Author Topic: Would you do this deal?  (Read 3522 times)

MustacheMN007

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Would you do this deal?
« on: July 23, 2013, 07:10:25 PM »
Hi, this is my first real post,

I am looking at a building to purchase here are the details:

Asking: around 200K
Mortgage: $1,159.00 per month
repairs needed: 30-40K
Rent: $3,200 per month once repaired
Taxes: $383 mo
Insurance: 225 mo
Upkeep: 650.00 (Lawn, garbage, repairs)

So that’s $783.00 per month cash flow not factoring in vacancy. 
My question is how much would you offer for this property?

I want some impartial opinions, what is the general thought on 4 unit buildings vs single family, duplexes or larger.  would I be better off hording cash until I could pull of an 8-10 unit building? 

Thanks

dragoncar

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Re: Would you do this deal?
« Reply #1 on: July 23, 2013, 07:21:59 PM »
Passes the sniff test and it seems like you are being conservative with your upkeep (seems higher than reality)

MustacheMN007

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Re: Would you do this deal?
« Reply #2 on: July 23, 2013, 07:28:30 PM »
Passes the sniff test and it seems like you are being conservative with your upkeep (seems higher than reality)

So if I was to end up in a bidding war, how high would you go?

Another Reader

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Re: Would you do this deal?
« Reply #3 on: July 23, 2013, 08:08:53 PM »
I assume this is a 4-plex, although you don't explicitly state that.  You want to spend around $60,000 a unit, including purchase and renovation costs, for $800 a month rent per unit.  That's 1.33 percent per month.  The two percent rule generally applies to multi-units, so you are light on the rent based on the rule of thumb.  I probably am not interested in this deal, unless there is something I'm missing about the property or your market.

First, how did you arrive at your rehab costs?  Are you a contractor or do you have experience estimating renovation costs?  Did you have a contractor look at the property and give you a bid?  A lot of the profit is made when you buy, so it's very important you have an accurate idea of the renovation costs.

Second, how did you arrive at the rent?  Is this what the current tenants are paying?  Is the place occupied or is it vacant because it needs these repairs?  Are the rents estimated from comparable rents in the neighborhood?  Are the comparable rentals similar to what your units will look like when the repairs are finished?  Are rents in the area stable, rising, or falling?  What about property values?  Are they on the upswing?

Third, what's the occupancy in the area?  Are there a lot of vacant units or is there a waiting list at every building?  What kind of neighborhood is the property in?  Is it a stable, middle class area, or is it a warzone?  Your expenses depend on how often the units turn over and how hard your tenants are on the property.

Fourth, where do you get your expense estimates?  In particular, where did you derive the maintenance and repair estimates?  You can check taxes on-line or call the taxing jurisdiction and you can get a quote for insurance, but repairs and maintenance are trickier.  Never, ever rely on a pro-forma provided by the seller.  Sellers and their agents are, ummm, optimistic about the future.  If you can, get the seller's tax return schedule for several years to verify the stated expenses.

Fifth, if the property is vacant, you will have to carry it until it is renovated and occupied.  How long will the renovations and lease-up take?  Have you factored in the carrying costs?

Finally, what are the mortgage terms?

As I said, on the surface, I don't like this deal.  I'm willing to be persuaded if you can answer all these questions in a way that convinces me you have a good deal and you are prepared to take the project on.

Another Reader

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Re: Would you do this deal?
« Reply #4 on: July 23, 2013, 08:36:40 PM »
I forgot something that is critical in a multi-unit building.  Are these units separately metered for utilities?  If not, I would not touch this property unless I could get the units separately metered for all the utilities.  Is the landlord paying for the water?  If you are the tenant, why call if the toilet is running or the faucet is dripping?  You aren't paying for it.  Same thing if the landlord pays for electricity and/or gas.  Tenants turn the heat on full blast and open the windows in the winter if they aren't paying for it.  The lights will be on all the time and the A/C will be set at 70 degrees 24 hours a day in the summer if you are paying the bill.  Your utility costs could be much higher than the $650 you are estimating for repairs and maintenance.

MustacheMN007

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Re: Would you do this deal?
« Reply #5 on: July 23, 2013, 08:48:21 PM »
I assume this is a 4-plex, although you don't explicitly state that.  You want to spend around $60,000 a unit, including purchase and renovation costs, for $800 a month rent per unit.  That's 1.33 percent per month.  The two percent rule generally applies to multi-units, so you are light on the rent based on the rule of thumb.  I probably am not interested in this deal, unless there is something I'm missing about the property or your market.

First, how did you arrive at your rehab costs?  Are you a contractor or do you have experience estimating renovation costs?  Did you have a contractor look at the property and give you a bid?  A lot of the profit is made when you buy, so it's very important you have an accurate idea of the renovation costs.

Second, how did you arrive at the rent?  Is this what the current tenants are paying?  Is the place occupied or is it vacant because it needs these repairs?  Are the rents estimated from comparable rents in the neighborhood?  Are the comparable rentals similar to what your units will look like when the repairs are finished?  Are rents in the area stable, rising, or falling?  What about property values?  Are they on the upswing?

Third, what's the occupancy in the area?  Are there a lot of vacant units or is there a waiting list at every building?  What kind of neighborhood is the property in?  Is it a stable, middle class area, or is it a warzone?  Your expenses depend on how often the units turn over and how hard your tenants are on the property.

Fourth, where do you get your expense estimates?  In particular, where did you derive the maintenance and repair estimates?  You can check taxes on-line or call the taxing jurisdiction and you can get a quote for insurance, but repairs and maintenance are trickier.  Never, ever rely on a pro-forma provided by the seller.  Sellers and their agents are, ummm, optimistic about the future.  If you can, get the seller's tax return schedule for several years to verify the stated expenses.

Fifth, if the property is vacant, you will have to carry it until it is renovated and occupied.  How long will the renovations and lease-up take?  Have you factored in the carrying costs?

Finally, what are the mortgage terms?

As I said, on the surface, I don't like this deal.  I'm willing to be persuaded if you can answer all these questions in a way that convinces me you have a good deal and you are prepared to take the project on.

Thanks taking the time to reply, I am a PM for a commercial construction company, so I have general knowledge on costs.  The units need cosmetic work but structurally all is well.  I was right on the line of doing a deal or walking away.  My goal is 180K and 30K for reno.  still not to your 2% rule.  not familiar with that by the way.  Thanks

This property is in the Twin cities, in an area most people would be happy with.  I used Craig’s list for rents and as the building sits it would rent for around 700.00 but the city is requiring repairs for an occupancy permit, it would rent for 800 if updated.  The owner gave up and has 2 units rented and two empty. 

Both rents and values are up in the Twin Cities and keep rising.  Vacancy in the town this property is located in is 2.75% for 2 beds.  If I do sec. 8 I will have less turn over but the tenants are harder on the property.  I only take market rate tenants on my other units.  I would say I will have tenants on average 2-3 years.

Thank for the advice on expenses, I didn't use what was provided, went to the city and pulled taxes, water, and gas.  Estimated trash and used figures from my other units.  I think I am heavy on expenses but would like to leave it that way until I know. 

It would take a month to renovate, and 1-2 months to come up to full occupancy.  I was using a commercial loan as Fanny/Freddy won't loan on it as is as its considered non-conforming.  6% fixed commercial loan for 180K with a 5 year balloon.  The plan being to refi ASAP into a qualified 30 year loan.  The loan has me a little worried as if interest rates rise I rapidly my cash flow would be reduced.

Yes all utilities are seaprate, gas for heat and cooking and Electric.  Water and gas for the water heater I cover.
« Last Edit: July 23, 2013, 08:50:15 PM by MustacheMN007 »

Another Reader

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Re: Would you do this deal?
« Reply #6 on: July 24, 2013, 03:12:11 PM »
I would not rely on Craigslist for rent information.  The listings on Craigslist are generally higher than offerings from property management companies and listings found on sites devoted to rentals.  In your shoes, I would call on every for rent sign in the area and chat up whoever answers for information about vacancy length, occupancy, rent trends and anything else the person on the other end of the line is willing to share. 

Water and water heat are not cheap.  The tenants will take long showers and lots of baths, trust me.  Are there common laundry facilities?  They have plusses and minuses, as you probably know if you have other units.

Is the property non-conforming because it needs renovations to get a certificate of occupancy?  Are there unpermitted additions/units that need to be brought into code compliance?  Four plexes should be financeable with conventional loans otherwise.

At the $180k purchase price and $30k in renovations, I'm a little more interested.  Might be the best you can do in the current market and at that vacancy rate, rent increases should be do-able.  Good luck with the project and please update us on your progress.

Hamster

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Re: Would you do this deal?
« Reply #7 on: July 27, 2013, 02:17:26 AM »

Yes all utilities are seaprate, gas for heat and cooking and Electric.  Water and gas for the water heater I cover.
This doesn't help you in any way, but I'm curious how this can be. Are there 5 gas meters? One for each unit for gas heat, and a separate one for a shared gas water heater? I'm just trying to figure out how you'd pay gas for hot water, but not for heat/cooking.

MustacheMN007

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Re: Would you do this deal?
« Reply #8 on: August 01, 2013, 08:38:56 PM »
Yes the property has 5 gas meters.  Its is a strange set up. 

Anyway, I made an offer at 175,000 and I thought that was high.  I lost to a high bid of 220K.  20k over asking.  Its a tough market I guess. 

Hamster

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Re: Would you do this deal?
« Reply #9 on: August 02, 2013, 01:43:49 PM »
Yes the property has 5 gas meters.  Its is a strange set up. 

Anyway, I made an offer at 175,000 and I thought that was high.  I lost to a high bid of 220K.  20k over asking.  Its a tough market I guess.

Our market is the same way right now, particularly anything under $300k. We made a full price offer on a $200k house, with an escalation option to $210k. It went to a cash buyer for $230k with no inspection contingency...

Another Reader

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Re: Would you do this deal?
« Reply #10 on: August 02, 2013, 02:22:51 PM »
Congratulations on missing an opportunity to lose money!

One of the most important lessons in real estate investing is to never, ever overpay for a property.  If you find yourself massaging the numbers to make a deal work, you are about to overpay.   It's much easier to make your profit when you buy than it is to squeeze it out later.

Properties are like buses.  If you miss one, another will be along shortly.  Keep looking, and the right deal will come along.