6-plex seller gives me expense spreadsheet, expenses seem unusually high?

17 Replies

attached is what I was given. they seem high to me, wouldnt the owner "want" to show me low expenses? these dont even include taxes which are $4,800/year. 

this is a 6-plex, seller is asking $210,000. it is located in a C class area. 

thoughts on expenses?

the rent is way too low. 

I agree with @Arlan Potter  in that the rent seems really low, is under $400 average per unit correct? I guess it would depend on what the specs of the each unit are (bed/bath), but I still feel like it should be higher.

Originally posted by @Arlan Potter :

the rent is way too low. 

 they provided me their rent rolls. Rents per month total right around 3,300/month. 

so 100% occupancy would be $39,600. therefore it looks like they must be getting 70% occupancy rate? they didnt state their occupancy rate in anything. 

I think the rents are pretty much at the market rate but I do think I could get the occupancy up to 10% or less, also I think their expenses are just high. 

heres a pic, 6 units in one single brick building, no garages, one spot per unit out front. little yard.

I mean, those expenses are a bit high, but given the specifics and the fact that they're listed down to the penny I'd guess they're actual expenses and not pro forma numbers doctored up to make the building look better than it is.

So, high expenses, 70% occupied, and rents below market potentially? To me, that all adds up to a great deal for you. You cut expenses and get the building fully occupied and you've added a lot of equity here.

@Isaac Essex - There are lots of hours in the maintenance (~$5,000) but not much in materials ($1,400). My experience is that those are about equal. I see a number of items missing. There are no significant CapEx items. What about roof and heating system? How old is the roof? What about the boiler?

@JT Spangler that is what I was kind of thinking, rents are probably already where they need to be but if I can get occupancy up to 90% and lower expenses down closer to 50% of income then its starting to look a bit better. Still surprises me the expenses are so high on a simple 6plex like this

There numbers are very strange.  1500ish for water and gas in one section then 2600 in the other section.  Very high hours charged for maintenance.  

I would want receipts for all of these numbers.  Either way my offer would be pretty low based on their numbers

Unless my calculations are off... You would have negative cashflow on this property in its current state . If expenses are accurate and you still have property taxes to pay out of them of $4800 that will leave you $2750 net for 1 year? 

OUCH !!! Thats also assuming you pay cash . 

If you finance having 30% down your losing money every month unless you can get that vacancy rate up to 90%+  But then you will have to look at are your utilities going to go up tremendously with more tenants????  If I put roughly 60K down on this property I sure would hope I would cashflow $500 a month minimum , and thats still under $100 per door. :(

If you do move forward, I would seriously consider talking to one of the tenants and offering to take $100 off a month in rent to have them take care of the lawn and snow removal . That alone will add $1200 a year more in your pocket and more than likely make 1 tenant very happy having lower rent.

@Aaron Junck your exactly right, with taxes and financing your cash flow negative. the lawncare i think is inflated, what you see in the pic is all there is, vitually no backyard, in my area it shouldnt be more then $40-$50/month.  Im still waiting on the property management company to get back to me with a time for a tour, im guessing they may be part of the reason these expenses are so high if they control maintenance. 

$100/door is also my personal minimum. So with the assumption that I can get expenses down to 50% including taxes, and occupancy up to 90%, I would be cashflowing around $100/door at an offer price of $165,000

@Sean Ploskina my thoughts as well. All units are separately metered tenants pay their own utilities. So landlord only pays for common area utilities, as you see in the picture theirs not much to the common area other then hallways/stairs. 

Something isn't adding up in the maintenance section.  If there is a property manager, then there should be a section for management fees and management supplies only.  If there is no property manager, then he should be charging for his time/supplies only.  The fact that he has management fees, management supplies, maintenance hours, AND property services tells me that he may be "double-dipping" in the property management area.  If you can self-service this unit OR hirer a property manager, I think you would be able to eliminate a significant portion of all these management charges he has.

The cap rate reflects A property, like new construction, downtown area of a larger growing city and even low at that. Pass.

UPDATE: My agent suggests I make an offer of $76,600!?

current owner paid $225,000 back in 2005. there is another 6plex next door, also assessed at $225k.

For the below reasons I was not originally going to make an offer, BUT for a price under $100k I think it looks great. I also think she is crazy thinking we can get it for that cheap but hey why not throw the seller atleast some type of offer instead of nothing right? And its her suggested price so its not like im wasting her time, it shows shes willing to put in low offers/work hard to eventually land a deal?

I told my agent I like her suggestion and to go ahead and write up the offer.

after looking in the neighboring unit and driving the area a few more times, im thinking its closer to a C or D property. Property manager gave me and my agent a tour of this property, 1 unit needs major repair, others are in fair to average condition. . looks like the owner and the property manager mutually dont care much about the property and obviously dont inspect units each year. 

what do you guys think?

Just looks like a badly managed property to me. Management is overpaying itself and underleasing the property. This stuff is typical, but if you have a vision for it you can turn this around. Also, if you plan to manage it yourself you'll see that NOI go up quite a bit. Management is the biggest cost. Next to that is the cost of lost opportunity from your existing management. Those who find great management are truly blessed. This is why so many of us want to grow to the point where we can hire our own, in-house management.

Originally posted by @Mike Krieg :

This is why so many of us want to grow to the point where we can hire our own, in-house management.

That is certainly one of my goals as well. My question is how large do you think you will have to grow before you will be able to hire your own in-house management? 

With 12 units, I will pay about $536/month for management. I figure once I am paying over $2000/month, it may be cheaper to hire a 1099 employee. 

 

I'm curious what happens with the offer. For under 100k I believe it's certainly worth doing further due dilligence to see if you can make the numbers work

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