15 unit. 750K asking price. 650 rents. Good deal?

31 Replies

Can we please let this die on the vine, as we are obviously not going to see eye to eye on this matter---You go your way and I'll go mine, but as long as the banks that I work for have the money, they are going to make the rules (again you argument isn't with me but the institution called lending).

Regards,

Scott Miller

Originally posted by "mwarden":
Originally posted by "EZLoanz":
Matt,

With all due respect, my opinions are not mine, but that of an industry called lending.

I don't know who everyone borrows money from, but these are the steadfast rules that are applied.

This does not change anything, and it certainly doesn't change the fact that your method produces estimates as well. Estimation methods are created for specific purposes. The 50% method is intended to have a certain balance between accuracy and speed of calculation, the latter of which is very important. No one has ever said that due diligence is not required.

Not to mention that no one here has been able to show that the more complex methods are more accurate.

Originally posted by "EZLoanz":
Can we please let this die on the vine, as we are obviously not going to see eye to eye on this matter

Sure. I'm not even sure what you're disagreeing with. Surely the "institution called lending" recognizes their method of projecting expenses is an estimation method developed for a specific purpose, so there is no disagreement from me.

This is something that we are just going to disagree on---Gross Rents x 50% provides an estimated NOI---using of REAL NUMBERS (like real numbers from tax returns, operating statements and historical data) yields a REAL NOI...

That is great in theory, but the reality is MUCH different. Remember, we're talking about small apartment buildings. The owners of these small apartment buildings are usually small mom-and-pop investors. If you don't know this from experience, you can look at the goverment data from the census and they have data on who owns the rentals in the United States. These mom-and-pop investors typically do not keep good records and do not include all the expenses because they don't know any better. In fact, the majority of small "investors" don't even know what the expenses are. Many think taxes and insurance are the only expenses. Additionally, since they paid too much for their property, they don't have the cash flow to cover the expenses and therefore expenses for many things come from their personal account and are "off budget". The point is that the numbers are bogus and worthless. To use worthless information in evaluating a property is very foolish.

Again, I bring up the point that CAP Rate = NOI/Value. If you go back to your 6th grade math class, you know you need two of the three variables to find the third. My point is that you don't know ANY of the three variables with which to complete the equation. The market cap rate is determined by looking at the financial data for similar properties that sold recently. Since most investors don't understand the expenses, who is determining this magical financial data for similar properties? How are they getting ACCURATE information? NO ONE HAS BEEN ABLE TO ANSWER THIS QUESTION (although I've asked it a bunch of times)! So, the reality is that you can't determine a market cap rate if you don't have accurate financial data. Therefore, the market cap rate is garbage. Even if it were accurate, since the majority of small investors fail, the only thing the market cap would tell you is the price you should pay so that you can fail also!

It's all nonsense!

... this is why cash flow analysis for short-term holds is pretty pointless (unless you have a warranty, or the term is so short that you know exactly what expenses you'll have, or something along those lines).

If you purchased right, you will have an average of $100/unit/month cash flow. That means one month you will have $+325, and the next $-284, and the next...

VERY WELL SAID MWARDEN!

Mike

I know this is over-simplifying things...but I imagine if you bought a property using Mike's formula (great book, by the way), that the cap rate would probably be exceptional and you would want to buy regardless. Either way, you win.

-Rich

WOW

I did not realize I was su7ch a trouble maker :groovy:

So If I find a property with a cap rate of say 10, I can still get burned on the deal?

I'm asking becuase I just posted a analasys of a property that I may be able to get very close to a cap rate of 10

BTW I also saw a property with a cap rate of 20!!!!

In a war zone. Scary :chicken:

If you come up with a cap rate of 10 I would get off my couch and investigate it. anything under 10 it's hard for me to move. Warning, most Realtors or even owners might not think that snow removal plays a factor but it does. Do your homework double check it twice or 5 times offer low. Maybe ask for owner financing and in 6 months you will finance the rest (If this guy thinks the deal is good)

So If I find a property with a cap rate of say 10, I can still get burned on the deal?

Yes, if you find a property with a cap rate of 10, you can and will get burned on the deal. Post the numbers and let's take a look! We need gross rents and purchase price to evaluate the deal.

Mike