Does this Property Sound Good For A Purchase?

Question

It's A Property in St. Louis-Looks Decent

40 Units
$2,275,000
Beautiful Florissant area
Near Henry F. Koch Park
Updated windows
Pitched roofs
Plenty of Parking
Gas forced air heating / Central air

Financial Summary
Expense Amount
Taxes $29, 325.88
Insurance $12,960.00
Maintenance $11,356.51
Payroll $8,969.40
Advertising $3,177.77
MSD $1,730.96
Gas $4,650.06
Trash $3,125.12
Water $2,491.29
Electric $4,705.46
Total Expenses $82,492.45
NOI $185,091.55

Kathy Utiss · Answer

Once again I "Thank You"; both for your responses. Have another ???What price range would make you think about purchasing. How much more cashflow? Just curious. Hoping it'll help me understand more.

Thanks,

Kathy

Louis Bergman · Answer

To answer your question; Yes, you're on the right track as far as commercial properties go.
Everything will fall into place once you acknowledge that there is a learning curve on applying your tools and sharpening your skills.
You have to put in the effort and the hours to become a player.
It's not just about knowing the rules, but you want to practice the plays time and again every day to become good at it.

If you strongly feel you want to be on the field regardless, I suggest you team up in a small way with an experienced investor.
As payment for your time and good services you will get a piece of the equity of a particular property.
But more important, you will gain valuable hands-on experience and start seeing things through a professional eye.

I think that is the best of all worlds for you at this time.
Believe me, if you find a "good deal", you will have no problem finding such a partner and you'll end up right in the middle of all the action.
So don't give up on your goals; there's no good reason for that.
Stay focused on the steps you need to take to get there and you'll be just fine.

All of us will be here to cheer you on!   :D

Account Closed · Answer

I was at a meeting with a dot.com person who has made millions and then lost millions when the market fell apart. He was much more confident about moving forward as he had seen the bottom and realized that he as still alive, he still had his family, business is business and FUD is the real risk.

FUD - Fear, Uncertainty and Doubt.

Good luck and good hunting for those REI deals. :shoot:

Jon Holdman · Answer

So, if I add up the expenses and NOI, I get total rent of $267K.  I assume that's per year, avg about $550/unit/month.

Those expense look very low to me.  For 40 units, you really are going to be up around 50%, including management, which you don't list.  You also don't show any vacancy.  If gross scheduled rent is $267K, I would assume expenses around $135K, including vacancy.  When they're this low, I suspect the current management is skimping somewhere, and you have lingering problems to clean up.

Even if the NOI really is $185K, 2.275 mil is too high.  A rule of thumb for good deals is price = 10x NOI, which equates to a cap rate of 10%.  You're at 8%, which isn't bad.  But even if you can get the 6.25% loan Louis mentions, that only leaves you 1.75%, and principle comes out of that.

If you want to approach this deal on these terms, base your offer on the claimed NOI, then make them prove it.  When they can't (expenses just aren't this low) or you find their deferred maintenance, adjust the price to keep the cap rate where you expected it to be.

Jon

Louis Bergman · Answer

First impression is kinda sorta OK, and it'll get better the more you can negotiate down on the price.
Based on the available info I'd take the safe route and shave at least  $150,000 off the purchase price.
If the seller stands hard on his price, you need to look at some additional items in order to make a qualified decision.

Here are some of the additional points I'd like you to consider.
--- How much is available for a down payment
--- Actual Rental Income/Pro forma rental income
--- Vacancy Rate
--- Average rent per unit
--- Management expenses/Fee
--- Estimated Appraised Value

These items will help to determine if there are any financial constraints on leveraging your purchase.
The good news is that the property might marginally qualify for a 85% loan, 35 years fixed @ 6.25%, non-recourse and no balloon.

My investment criteria would disqualify this property for my personal portfolio as I run my properties arms length; i.e. I do have professional management expenses as a result.
Also I do allow for vacancy in my calculations, so that brings my NOI further down.
However, depending on the real rent numbers, this property might just squeek by on the minimum DSCR required of 1.18.

But setting my personal opinions aside, and depending on your investment objectives this property could very well be a good fit for you.
And yes, I see possibilities to get some solid funding for it along the lines I mentioned above.
Help us with some more detailed numbers, and we'll gladly give this a second look.

Hope this helps a bit.  :wink:

Kathy Utiss · Answer

I really appreciate you both attempting to answer in such a diligent way. I have to say I've read a few of both of your posts in the forum and as usual very informative!

I however, currently am in one of the worst financial straits I've ever been in. Was it totally brought on by me? NO but the only way I could of changed the circumstances would of been to relocate to where I could make the income I was making here where I live. And my hubby refuses to relocate regardless. And my four kids are my world so there u are.

So now I'm flat busted. Have the residential side down alot with alot to learn. But just trying to figure out if I was on the right track as far as commercial properties go.

I would assume the seller would take somewhat of a discount on this property as I spoke with the agent earlier. He did say it has a $1.6m assumable mortgage on it. But with my credit now I know I have no hope for at least two years after I make the hardest decision I've been trying to avoid for a few years by filing a chp 7 now.

I'm stuck in cross hairs though as well. While I know more than others about how banks work I'm not adept enough I've always felt to do my own purchases. But since I've come back here and the site has grown with the knowledge base of members it definitely helps! But I've always been scared in getting in over my head. How stupid is that? I still ended up over my head by sititing and watching everyone else make the big $$$.