I'm running different scenarios with the BP rental calculator for a 4-flat that I'm considering purchasing in southeastern Wisconsin. The building is in good shape and is fully-rented, but it is older (80+ years) and is in a lower-middle class neighborhood. Because of these factors, I'm estimating that operating expenses will grow slightly faster than rental income over the life of the building. The scenarios inevitably show that at some point around 10 years into the project, expenses will exceed income. Obviously, there are ways to manage the building that will increase the likelihood of better rental income and to reduce expenses, but for a purchase and investment analysis I am leaving my income and expense estimates as they are.
All of my scenarios show that the building will cash flow at least $300 and $400 per month total (i.e. not per door) for at least 10 years before expenses start to overtake income. They also show that I can make a reasonable profit if I sell the building between 3 and 10 years into the project.
In a previous career doing business analysis, I told clients that any projections beyond two years were ridiculously speculative, and that even two years of projections could change with the drop of a hat. I routinely laughed at five-year projections.
My question is this: when you use the BP rental calculator, how much stock do you put into the longer-term numbers that the calculator generates? Are those numbers ever enough of a red flag to keep you away from a project?
My gut tells me that this project has good potential in spite of the long-term numbers. The current owner has done very well with the building, but he manages it himself and he's getting landlord fatigue and wants out of it. He's been trying to sell it on his own for several months, but he hasn't listed it on MLS. The only offers he's had are from people who want him to do seller financing.
Thanks for any thoughts here.
@John Franczyk I hate to say it but you haven’t offered anything that makes this sound like a good deal. Owner can’t sell, old property, you think expenses will climb, you have a defined(ish) 3-10 year window where you could sell, etc. So let’s say you do sell it in 3 years. That will give you $300 * 36 months = $10,800. Let’s say that it also costs you 10% to sell (realtor fees, closing costs, getting it “sale ready”, potential vacancy, etc.). Odds are that the cost to sell is greater than $11K. Sure, renters are paying down your mortgage but the vast majority of early mortgage payments go to interest (not principal).
I’m sure others will disagree but all I’m hearing are reasons *not* to buy this property. So....why are you even considering this?
Like other people in southeastern Wisconsin, I'm beginning to play the "FoxConn" game. If all goes according to plan, the Asian flatscreen component manufacturer, FoxConn, will begin construction of a new facility here that will ultimately employ 13,000 people. There aren't enough potential employees here right now to fill those jobs, and people will have to start moving here to get those jobs. Nobody wants to build this prospect into near-term projections, but it will alter the housing landscape here over the longer term.
The BP calculators are necessarily based on information that is more objectively known right now. The FoxConn development won't be real until someone pushes a shovel to break ground, but that's looks likely to happen as early as next spring. I never liked to incorporate things like that into business projections for other industries, but the real estate and housing aspect of it makes this situation different.
I could likely get this 4-flat for somewhere around $80K. It's generating $2700 month in gross rents. The building needs about $10K in repairs (new downspouts, shoring up 2 porch roofs, a bit of painting). I've thrown a lot of expenses into the calculation to make it as conservative an estimate as is possible right now. After 2 - 3 years, the income could very well grow at more than the 2% I used in the calculation.
I guess the question boils down to how much faith do I put into possible upward growth in rents after the initial 2 to 3 years of ownership. That potential makes this project interesting.
@John Franczyk Be careful playing the "speculation" game. As the investors in miami how that turned out for them. Dude if you willing to accept the worse case scenario on the property buy it. Only buy properties that cash flow to your biz plan... Biz plan you say.... If you dont have a minimum cash flow requirement on a plan, I suggest you get one. It creates a baseline and prevents posts like this on BP.
All investment is, to some degree or another, speculative. If this deal is going to cashflow without Fox Con raising your rents or property value, then I'd buy it.
What exactly are you projecting for maintenance that's going to increase? Can you take those costs to the seller as a negotiating tool? If the heaters are 40 years old, ask if he can replace them, or discount the property to account for the fact that you need new heaters installed in the near future.