Why people sell cash flow units?

Question

Hey guys.. I'm almost have enough money to put down on a down payment on a multi unit complex... I've been searching the paper and craigslist and I've found a few units that are fully occupied and generating 1500-3000 per month... why in the world would anyone sell something that is making money consistently? Only thing I could come up with is the building owner dies and the family wants nothing to do with it and decides to sell.

Jon Holdman · Answer

That's exactly what I mean by cash flow being overstated.  Gross scheduled rents are $33,120/year.  Claimed expenses are $10,580.  The implication is NOI (net operating income) is $22,540.  If you buy it for $240,500 with 25% down and a 30 year, 5% loan, you're looking at P&I of $968 a month or $11,619 a year.  You appear to be getting $10,920 a year in cash flow.  With your %60,125 investment, that 18% cash on cash.  Not a bad deal.

Unfortunately, the seller's numbers provide nothing for vacancy, nothing for long term capital expenses (e.g., a new roof), nothing for legal or accounting fees nor for property management.  So, he's assuming you will manage it yourself for free.

A more realistic NOI estimate would be $16,560.  After the payment that leaves you $4940 a year ($411.71 a month, or $102.93 per unit per month).  With your initial investment that's an 8.2% cash on cash return.

Now, maybe that's good enough to meet your goals.  Or, maybe there's some other way you make money here, such as long term appreciation or a condo conversion.

Kyle K. · Answer

To answer the question at hand, there are basically two primary reason one sells: out of some sort of necessity or to access the capital for better investments. Hopefully we're all able to sell for the latter reason.

Nathan Emmert · Answer

85% of purchase price is $216,750 @ 6% and 30 years amortization (ad didn't mention loan length) your payment is $1,300 a month.

Given rents of $2,760 and the 50% rule for expenses (being that you're paying gas and have Chicago taxes I would guess that number to be the best you can do) you're looking at NOI of $1,380 a month.

Cash flow is $80 a month or $960 a year.  Given a downpayment of $38,250 (15%) you're CoC is 2.5%.  That's a lot of risk for a pretty low cash on cash return.

You can also look at the cap rate.  NOI $16,560 / Cost $255,000 = 6.5%.  Ideally you'd like that number in the 10 - 12% range from a motivated seller.  6 - 8% is for cash buyers looking to diversify their holdings, not to maximize returns.

Johnny P. · Answer

Why people sell -

Lifestyle change

Sick of being a landlord

or a BALLOON PAYMENT IS COMING DUE AND THEY HAVE TO EITHER SELL OR STROKE A CHECK

Steven Hamilton II · Answer

Actually that is an area in which I am active. For those from the area. I live in the Gurnee/Lake Villa/Round Lake/Grayslake area. Walk away from it. That is over priced. And not to mention it looks like it will need quite a bit of updating. I agree about the low insurance on this one. One price I just got for a sfh here was 650. So that is obviously low/under-insured. Not to mention that area. I picked up a decent 3 bedroom 1500 sqft house. for 55k after rehab.

Sharad M. · Answer

Thomas,

The property is in Lake County, so Cook County or Chicago taxes won't apply. The gas bill may only be some some common areas or hot water heater or some other mix. DON'T go off the numbers provided by sellers. Use those numbers as your guide and do your own due diligence.

There are a lot of expenses missing from NOI. No vacancy, no capital expense reserve, etc. Also, the insurance amount of $483 for that kind of a property seems really LOW.

Nathan Emmert · Answer

Does your aunt do real estate investing?  If not, I would personally use someone else unless you're really looking to throw her that 3% commission bone.  Someone who understands flipping homes or is a land lord as well will probably be a better asset in terms of advice.  Your aunt is more likely a Realtor that posted the Craigslist ad you mentioned spouting higher than realistic returns (and likely believing them to their core).

If you are going to leverage the purchase AND receive good CoC returns, you'll need to find motivated sellers.  Those properties will move quickly because they are rather easy to spot based on the few evaluation formulas you've been shown.  You can either prowl the MLS relentlessly or start forming connections outside the MLS to find off market units that are sellable.... or you can look at units that need rehab due to mismanagement or neglect.

Nathan Emmert · Answer

$1,800 a year on projected expenses of $16,500... that's over 10%.  My renters (or soon to be renters) pay their own gas.  That means that same 10% either provides me additional buffer from other expenses or goes in my pocket.  Studies have essentially shown that covering utilities in the rent doesn't return 1 for 1 in rental raises (i.e. $800 w/ utilities versus $700 without).

Thomas McNicholas · Answer

Man this site is quite the asset! Thank you all for your replies! Now I've never owned a building before.. looking at 4 units how often will they really be calling me for "needs"? just a rough estimate... My aunt is also a Realtor in Chicago... she was actually a top 100 Realtor for Century 21 nation wide.. I'll be working with her obviously on all these deals but I'm trying to learn as much as I can so she should have to explain every single thing to me. Thanks!

Thomas McNicholas · Answer

I'm confused about the Chicago Tax... this isn't in Chicago and the gas bill is pretty low 1,800 for the year.

Why people sell cash flow units?

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