Investor · McAllen TX · Member since 2016 · 27 posts · 4 votes
Hello, My Name is Peter Torres, I'm so exited to join this community of successful Investor. I'm ready to Purchase my first apartment Building, but i'm terrified that I could make a mistake.Can you please give me an input on this deal?
Units 8 in McAllen TX
Price 525,000
Gross Income$ 69,200
Vacancies 5.91% (4,093)
Total Net Income $65,127
Expenses $19821 (30.43%)
NOI $ 45,306
Debt Service $27,622
Cap 8.63%
Cash on Cash 12.25%
The Broker tells me that the property was remodeled completely and the expenses are low for that reason.
Please help out this "NEWBIE"
What should the Offer be? How Low should I Shoot for on the price?
@Cody L. Thanks for your response. But should I believe that they operate at 30% of expenses?
Not going to tell you what to believe. I know what I pay for various things so almost ignore seller provided financials. Some financials supplied are laughably inaccurate in both directions.
I tend to buy based on price per door and what I want to see in an area (and what I've paid) and price per rent ratios (also based on what I've seen traded / what I've paid).
So on a simple "how much are you paying for that rent roll" basis, that property is fine IMO. Because that's what you're doing when you buy a property. You're buying a rent roll.
Investor · Mission, TX · Member since 2017 · 220 posts · 135 votes
9y
@Peter Torres I just looked it up. That's a good, established area. The numbers look pretty good to me. One thing you may consider is that area is heavy on the apts so you would not have a lot of control on rents and value add stuff. But it is an area of town I would consider investing in- I would rate it C+ or B-.
@Cody L. Thanks for your response. But should I believe that they operate at 30% of expenses?
Not going to tell you what to believe. I know what I pay for various things so almost ignore seller provided financials. Some financials supplied are laughably inaccurate in both directions.
I tend to buy based on price per door and what I want to see in an area (and what I've paid) and price per rent ratios (also based on what I've seen traded / what I've paid).
So on a simple "how much are you paying for that rent roll" basis, that property is fine IMO. Because that's what you're doing when you buy a property. You're buying a rent roll.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Oh, also, how am I suposed to believe an expense number that's simply rolled up? I don't believe %'s. I'd want to see how that was spent so I can see if something looks out of wack.
Maybe they self manage so they have $0 management fee? Maybe they own cash so they have no insurance? Maybe they treat all their repairs as Capx and have them missing? Maybe they paid a low property tax rate and this year it's much higher?
If you want to make a decision based on their NOI, then don't take a lump number for costs. Ask for a breakdown.
Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
9y
Based on the numbers you put out it's a solid deal. As to whether it should be 50% expenses, that's where due diligence comes in. I have several properties I own that are nowhere near 50% expenses. If it's truly renovated and in great shape, it's not uncommon to see a lower expense ratio, BUT you have to verify that's the case.
Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
9y
30% is not a sustainable expense ratio over the long term, period. Maybe one year here and there. Ask the broker to provide you with the expenses broken into categories, that's the only way you are going to be able to tell what is/is not accounted for. As said above, they be self managing and using 0% for a management percentage. Maybe they mow the lawn themselves and don't count that expense, etc. Just remember, their NOI is not the same as your NOI, so make sure to underwrite accordingly.
Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
9y
lol @Peter Torres ... usually you make it your business to know these things before buying the property -- not after.
If you are buying a rental... in additional to what market rent is, you definitely want to know what the vacancy rate is because, hello, it determines your income!
Your estimate used a vacancy rate of 5.91%, won't ask where you got it from, but it seems low for the area.
According to US census data, most recent vacancy rate for area (as of 2015) was about 8% and the area's vacancy rate appears to often be higher than the national rate.
So vacancy estimate would be $5536 but this doesn't materially affect the cap rate -- assuming of course that your expense estimate is correct and thats an if.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Peter Torres ask if you can get a copy of their Schedule E for that property the last two years. It will show you the real numbers. Tell them they can blank out other properties or any personal information. Some people refuse to give this, which could indicate their listing numbers are not accurate.
Another thing you can ask for is the rent roll for the last two years. Be very specific that you want actual rents collected for the last two years and not just total potential rents. Actual rents shows vacancy and lost rents. It will also reveal if there were rent increases.
Ideally whatever documents you get from them are signed certified accurate by their accountant.
Some of this may seem like overkill, but people routinely misrepresent numbers in listings.
Hello, My Name is Peter Torres, I'm so exited to join this community of successful Investor. I'm ready to Purchase my first apartment Building, but i'm terrified that I could make a mistake.Can you please give me an input on this deal?
Units 8 in McAllen TX
Price 525,000
Gross Income$ 69,200
Vacancies 5.91% (4,093)
Total Net Income $65,127
Expenses $19821 (30.43%)
NOI $ 45,306
Debt Service $27,622
Cap 8.63%
Cash on Cash 12.25%
The Broker tells me that the property was remodeled completely and the expenses are low for that reason.
Please help out this "NEWBIE"
What should the Offer be? How Low should I Shoot for on the price?
Thanks
Peter Torres
Peter, are you buying without visiting ? I am all for buying sight unseen if the numbers look good, on a SFR fairly simple analysis. Since expanding my personal portfolio to apartment buildings in the past several years, one thing I know for certain, apartments are worth a quick visit - beyond the numbers you want to know the tenant make up, you want to see several units if not all if the building is under 10 units, have a plan to increase your Cap (obviously) - look for deffered maintenance, get a good understanding what buildings are trading for in the area for a similar property.
Real Estate Investor · Mukwonago, WI · Member since 2017 · 76 posts · 16 votes
9y
@Peter Torres if you are basing your calculations on what the owner is telling you for income and expenses, I would suggest making your offer contingent upon viewing of their schedule E (like someone said earlier, you can tell them it's OK to black out their personal info except their name, and their other properties) and verification of the tenants leases. You should have your realtor or attorney come up with the exact verbiage to use there, but you will want proof of these numbers before going to closing. I also like to use rentometer or data from my agent to determine what market rent could be for units I'm interested in so I can make some projections of what my income will look like as the tenant's leases come up for renewal or they decide to leave.
@Peter Torres if you are basing your calculations on what the owner is telling you for income and expenses, I would suggest making your offer contingent upon viewing of their schedule E (like someone said earlier, you can tell them it's OK to black out their personal info except their name, and their other properties) and verification of the tenants leases. You should have your realtor or attorney come up with the exact verbiage to use there, but you will want proof of these numbers before going to closing. I also like to use rentometer or data from my agent to determine what market rent could be for units I'm interested in so I can make some projections of what my income will look like as the tenant's leases come up for renewal or they decide to leave.
@Peter Torres ask if you can get a copy of their Schedule E for that property the last two years. It will show you the real numbers. Tell them they can blank out other properties or any personal information. Some people refuse to give this, which could indicate their listing numbers are not accurate.
Another thing you can ask for is the rent roll for the last two years. Be very specific that you want actual rents collected for the last two years and not just total potential rents. Actual rents shows vacancy and lost rents. It will also reveal if there were rent increases.
Ideally whatever documents you get from them are signed certified accurate by their accountant.
Some of this may seem like overkill, but people routinely misrepresent numbers in listings.