tenants to fall in line, when they’re used to paying “whenever” they’ve felt like it, or late, without any real consequences, much less having to abide by the remaining lease terms.

I’ve mentioned elsewhere what I’ve done to get management control of a building at the get-go. I’m quite fine with object lessons that will convince everyone that I’ve got emotional problems, and ready to go all “psycho” on them …if they mess with me.

Meantime again, it can take some determination, negotiation and communication skills to establish control of a mismanaged property otherwise, but once it’s established, things become more routine, as a rule.

If you’re like me, taking on management problems is a satisfying challenge. It taps all my strengths, and challenges most of my weaknesses. And with each success, I can’t wait for the next “fix.”

Well let me ask you this, are the properties that have debt coverage ratios of 2 or greater, the ones that are profitable, actually make it to commercial real estate properties websites? I suspect that good cash flowing properties are usually sold to a buddy or another investor they know before they put it on Loopnet, Zillow, CMLS or other websites that sell commercial properties. Do you find most of your profitable properties from another investor or simply googling “apartments for sale in…” ? Am i wasting my time look on CMLS and loopnet and others looking for profitable properties? Im interested in rental homes and cheaper retail and industrial.

The answer is complicated, but I’ll try not to write a book here.

First you’ve got to know how to analyze a deal. Otherwise, it makes no difference where you find a deal. You’re not there yet. I always recommend analyzing 100 operating data sheets, before ever making an offer on multifamily (or commercial) property. This takes some effort and self-discipline. However, by the time you’ve sifted through this pile, you’ll recognize hidden values and profits that only professional investors would recognize.

However, my preliminary analysis goes something like this:

GSI divided by 2 equals the NOI. NOI divided by price equals the CAP rate. Then see if the deal is close to being something you want to negotiate. It’s way more complicated than this, but this will jump start your analysis.

Meantime, of course, deals are negotiated. Few deals appear to be deals until after you’ve worked the seller over.

Finding deals from any source hasn’t changed. Frankly, the free version of Loopnet is a Gold mine, if you know what to look for. Loopnet lists a boatload of stale listings on the free version. Well, who might be motivated the most? The seller who just listed his property yesterday? Or the seller who’s sitting on his thumbs, having suffered from a bunch of low-balls, and now several months later has no activity on his stale listing whatsoever? If you said ‘stale listing’ you win.

Frankly, I hate being the first offer on a fresh listing. Rarely is the seller ‘real’ yet. So, part of finding deals, is making offers on properties and waiting the sellers out. It could take months of talking back and forth to finally nail down the sweet deal you wanted in the first place. Most investors I know don’t have the patience for this. And that’s why they settle for marginal deals.

As an aside, sellers that are asking too much, often get ignored for obvious reasons. These sellers will often become highly motivated after a while, and become the hidden gem that only you were patient enough to uncover. High asking prices doesn’t mean inflexibility.

Sometimes the low hanging fruit, takes a while to get low enough to pick.

Be that as it may, finding actual deals before anyone else knows they exist (or after everyone knows and loses interest), will most likely be a result of your own marketing efforts. That is, you’re advertising yourself as a buyer. This is why direct mail is popular with professionals and the sophisticated private investors. It’s about getting motivated sellers to call them, and not the other way around.

Now, it’s not a total loss with agents, if you want the actual deals… They will have pocket listings that get passed by their pocket buyers first. In order for you to become a pocket buyer, you have to do at least the following: Make friends with the agents that actually find deals. Define what you will buy. Show your ability to close. Be a repeat buyer. All of the sudden, you’ll get real popular. And by popular, I mean you’ll get first crack at the ‘real’ deals, not just the leftovers.

Gotta go.

This is exactly what I am focused on right now. I found a book on Commercial Investment Analysis from the University of TN, Graduate Real Estate Program, trying to teach myself about investment analysis.

Forget that. Cut to the chase and just start filling in the blanks on the form I gave you, using the operating data you get from sellers. You won’t even know what’s important to learn until you’ve attempted to analyze the operating numbers on a project.

Otherwise, go talk with an owner of income property similar to what you want to own and pick his brain. Take him out to lunch and pay for it, with the express intention finding out how he evaluates income property, or better yet, what he thinks is a deal in your area. You might find a source of a property, or a source money, or referrals on property. Who knows?

You’ll get more insight, more quickly, than doing about anything else. How do you find income property owners? Attend a investor’s club meeting. Join the apartment association in your area, and go to any meetings they offer. Take an apartment manager out to lunch and pick his brain. They LOVE to talk about their jobs. Talk to the FSBO sellers you find. You’re apt to really find out what NOT to do. Just saying.

But reading a book on investment analysis has got to be the driest approach I can think of. Never mind it will be written in technical terms, and probably written by someone with zero experience in the ownership and management of income property. But go ahead, make my day! :banghead :biggrin

While it is very dry, it is also to the point. I find the information i learned from that read would take me forever to learn on forums. That form is very clean and organized, I like it, did you make that form yourself?


javipa my friend I thought you took a vacation again? :banana

Do you have any experience leasing to businesses instead of homeowners? I handle the relationship with our property owner and the company I work for. Personally I have the hunch that leasing to a business would be much less stressful then to a renter at a single family, especially when they destroy the place after not paying 2 months rent. From my experience businesses tend to be more professional. Do you have any experience with renting in single family homes vs businesses?

I’ve been around rental houses since I was eight. I have no experience with non-residential income property. That’s why I don’t weigh in on the expenses/ratios, etc. involved with commercial office/retail/industrial types of investing. I’ve been told many times that I’m missing the boat with commercial retail space, but it just hasn’t clicked with me.

Back to my original number without increasing revenue @ GSI of $12540 yearly, you could only finance about $38,000 to get a Debt Service Ratio of 2 or greater, which means I would need to put down $131,000, which is not practical. The current owner wants $169,000 which equates to a TRUE cap of .037…which is horrible. If an investor actually puts $131,000 down they would only return about 4%…weak - (my checking account gives me 3%).

So my conclusion is this investor is, like the one you mentioned, has yet to become REAL about his asking price. The property is valued around $120,000.