Turn key building from long time owner of 26 years, here are the numbers I have verified. Class B+ neighborhood. How much would you offer?
|#||Description(All Figures are Annual)||Monthly||Annual |
|1||POTENTIAL RENTAL INCOME||$ 5,560||$ 66,720|
|2||Less: Vacancy -10%||$ (6,672)|
|3||EFFECTIVE RENTAL INCOME||$ 5,004||$ 60,048|
|4||Plus: Other Income|
|5||GROSS OPERATING INCOME||$ 60,048|
|6||Real Estate Taxes||$ 723.00||$8,676.00|
|7||Personal Property Taxes||$ -||$ -|
|8||Property Insurance||$ 189.17||$ 2,270|
|9||Off Site Management||$ 483.61||$ 5,803|
|10||Payroll||$ -||$ -|
|11||Expenses/Benefits||$ -||$ -|
|12||Taxes/Worker's Compensation||$ -||$ -|
|13||Repairs and Maintenance||$ 750.00||$ 9,000|
|15||Accounting and Legal||$ -||$ -|
|16||Licenses/Permits||$ -||$ -|
|17||Advertising||$ -||$ -|
|18||Supplies||$ -||$ -|
|19||Lawn and Grounds Keeping||$ 140.00||$ 1,680|
|20||Miscellaneous||$ 150.00||$ 1,800|
|21||Electric||$ 50.00||$ 600|
|22||Gas||$ 250.00||$ 3,000|
|23||Water||$ 165.00||$ 1,980|
|24||TOTAL OPERATING EXPENSES||$2,900.78||$ 34,809|
|25||NET OPERATING INCOME||$2,103.22||$ 25,239|
I would pay around $315k.
@Nazz Wang $315k is an 8 cap which is pretty fair for a solid B area
I might be completely off here but with the numbers given I don't think this property will cash flow even using the 2 percent rule if you are doing a conventional 25% down....? It appears you are using 15% for repairs and maintenance,10% for vacancy, and 10% for PM. I calculated in 10% for CapEx. When calculated using the 2% rule you get a purchase price of $250,000, plug that into the calculator with the above percentages and the rest of the expenses you stated and you are still -133.00. Maybe I royally messed something up here and if I did please let me know so I can learn. I am new to all this after all......
@Gavin Delmas , You don't mix 2% rule with 50% rule.
If you use 50% rule then you use half gross rent minus the PI to get your cash flow.
If you use 2% rule then you get your Purchase price and can't use that to calculate cash flow.
I don't know how you come up with Neg $133
Tommy thank you for making me think here. I'm very new and trying to process it all. Since she didn't provide a potential offer number I just figured for starters I would see what the 2% rule was in reverse, so I divided $5004 by 2% and that arrives at $250,200. I then plugged that info into the rental calculator on this site along with the other info she provided and it pops out negative cash flow. Maybe I am inputting things wrong or going about it wrong.
@Nazz Wang Any idea what the area cap rates are? 8% Might be a fair return for a larger building. If all the other 8-10 unit buildings are getting closer to 10-12% you might be overpaying at 310K.
I personally like 10Cap minimum. Or value add so that proforma cap rates end up around 15%
@Bob Bowling @Brie Schmidt @Samson Kay @Account Closed Thanks for the insight. I usually used a 9% cap rate rule, but I am doing more research now about past sales of similar properties and see what the trading cap rate is. Is the trend towards 8% for a B neighborhood nowadays? What cap rate do you guys use for C and A neighborhoods?
This is also a 60 year old building with a lot of recent upgrades (or should we say, deferred maintenance caught up) in 2012. I don't have any experience with buildings more that 35 years old. Any insights?
Thanks for thinking about the deal. If you are new, I would really recommend you use the 2% rule and 50% rule very very sparingly. Those two rules are very rough estimates, and I only use them to filter out listings. Once one looks at a potential purchase like the I listed here, one needs to look at the real numbers or best estimates to determine the cash flow. For instance, single family and multifamily properties are drastically different. In SFR's, the tenant usually pays for all expenses not covered in property taxes and homeowners insurance, while the landlord usually pays for water, landscaping, trash, and sometimes gas and electric, which increases the overhead by a large sum. Do you see how you can't just apply the "50% of rent collected are expenses" rule on all properties? Also property taxes are very specific based on location. Notice the property tax here is about 8700, for a property that is about ~300k, while many of my other properties in California about the same in value only pay about $2500 to $3000 in taxes every year.
The 2% rule, ha, let me just say, I have properties where monthly rent is about 0.75% of the purchase price and will cashflow $300 dollars a month. You have to do your numbers based on real numbers of your target location.
Also the property is 8 units so I will not be able to use conventional loans for financing. Commercial loans are usually higher interest with a shorter loan term.
Nazz, can't speak to Cali but 15% maintenance looks a bit high. What about delinquencies? Are you sure you can get great tenants? What are you renting each unit for? If less than 900 bucks, I would use higher delinquencies based on tenant base.
I keep a minimum of $1000 a unit plus $1000 for common area maintenance every year. The $9000 I budgeted was the highest amount in the past four years. The rent is about 700 a unit. The vacancy and eviction costs I am accounting in the 10% vacancy rate from gross potential rent, which is the running average for the last 4 years. It is an easy rent in a solid B at those low rents, so I am not expecting a lot of vacancies. You are right perhaps I need to increase my repair budget.
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