i'll try to keep this brief. I am currently looking at larger deals that are "unsexy" to the average investor and owner financed due to being maxed out on conventional borrowing at the moment.
I ran across an RV park that has been listed with an agent for over a year with no action. It is right on a main intersection with good road frontage close to town (could be a commercial buyout play down the road). It needs some work. It is part of death sale and the owner is looking to liquidate. i called him, he owns it free and clear and is willing to work around the agent. Here are the numbers...
current units: 14 (35 total available units)
rent income/month/unit: $325
barber shop on property rent/month: $300
total monthly income: $4,850
Here is the catch. The owner has been charging a TENANT $800 to manage the whole RV park and charging the barber shop $300. He let's the TENANT KEEP THE REST OF THE PROFITS!!! WTF. So the OWNER is only bringing in $1,100/ month. He said himself he wants out, realizes the park is underperforming, and is OK with this setup right now. There is also no books on this business. His family has owned the park for 30+ years.
I am concerned without talking to this TENANT that this could go south quickly if step in. If i am this tenant i would not want to give up the cake walk he is. I'd have to do something to satisfy this person, or ask him to step out of his role.
My offer to this man was 10% down ($29,500), 5% interest only/month for 5 years ($1,120/monthly payment) then full cash out after 5 years (i'll be able to get financing by then). He is asking $295,000 - the land is worth $220,000 and the barber shop building may be worth $25,000 and infrastructure somewhere in the $30,000 - $40,000 range for septics, electrical, office building, so forth. Totaling - $285,000 or so.
Expenses - $1,120/month interest payment
management company (10% TBD) - $485
internet - $120
insurance - $250
water - $500
septic - $0 (included)
dumpster - $75
property taxes - $400
total expenses - $2,950
Current income with current units: $4,850
Current expenses (am i missing something???) - $2,950
Estimated current cashflow - $1,900/ month
At this rate i would have my initial investment back in 16 months if I make no other improvements. I am budgeting around $5,000 in deferred maintenance costs which would put me back to 19 months to return my initial investment.
ANY thoughts on how i should approach this situation?? The seller said he would get back to me next week. everything is contingent upon the tenant coming to an agreement with me on the management process. Please advise.
So, I have NO idea how this works in reality, but it seems to me that the tenant is basically like an employee/property manager. While I agree that you should try to work something out with them to be a good person, technically, I'm not sure you HAVE to. Of course, they won't want to give up the deal they have, as you've said. But if you are planning to manage the place yourself, you don't need them. I'd suggest maybe giving them 90 days (or 6 months if you are feeling super generous) or something to find another source of income and letting them know that after that, the deal is done. But that's my 2 cents, which is probably only worth what you paid for it. lol
Good luck and congrats on your impending deal! :-)
thanks Jody! Since the post i have met with the owner and have talked to him about completely going around this manager since i plan to manage it myself. The owner thinks that the tenant (manager) will flee the scene anyways when he finds out he is selling because A). he has a racket going and B) he is keeping all the money and providing no real value. We always want him gone because he is the ring leader on allowing "trash" in the park and letting other users have more than 1 RV site for the cost of 1.
The owner is on my side since i plan to keep it nice and he is just trying to get rid of it help pay some bills. We have decided to move ahead at this time. I have him checking on my funds and he is calling the "manager" tenant to let him know what is going on.
i'll keep everyone posted!
Congratulations and good luck with that! I hope that manager/tenant does leave because I'd hate for you to have to deal with him. Ick!
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