Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y
@Todd Keith Does the current owner use a property manager? It's always nice if there's some neutral 3rd party that's telling you OpEx numbers. You also have no clue (at least I'm guessing you don't) if they are doing 100% of the labor themselves and really driving down those maintenance costs. Regardless, the OpEx percentage seems low. You should be able to take a peek at what they pay for insurance, look at the property tax records, and maybe trying to fudge what they are telling you they pay for maintenance, landscaping, property management, etc.
I know this is really obvious but cap-ex for a 26-unit place is where you could get killed. Roofing for 26 units, HVAC issues, resurfacing the shared parking area, etc. are all high dollar items. And for a current owner it's really hard to "get your money back out of it" when you resurface a parking lot. It's not like you could charge more rent and you have to depreciate the expense over time. Not fun stuff. And could be a reason to sell.
The other thing to think about (speaking from experience) is that 1 bedroom/1 bath places are a little bit of a unique animal. It's arguably better to have a mix of 2/1 and 1/1 to appeal to a broader range of renters. Having *only* 1/1 can be limiting. You really have to know the tenant population in the area. The last thing you want to end up being is the "low cost option" in the area.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
8y
45% expenses seem really low for a class C in Akron. My assumption would be you pay for water, garbage and heat and the building in 1970's or older. If that is the case and you don't self manage I would expect closer to 55-60% expense to income.
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
8y
I'm going to second the opinion of potential plumbing issues and the entire building being 1/1s. I recently went through the process of hiring another property manager for my building in VA, and a few of them actually turned down the business. One stated that (in my area) people in 1/1s are one step from being homeless. I feel that was a little strong wording, but vacancies have run a little high as we look for decent tenants.
Also the plumbing has been an issue, seems like every month there is a clogged toilet/sink/tub to deal with in one unit or another.
I wouldn't turn you away from the deal, but be sure to up your capex/maintenance numbers and potentially add a little more vacancy too.
Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
8y
I concur with many others....the expenses are too low. I go with the 50% rule. It is usually tried and true.
The only other thing that draws concern (at least it would in my neck of the woods) is the fact that all of the units are 1 bedroom. This would be very concerning to me as not having a good unit mix limits the tenant pool. Just a thought...
Todd Keith I have double that many units in Akron and I can tell you that it’s over priced. Overall expenses will be much higher considering management fee (6-10% of gross income), your insurance is way to low ($2k annual isn’t real, perhaps he has an ACV policy to save money, HIGE RISK) and laundry income is crazy high. Also assuming you will be hands off, the maintenance work that gets subbed / supplies eats up a TON of cash flow😩
I had a 12 Unit catch on fire this year in Akron and luckily I had an A+ RC Insurance policy and they took care of everything without any hassle, total claim was $500k. Your policy should be around $4-5k. Just assume higher for all the numbers and run numbers conservatively.
My annual taxes went up $8000 in one year due to the school board ATTY who is ruthless. Purchase price dictates new valuation and taxes WILL go up if the current valuation is lower than purchase price.
I went back to seller and said "Mr. Seller, I think I may have written these expenses down incorrectly. Could we go over those again?"
Long story short, some of the numbers have now changed. The expenses went up and the laundry income went down by half. Here's where we are now on the expenses and income:
We're getting closer to reality, but I'm sure there's still more to the story.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Account Closed - Thanks for seconding that tip. Plumbing is definitely on the due diligence list. One1 step away from being homeless? Wow. Haven't heard that before.
When you do find 1/1 tenants, how long are they staying? Is turnover pretty high? Having any rent collection issues with the level of tenant? (Higher than the norm)
We're planning on 10% vacancy. Think we should plan on something higher than that?
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Todd Dexheimer - I defer to your judgement on this one. Know you're an old pro in the OH markets. Running with a 60% OpEx, the Cap Rate (Of the $1 Million Asking price) is 5%. That asking price is looking way to high.
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
8y
60% is a good rule if you are paying all utilities besides electric and gas for the stove on a 1970 or older building. If it has cast iron waste and galvanized supply lines, I would add 3% more for reserves (3%*gross rent plus normal reserves).
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
8y
@Todd Keith Vacancy has been higher, but it's hard to tell what the true number should be. When I bought my building it was an F in a C area. We had drugs, prostitution, squatters, you name it when I took it on. The units also all needed alot of work due to years of neglect, so we averaged 25% vacancy for the first two years. Right now we are closer to 12% with a few late-payers. Budgeting a little more wouldn't hurt. Aside from that I'd just make sure you have adequate access to cash too. Don't tie up every penny in the deal so you can deal with any issues that pop up.
It seems like with the 1/1s in my area in my building we have one of three types of people. Lifers - one guy has been in the building for 19yrs, another has been there for over 7; those moving up and on - transition to different city, get married/have kids etc, or the ones that fall off the tracks, lose their jobs get evicted types. I have a student or two in the building b/c ODU isn't that far away, and I'm in the center of the area's military, so I expect turnover to be a little high, maybe 4 turns a year in a 16 unit building.
Real Estate Investor · Dallas, TX · Member since 2011 · 529 posts · 48 votes
8y
@Account Closed - That's impressive. How long did it take to go from a 25% to 12% vacancy rate? What would you say are the top 3 ways you dropped that vacancy rate?
Having 4 turns a year must drive up the make-ready/repair costs. What percentage of your GSI go to OpEx, if you don't mind me asking?
Investor · Jacksonville, FL · Member since 2014 · 186 posts · 34 votes
8y
@Todd Keith I'm going to be candid, you have great questions, but it has been really difficult to pin those numbers down. Because of the total work done on each unit, all we've really had to do was some spot paint and a cleaning. Which has only cost a few hundred, and all of that has come from the tenant's deposits. That said, I have had a really hard time pinning down the costs and vacancy has been high on the manager's watch, even after the units have had a total makeover. I have actually hired another company to take the property over January 1st, so I'll know more in a few months.
We did a large rent decrease on the units just to fill the building up b/c we were getting close to the end of October. Rents could always be raised later as units turn, but I wanted income coming in for the winter. One of the things that did help with the existing tenants was a $50 gift card. Everyone that paid their rent on time each month would get a "ticket" and at the end of the quarter we drew a winner. This improved paying on time quite a bit with the good (but slow) tenants.