Rate My Deal
Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes
Rate My Deal
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Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
11yOriginally posted by @Matthew Schroeder:
@Blaine Johnson I thought I would let you off easy on the cap rate as I just saw someone else on BP make the EXACT same error a couple of days ago - I am actually a little surprised that @Account Closed didn't catch the issue before me in his earlier post, as he usually has a very keen eye for such calculation issues.
I hope that my comments were helpful! In the event that you decide to still move forward with that investment, make sure to check on those utilities to see who pays (owner or tenant) - that can be a big swing factor in the economics of the project!
@Matthew Schroeder See it really doesn't make ANY difference if you calculate the NOI correctly or incorrectly because if you use the cap rate incorrectly you still end up with a USELESS number in both calculations. Now if @Blaine Johnson had actual cap rate comps from closed sales of similar properties in the same market around the same time then IF he had a correct NOI calculation then he could arrive at the market value for the property.
As long as anyone is just dividing NOI (correct or not) by some asking, guesstimated, hoped for price then you have NOT created a cap rate. Think about a 1000 sf house that they are asking $100,000. That would be $100 a SF. Yeah! But what if you knew a SALE of a 1050 house sold for $84,000 and a 980 house sold for $80,750. Wouldn't it be better to use THOSE $ per SF to come up to an offer of say $81 a SF times 1000=$81,000? See, just saved yourself $19,000 by using correct numbers properly.
31 Replies
- Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes11y
What are the financials? How can we rate the deal if we don't know how much money it makes? or loses? =) Give us the financials. Don't give us what the Seller gave you, give us what you found out doing your due diligence.
Best of luck @Blaine Johnson.
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
The cap rate was on my calcs, not the current owners.
Conservatively, and based on the area market, the total rent revenue should be at 2400 mo. 50% capacity, or even just the 2 larger units rented continuously, will pay the bills and keep the emergency fund ready.
Annual net income approx 15k. after ALL usual costs.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
What are the market perceived risks that the market will ONLY buy the NOI at an 18% cap?
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
Originally posted by @Account Closed:
What are the market perceived risks that the market will ONLY buy the NOI at an 18% cap?
Bob,
I do not think that the market will ONLY buy at an 18% cap, and that is not the norm. The market risk in this area is controlled by the quality/longevity of renters in general. This is especially true for small units like most involved in this deal. As a college town that is heavily dependent on that institution for it's economy, all things rise and fall with the school year. Wages are low in general compared to the national average as well. Most smaller properties can not absorb the potential 3 month loss of income at the lower rents the market dictates vs. the initial investment costs and be as profitable as this potential.
Owner occupied duplexes are numerous here, with few large multi-families. (I have owned a couple of those in the past that actually paid me to live there for free.) They are serious competition is this market. However, this particular deal has 2 larger units included that could/would rent to a less transient client and carry the debt entirely. The caps in this area still usually range from a nice 8-10, but 15 is a very real potential cap if you stay on top of it, and ahead of the MLS, in going after the deals. I am not hinging the deal on any of that, just putting it out there.
- Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes11y
Blaine,
A couple of quick follow-up questions - perhaps I missed some details.
(1) Cap Rate: How did you get to 18%? I get something closer to 9%. My simple calcs are $2,400/month for 12 months ($28,800 gross annual rent). Assume Operating Expenses of 50%, which gives NOI of $14,400/year. That is a 9.0% cap rate ($14,400/$160,000).
(2) Operating Expenses: Do you, or tenants, pay water & electricity? In these larger complexes (>4 units), owners often pay water and sometimes electricity. Water bills (and electricity) can get pretty high, especially if the owner is paying.
I hope that is helpful in your evaluation.
Best,
Matthew
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
Matthew,
You are actually correct. Net profit after ALL projected expenses would be a little over 15K a year. A little over a 9 cap rate.
I am re-learning some definitions here.
- Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes11y
@Blaine Johnson I thought I would let you off easy on the cap rate as I just saw someone else on BP make the EXACT same error a couple of days ago - I am actually a little surprised that @Account Closed didn't catch the issue before me in his earlier post, as he usually has a very keen eye for such calculation issues.
I hope that my comments were helpful! In the event that you decide to still move forward with that investment, make sure to check on those utilities to see who pays (owner or tenant) - that can be a big swing factor in the economics of the project!
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
@Matthew Schroeder,
I have checked into and received documents and quotes for utilities, taxes, insurance, management, etc., etc. in my projections.
I will be paying water/sewer/garbage, all municipal, as is customary in this location for a multifamily. SFR's can be either way here. All other utilities are separately metered and paid by the tenants.
I was not relying on my erroneous cap rate number as a deciding factor, but on the actual projected expenditures vs. income and the potential return.
Thanks again for your help!
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Matthew Schroeder:
@Blaine Johnson I thought I would let you off easy on the cap rate as I just saw someone else on BP make the EXACT same error a couple of days ago - I am actually a little surprised that @Account Closed didn't catch the issue before me in his earlier post, as he usually has a very keen eye for such calculation issues.
I hope that my comments were helpful! In the event that you decide to still move forward with that investment, make sure to check on those utilities to see who pays (owner or tenant) - that can be a big swing factor in the economics of the project!
@Matthew Schroeder See it really doesn't make ANY difference if you calculate the NOI correctly or incorrectly because if you use the cap rate incorrectly you still end up with a USELESS number in both calculations. Now if @Blaine Johnson had actual cap rate comps from closed sales of similar properties in the same market around the same time then IF he had a correct NOI calculation then he could arrive at the market value for the property.
As long as anyone is just dividing NOI (correct or not) by some asking, guesstimated, hoped for price then you have NOT created a cap rate. Think about a 1000 sf house that they are asking $100,000. That would be $100 a SF. Yeah! But what if you knew a SALE of a 1050 house sold for $84,000 and a 980 house sold for $80,750. Wouldn't it be better to use THOSE $ per SF to come up to an offer of say $81 a SF times 1000=$81,000? See, just saved yourself $19,000 by using correct numbers properly.
- Investor · Nashville, TN · Member since 2015 · 688 posts · 607 votes11yBlaine Johnson I would dump the water bill on the tenants. Pay for 6 submeters have them installed, would be about 2-3k for the meters and installation. You regain that in 1 maybe 2 years owning the place.
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
@Account Closed, I am on the same page with you on comps and gave the same explanation to someone else, with very similar numbers even, just yesterday. Isn't that supposed to be the first question in real estate valuation? What are the comps? Seems to be the case in my neighborhood even if the final sale comes in much higher or lower for whatever other reasons.
- Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes11y
@Account Closed On a very different topic, I know that you have properties in Diamond Head / Honolulu - just curious if you happen to own any on Pualei Circle (at the base of Diamond Head)? I worked for Coopers & Lybrand (now PWC) in Honolulu in 1995/96 and I rented a place in Pualei Circle during that time. What a fantastic location! I went jogging through Kapiolani Park and along Waikiki beach every night - it doesn't get much better than that ... but I am not telling you anything you don't already know! :)
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
@Devan Mcclish, a good thought...
However,
Water/Sewer/Garbage are all combined in one bill/account within this municipality, required by statute for all residential units, and would require meters AND sewer AND Totes/dumpsters to be individual to each unit. They are not separable. That would be very expensive, and nearly impossible logistically to make happen on this property.
- Investor · Whitttier, CA · Member since 2015 · 405 posts · 110 votes11y
Great posts @Blaine Johnson Congrats on getting owner financing on the table. Off the bat, I don't think the units passes the initial 2% rule, with the gross rent being $2,400 and annual net of 14k and expenses being 15k, apart from that I would love to see what the tax rate is for that area and how likely they are to increase when the wind blows.
@Matthew Schroeder thanks for the calculations on the cap rate it would appear that if Blaine wanted to leverage the equity in the units by maybe adding a few upgrades and flipping the units to an investor or someone who is more inclined to stay in the town then this may be more attractive. But it sounds like it might be a little difficult to cash-flow on the units and can be purely an equity play.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Matthew Schroeder:
@Account Closed On a very different topic, I know that you have properties in Diamond Head / Honolulu - just curious if you happen to own any on Pualei Circle (at the base of Diamond Head)? I worked for Coopers & Lybrand (now PWC) in Honolulu in 1995/96 and I rented a place in Pualei Circle during that time. What a fantastic location! I went jogging through Kapiolani Park and along Waikiki beach every night - it doesn't get much better than that ... but I am not telling you anything you don't already know! :)
Oh yeah, bought in Pualei Circle in 1978 for $35,000. A recent sale in my complex went for $510,000. Here's a two bedroom that I showed my buddy @Andrey Y. http://www.oahure.com/SearchMLS_Details.php?MLSNum... Mine has been a rental since 1982. Not one day of vacancy and I have a 14 year tenant in now! I also bought in Diamond Head Sands behind Pualei. That was the last condo complex built in Diamond Head, 1975! Both were going to be the retirement condo but real estate has put me on the beach on the Gold Coast. That area is only going to gentrify more and even all the new Kakaako condos can't match the walk thru the park to the beach without crossing 8 lanes of Ala Moana. Aloha!
- Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes11y
@Account Closed Very nice! Congratulations on your real estate success - you nailed it! And, the next time you are having a drink at sunset on the outside patio at the Hau Tree Lanai, order a vodka tonic for me! It doesn't get much better than that! :)
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Matthew Schroeder:
@Account Closed Very nice! Congratulations on your real estate success - you nailed it! And, the next time you are having a drink at sunset on the outside patio at the Hau Tree Lanai, order a vodka tonic for me! It doesn't get much better than that! :)
I've only very recently got into vodka tonics/vodka water, after a 3 year stint of gin and tonic as my go to "social" drink. What vodkas have you experimented with and which one works best with tonic and why?
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes11y
Originally posted by @Account Closed:
Originally posted by @Matthew Schroeder:
@Account Closed On a very different topic, I know that you have properties in Diamond Head / Honolulu - just curious if you happen to own any on Pualei Circle (at the base of Diamond Head)? I worked for Coopers & Lybrand (now PWC) in Honolulu in 1995/96 and I rented a place in Pualei Circle during that time. What a fantastic location! I went jogging through Kapiolani Park and along Waikiki beach every night - it doesn't get much better than that ... but I am not telling you anything you don't already know! :)
Oh yeah, bought in Pualei Circle in 1978 for $35,000. A recent sale in my complex went for $510,000. Here's a two bedroom that I showed my buddy @Andrey Y. http://www.oahure.com/SearchMLS_Details.php?MLSNum... Mine has been a rental since 1982. Not one day of vacancy and I have a 14 year tenant in now! I also bought in Diamond Head Sands behind Pualei. That was the last condo complex built in Diamond Head, 1975! Both were going to be the retirement condo but real estate has put me on the beach on the Gold Coast. That area is only going to gentrify more and even all the new Kakaako condos can't match the walk thru the park to the beach without crossing 8 lanes of Ala Moana. Aloha!
See the real estate wont outpace inflation thread. So far I have been loving living and investing here.. I just don't see people paying $7000/mo. to rent a 2BR/2bath in/near waikiki in 10-15 years. I can probably get $3100-3300 for my 2BR if rented seperately and I dont see that number going above $4k in the near future or far future.
If that would ever happen then something is slowly dawning on me.. ;)
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Originally posted by @Andrey Y.:
See the real estate wont outpace inflation thread. So far I have been loving living and investing here.. I just don't see people paying $7000/mo. to rent a 2BR/2bath in/near waikiki in 10-15 years. I can probably get $3100-3300 for my 2BR if rented seperately and I dont see that number going above $4k in the near future or far future.
If that would ever happen then something is slowly dawning on me.. ;)
Bout time! Ha Ha. But if you go back 15 years at 6% then a $3100 two bedroom would be renting for about $1300. My one bedroom rented for $850 in 2001 so that sounds about right! My records just go back to 1977 and it's been 6% since then. Leave it to you kids to screw things up! ;-)
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes11y
@Davon Lowery You said "I don't think the units passes the initial (gross) 2% rule".
But, just because it doesn't gross $24%/yr doesn't mean it's not a deal. Everyone should know that it's just a "rule of thumb", and depends on so many other factors, (especially, neighborhood). So in this case, 1.5%/m may well be a smokin' deal! [No recommendation implied]...
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
@Davon Lowery, The market is this area rarely supports the 2% rule. In fact, I have never had one OR seen one meet that criteria. 1.5% is even stretching it due to the low rents involved. Some of the large multi's may make the cut, barely. The main goal here is to simply make it pay for itself and hold it for the future (retirement) income it will yield. Any cash flow now is a bonus. Equity is hard to grow here as the market is slow to move in any direction. The taxes are at 68% of the national average and assessed on the full market value/last sale price of the property. Tax increases are few and far between, impacting individual properties minimally. Government spending is very low compared to most. Way lower per-capita (I mean taxpayers footing the bill) than California. People "invest" here for personal reasons. But it can and should still be done with common sense over emotion and the best deals one may find.
- Investor · Carmel, IN · Member since 2014 · 332 posts · 245 votes11y
@Andrey Y. @Account Closed
Andrey, you have some very valid points & I agree with you on some of them. When I was younger, I would have agreed with you almost completely.
Hawaii, and specifically Honolulu, and even more specifically Waikiki/Diamond, are a very special case, like only a few markets in the entire world.
As I have grown older, I have come to realize the importance of "supply constraints". Most people rightfully focus on the demand side, but pay much less attention to the supply side.
I could go on & on & on about this, but look at the most expensive cities in the world, and they all have supply constraints, real or imagined. New York, at least Manhattan, is an island - it is not growing. Everyone wants to live in Manhattan, not Queens. I lived in Hong Kong, one of the most ridiculously priced markets in the world. Why is it so pricey? It is NOT the quality of the residential stock - it is supply constraints. San Francisco - supply constraints. There are billionaire real estate owners in the big cities of India - the real estate quality is actually quite poor. Why is it so valuable? Very real supply constraints.
Oahu is an island. Honolulu is smaller sub-set. Waikiki & Diamond Head are even even more, desirable subset. Development on/around Diamond Head is highly, highly limited and regulated. Don't forget the fact that a very large portion (50%?) of the land on Oahu is in the hands of Bishop Estate, Campbell Estate et al. In terms of appreciation, nothing would surprise me! If you want to see how extreme things can get in Hawaii, just look back to the 1990s (25 years ago) and look at the prices Japanese banks/investors were willing to pay for some assets.
And then, there is the whole issue of historically low interest rates - real interest rates (after inflation) are essentially free, but that is a topic in and of itself.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Blaine Johnson sounds like you have plenty of experience and knowledge of the market and area not sure what your looking for in the way of feedback as it sounds like this is a done deal .... What state is it in ?
- Rental Property Investor · Pocatello, ID · Member since 2014 · 33 posts · 6 votes11y
I did spend over 20 yrs. in this market in the past but this is not a done deal at all. I ask for input to be sure I am covering all the angles in my research. I am not countering or denying anyone else's comments, but letting them know that I have looked into what is being said or suggested and the applicable info or results. I am actually leaning away from the deal at this point, until I get more info from sources "on the scene". I will let everyone know the outcome and location then.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Blaine Johnson that was my impression I don't think you needed anyone's feedback from BP other than some obvious comments about water meters etc.. with your experience already in the market... its a deal if you want it or you can pass...
I don't think you will learn anything here that you don't already know by people commenting who don't really know the deal the area or anything else.
Its not like many post here were the folks have zero experience and they are buying one of the most risky invest that being an out of state rental.. and having no clue as to how risky it really is..especially at the low price points
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