Seal the Deal or No Deal

9 Replies

HI

I'm new here to BP and loving all the info and advice. 

I currently own 3 rental properties in Salt Lake County Utah (townhouse, duplex, condo) and I am looking into bigger and bolder RE. I am under contract on a 6 plex in Price Utah and need some advice.

After crunching the numbers fairly conservatively I come up with an annual cash flow of 7,896. this is an average ROI of 20%! WHOA right? I've run several different scenarios and I cannot get this looking worse than 2% ROI and that's with a 36% vacancy rate which would mean this town had gone ghostal.

This number includes all management and maintenance being done by a property manager. So basically I sit back and collect a few extra hundred bucks a month from my office 100 miles away. 

Here is where I'm stuck.....This particular area has a not so diverse economy. Their main source of income and jobs is in coal mines and other natural resources. They are the county seat of that area but that's not saying much. The population is about 8400 and staying steady. Employment comes from either the mines, government, a local extension of a College University or a local hospital. This town has not suffered a lot of economic downfalls or hardships, but has not and does not grow very quickly. I expect to gain very little if any appreciation on the property. 











Annual Cash Flow $ 7,896 

at 20%, all you need is 5 or 6 years of great luck to get this deal to pay off ... 

Are you self managing or using a pm?

Coal miners are rough, scratch that, VERY VERY ROUGH on their housing - same as oil workers. but if their employers are fitting the housing bill, you can charge them for maintenance. 

Also, those mining companies out there have been catching real heat lately because of the shaft collapse a few years ago.  You should do some research on the politics of those mining co's so you can get more comfortable with what the outlook might be for the stability of Price and Helper, and those mines. If they fail or get more heavily regulated and take a downturn the college won't be able to support the community, and that city will have a pretty great chance of really shrinking  

As @Blair Poelman mentioned, you'd need some luck to make it work out.

Personally, the town's population number + reliance on a few companies are enough for me to run away quickly.

So let's be honest, coal isn't going away in the next 10 years. Assuming that mine is set for that same 10 years (maybe you can call and ask how much coal they have left?) and you get an average of your estimates (%10). You're investment is gold after that. %20 cap rate is nuts. In my market %10 is good. Buying property for it to appreciate is called speculating. 
Just my two bits. 

@Jenny Billings

You also need to account for cap ex (10-15%) and a higher maintained allowance due to the type of tenant that will most likely be renting. What are the rents and estimated purchase price?

2148649796

Are the current tenants miners, hospital staff or government workers?  Everyone has assumed that because there is a mine in town that the tenants are a bunch of roughnecks. 

So what if the economy tanks in 5 years?  You'll be ok. 

I saw a survey the other day that said 99.99% of Americans given the option will always choose to live in-doors and that number is not expected to change. 

You say 20% return and you know what you are talking about.  Don't over analyze the deal.  Sounds like a good deal to me.

Thanks everyone for your input. As it turns out, I have met all but one of the tenants and none of them are miners. So that adding another plus, I am moving forward with the purchase so long as financing etc go as planned. I'll send updates as they are available. 

Thanks everyone for your input. As it turns out, I have met all but one of the tenants and none of them are miners. So that adding another plus, I am moving forward with the purchase so long as financing etc go as planned. I'll send updates as they are available.

What does the seller know about the economic outlook that you don't?  There's a lot of uncertainty in Price right now.  The power plant is at the end of its lifecycle which may impact the viability of the mine. 

That being said, owning rentals in a plummeting economy is not always a bad thing.  Just know what you're getting into.

I am crude oil hauler, and have been hauling to price for the last 3 years. Savage owns the biggest coal yard there and they have laid off 70% of the work force there coal is in a downward spiral. both of the closest power plants are closing one this year one the next the only oil jobs are transport and the majority of those folks do not live in price. With the regulations in place now on coal and the ones still in the pipeline it will kill coal.

mid winter coal trains were coming into price several times a week now its 1 once a week most time 1 every 2 weeks. I would seriously reconsider buying anything in price except a ticket out!