Dear Fellow Investors,
This is my first deal analysis, here are the details:
- Class C, 12 unit, $500 per unit rent, all units rented out currently.
- Property is owner managed and all expense records are not available, I am assuming 50% operating expense on gross rent, 0.5x500x12x12=$36000.
- NOI with 10% vacancy = 12x500x12x0.9 - 36000 = $28800.
The questions I have on this:
1) How do I get realistic operating expense numbers on this property? Are there resources that can help get real numbers for comparable properties in houston?
2) The tenants are currently without lease, with no credit/background check. If I have to evict any of them, what are the eviction costs and timeline?
3) What cap rate should I use to make my offer? Seller is willing to carry back 65% of the purchase price at 5%, 5yr balloon.
4) What exit strategies can this market have?
First start out with finding out what the true market rent should be,,it might be higher or lower than $500, but with no lease or background check, just act like your going to have to kick everyone out.
Figure out what your rehab will cost,,,the true rent and rehab are the first two things to find to start putting the numbers together
Welcome to BP.
Answers to your concerns;
1. Ask for p&l figures from the current owner. Don't accept pro forma, but real numbers.
2. They seem to be month to month tenants. Give them a 30 day eviction notice (in most states it's 30 days) and they should move, but if they don't, you will have to file forcible entry and retainer in the court.
3. Cap rate is strictly local market driven. There is no one universal number to go by, having said that most investors are fine with the range of 8-12 cap rate.
What is the purchase price?
Hope it helps.
Thanks for your responses. The asking price is more than 300k based on pro-forma, however my offer will be on actuals plus the rehab and eviction/leasing costs factored in.
If anyone has any recommendation for property management company in Houston that can manage this 12 unit, please do refer to me.
Is this a self contained apartment complex, or a collection of smaller structures that add up to 12 units?
This is important because the city of Houston requires that all apartment structures that are 10 units and over the be registered with the city. So then a habitation inspection and an updated certificate of occupancy will be required. That can be an expensive and time consuming proposition, so you want to make sure that they have this.
Its a single building with 12 units, thanks for pointing this out, will check with the seller on that.
@Kamal Katiyar Any update on this? Have you found out whether they have cert or not? If not, did you decide to move forward?
Reason I ask is that I might be facing the same situation.
@Nate Paoinchantara - the seller had not done any inspection by the county since the time he has owned the property (around 30 yrs). I have asked for tax records from past 2 years to determine the economic vacancy. Also current tenants are without lease, there would be the eviction/lease costs associated after ownership transfer.
Be careful in this... without leases and background checks, they sound like warm body tenants... they're there, but they aren't paying rents and they are likely to be professional tenants. Thi3)s means a couple things...
1). You won't ever collect rent from them, don't plan for a dime of immediate income on the property so watch your cash reserves.
2). They know the system, a 3 day pay or quit won't work. You're going to have to get a lawyer, he is going to have to appear in court. In Utah I can have them out in 2 weeks, not sure how the courts are where you are but it still costs me about $850 an eviction if the lawyer has to go to court because the tenant responded to the eviction filing (stall tactic). Plan this expense into your math.
3). You'll have to immediately rehab every unit. Again, no rents coming in (essentially 100% vacancy), cash hits to evict, and you'll likely have to pay somewhere in the $1,000 to $3,000 per unit to do trash outs and make them rent ready after these people leave.
If they can't prove these tenants are good tenants and paying rent, I'd plan for all 3 of these things when doing your analysis. Remember, landlords with paying tenants aren't generally selling their properties (they're laughing their way to the bank cashing the rent payments!).
Well....sounds very familiar. I did a little research yesterday that if you don't have the city inspection and they find out, you might face fines from $200-$2000 a day in Houston. If you don't eventually pay and get it fixed, the city can cut the utilities in the properties.
Al that said, it might play into your negotiation power.
Anyone knows if the inspection by city authorities can be done by appointment or do we just wait for them to arrive by their list (once in 6-7 years) ?
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