Investor · Fayetteville , NC · Member since 2008 · 19 posts · 0 votes
Hi all looking at a 8 plex . I have not yet contracted. Though i expect to contract for $255,000 Details follow.
8 plex renovated in 2006 and 2007: new roof, all apartments new carpet, painted, new windows, new lighting fixtures, new kitchen cabinets and appliances.
4 two bedroom and 4 one bedroom all with w/d hookups
Currently 100% occupancy with 1 year leases.
Sheduled gross income $3300/month
taxes and insurance $2500
estimated maintenance $1800
all apartments on separate water and electric
long time handyman on premises gets rent reduction for service. All ready calculated in schduled gross income.
I currently live in the building and the area is descent. I will manage my self. Mostly middle and lower economic people. Only 5 mins to US Army Post the major employer for area. Close to shopping and schools.
Thanks for the tip. I will try for an asking price at $220,000. But considering the money he put into it I doubt it.
I did read your book by the way. I like your no-nonsense approach without all the motivational stuff.
I have been finding it difficult to come by a deal at the discount you suggest in your book. My goal is to buy multiunit properties and hold. Do you have suggestions as to where to look? I have seen similar properties for about $100K less but the amount of repair required and the neighborhoods they are in make them prohibitive.
Thanks for the tip. I will try for an asking price at $220,000. But considering the money he put into it I doubt it.
I did read your book by the way. I like your no-nonsense approach without all the motivational stuff.
I have been finding it difficult to come by a deal at the discount you suggest in your book. My goal is to buy multiunit properties and hold. Do you have suggestions as to where to look? I have seen similar properties for about $100K less but the amount of repair required and the neighborhoods they are in make them prohibitive.
Mark
Mark,
I will let Mike respond for himself...but I would like to share my thoughts.
I read Mike's book, and agree with your comments. For a long time I had trouble finding any deals that yielded the 2% rule. Now I am finding them more and more. I am in the process of moving to an area that has many more. The key is networking within your local REI group. Also hook yourself up with a hungry realtor, real estate lawyer, etc. These people can be some of your best contacts. It will take some time, but it will happen. Don't settle for a property that is just ok. Keep working hard and find a deal that you KNOW will cash flow properly. It is much more exciting!
Mike, does it make any difference if you are not buying it for income, but for investment purposes. I ran that scenario through the property evaluation tool, and even with no appreciation it makes 12% total return or so (not cash on cash).
Also, I note that the taxes are very low, which could change the expense percentage quite a bit. Four plexes that I am looking at have 4 times those taxes. Also, he is doing the management, so $330 is in his pocket.
Sparky
I have never seen a property that has maintance costs of 225.00 per door per year. You need to look at the numbers and you will be feeding the property cash.
If you buy an investment it had better produce an income. Would you buy a stock that you knew was going to be dropping in price and say thats ok because it's an investment?
I appreciate all the advice and comments. To make this deal work I would have to purchase the property for around $110K. Or raise rents to about $650/unit which the market won't support.
Mike, does it make any difference if you are not buying it for income, but for investment purposes. I ran that scenario through the property evaluation tool, and even with no appreciation it makes 12% total return or so (not cash on cash).
Any purchase is an investment. Some of the return on the investment is from the cash flow. Some is from the appreciation if there is any.
The building is a commercial property. Its total value as an apartment building is based on the NOI. It will not appreciation unless the NOI goes up or investors are willing to accept a lower yield (CAP rate, largely tied into the prevailing returns from other investment classes or interest rates).
How do you get a 12% return from the property? It could be because the running costs are under estimated (see MikeOH's & OH Realtor's).
You've got it right. To make this property cash flow properly, you would need to buy it for less than 1/2 of the asking price. That's probably why the owner is selling. He's taking a negative cash flow bloodbath.
You are also right, it is hard to find deals that will cash flow properly. If it were easy, everyone would do it. In fact, I would go one step farther and say that EVERYTHING about this business is hard. I'm not trying to discourage you, but I'm just telling you the way it is. Does that make it a bad business that is not worth pursuing? NO! It is a great business. With enough rentals you can have nearly complete freedom; make a nice monthly income; and build significant wealth in a relatively short period of time (a few years).
I don't have a lot to add to what Rich said. Making the right personal contacts is KEY if you are going to find good deals. Get out of the house and meet people. Join your local REIA and make friends with the SUCCESSFUL landlords in your area. You'll be amazed at how many good deals you'll get just by knowing the right people.
Reflex,
I'm not quite sure what you mean by an "investment". For me, rental properties are a business. In business, you MUST have a positive cash flow or you're out of business. One of the questions I often ask is "how many of these investments can you afford to own". In my opinion, with every new investment, you should make more money. If you are losing money on each investment each month, that is more like a forced savings plan to me.
However, to answer your question directly, no it doesn't make a difference to me. I only buy rentals if I will have at least 30% instant equity and a significant positive cash flow.
John and Mike, thanks for clarifying. I ran it through this website's tool. I think the return is based upon the pay down of the mortgage giving increased equity.
Mike, I do not get any cash flow from my stocks or my IRA. I put money in year after year, hopefully with a payoff down the road.
The other thing you could look into is see if he would be willing to finance all of it for you. Tell him you can give him 255k if he will let you pay him 1400/month for 15 years. He gets rid of his loosing property, doesn't have to pay capital gains, gets his full asking price and you get an interest free mortgage on the building for 15 years. It's a long shot but you'll never know unless you ask.
The other thing you could look into is see if he would be willing to finance all of it for you. Tell him you can give him 255k if he will let you pay him 1400/month for 15 years. He gets rid of his loosing property, doesn't have to pay capital gains, gets his full asking price and you get an interest free mortgage on the building for 15 years. It's a long shot but you'll never know unless you ask.
Great point.
Price is only one variable. Terms and conditions can matter just as much.
I know a guy who did a lease/option where he has a 40 year option with a fixed sale price. He sold off the long dated option for a large premium.
You do not want to overpay yet over paying is a function of how and when you actually pay.
Note that the seller will have an issue with inputed interest. That is not the buyer's problem.
You should be VERY CAREFUL in considering price and terms to be equivalent. They are NOT equivalent. Price is more important than terms because it gives you flexibility.
Here's an example. Let's say that you are looking at a duplex (rental property) that has gross rents of $1,500 per month and a NOI of $750 per month. The owner is asking $180,000, which is full market value.
If you use the 2% rule, the most you could pay for this property would be $75,000. With a conventional 30 year loan at 7%, your payment would be about $500 per month and your positive cash flow would be $125 per unit per month.
Now, let's say that you assume price and terms are equivalent. You ask the seller to take $75,000 and he says no, he will only take $180,000. Since you believe price and terms are equivalent, you offer the full $180,000 with 100% owner financing at ZERO percent (no interest). The seller accepts. You have a mortgage payment of $500 per month and a cash flow of $125 per unit per year.
So, both deals will give you the same cash flow. Great -- right? NO! In the first instance, you bought the property with $105,000 of instant equity. In the second instance, you have no equity. If your personal circumstances change and you need to sell, you can easily sell the first property for a profit. Many new landlords discover that they HATE dealing with tenants and want out. If you bought at a discount, you can easily get out, even if the market continues to decline.
Now, let's look at the second scenario. What if the the second landlord needs to sell? He paid full retail and will have to sell at full retail just to break even. In a declining market, he could EASILY be upside down almost immediately and even if he got full retail, he would lose money. The only other alternative would be to sell the property with the same terms he received: full price and zero interest. This would mean the loan would need to be assignable or he would need to sell subject to (not very safe).
Therefore, you see that price and terms are only equivalent IF you can hold the property for the duration of the loan, which is 30 years in this case. Thirty years is a LONG time and that should be carefully considered before doing a deal like that. I am committed to the rental business long term, but I wouldn't do a deal like that.
So if one was to attempt terms like this (I had been thinking about it a lot lately) The best way to set it up with the lowest risk from what I'm reading in your post would be to make the offer assignable and put some money down say 10-20% to help eliminate the risk of being upside down right out of the gate?
I do follow what you are saying and understand that buying at the right price is a much better option.
So if one was to attempt terms like this (I had been thinking about it a lot lately) The best way to set it up with the lowest risk from what I'm reading in your post would be to make the offer assignable and put some money down say 10-20% to help eliminate the risk of being upside down right out of the gate?
I do follow what you are saying and understand that buying at the right price is a much better option.
Putting money in so you are not upside down is chasing your tail.
You could pay all cash and not use debt if being upside down is a real risk.
You need to look at the returns. It is not a bad idea to put in cash but that cash needs to earn a good return. If you put cash into a bad deal and then a better one comes along what would you think then?
Focus on doing good deals. You can take you cash to any seller. The seller only has their specific property to sell. If the deal is not a good one then putting in cash does not make it a whole lot better.
So even if I could negotiate terms that would be much better long term, like 15-20 years down the road (as in 0% rate) it's still a bad deal if it's not sweet now. Even though the cashflow is equal to what it would have been had it been purchased at the 2% rule price.
no, it's good stuff. I was thinking about trying to go for terms like that next time I run into a stuborn seller. But now after your input and REI's I'm having second thoughts on trying to negotiate terms. You're just enlightening me to some new angles I've never considered before. Which is always good stuff :mrgreen:
I looked at your deal and it might work. Here are some additional things to consider.
You mentioned recent renovations. Those are great, but are they renovations that will decrease your operating expenses? For example, new plumbing and fixtures, electrical wiring, appliances (including AC units), install tile wherever feasible to reduce the replacement cost of carpeting, make lighting fixtures and locks generic to reduce replacement costs. If these things were done and these components of the building are all new, then you can certainly reduce your operating expense down to nearly nothing, especially considering the onsite maintenence guy.
Also, what would be the financial terms of your purchase? If you can put 30% down (combination of cash down payment and seller secondary financing) then the numbers will work.
So, given Mike's analysis at the start of the thread:
Originally posted by "MikeOH":
Gross rents: $3,300 per month
Operating Expenses: $1,650 per month
NOI: $1,650
Mortgage: ($255K, 30 year, 8%) $1,870
Monthly Cash flow: $220 LOSS OUCH!
What would you say is different? Note that Mike's analysis assumes 100% financing, which is another way of saying you have some combination of first loan, seller carryback, and downpayment and you're paying the same terms for all the money.
I really would like to see the analysis from a lender's perspective. I see a deal that just happened here in Denver where a 440 unit complex sold for $117,500/unit. Looks like average rents are about $1100/month. If expenses are 50%, then NOI is about $550/unit/month. Payment on $117,500 at 7% for 20 years is about $910. Yes, I know you could put in a down payment, even 100% down. But 100% down seems to give a cap rate of 5.6%. That's very close to no-risk CD's. So, I don't get why anyone would do such a deal.
Having capital improvements done will NOT reduce the operating expenses to "nearly nothing" - NOT EVEN CLOSE. Maintenance is only one of a myriad of operating expenses and is not reduced to anything close to zero even if everything is absolutely new.