general analysis

[Eric Schrader]

All

So I have started to dig in and evaluate some deals as recommended.  I have also heard that all the deals on Loopnet are picked over/left overs etc.  So I will go over a pro forma provided to me by a broker and see what type of deal it is. 

Background.  

10 unit / group of townhouses.  They consist of eight 2 bed 1 bath and two 3 bed 1.5 bath units.  All are currently rented.  average rent for the lot is 900/month.  Pro forma has the cap rate at 10.12%.  The comps for these THS are approx 90k for the 2/1s and 125k for the 3/1s.  Paperwork claims the following:

summary of expenses for the property on pro forma:

So my analysis.  

Taxes:  Based on the assessors website, the average yearly, tax rate for the 2 bdrm is $931 and the 3 bdrm 1331.  Total taxes - $10,110  slightly different then pro forma

Insurance:  on an individual basis, home owners for each unit is $70/month x 12 x 10 = $8400.  I am sure the cost may go down if the group of homes is insured as a bundle, but i used this as a worse case scenario.

Utilities and HOA: Most HOA fees in this area include lawn care and trash removal. I have not contacted the HOA to verify this. I am also assuming that the utilities they are speaking of is water/sewer. Since these are individual homes, there should be individual meters so the tenant can pay, however, the amount above seems off. My families usage, when in a similar THS was around $90/qtr for water and sewer. I have used those here as well. so total HOA fee + water/sewer = $ 19,200

Management:  in my conversations with the broker, the current owner self manages.  i would want someone else to do so.  For management, 10% of monthly rent: 90x12x10 = $10,800

Maintenance: I think the maintenance for the older units is not represented in the #s above. Again, i used the percentage method as a first go round.  80x12x10 = $9,600

So to sum up, my GSI calculation for the deal

So based on my new #s, it looks like the purchase price should be around the $400k mark, not the $650k mark based on the provide cap rate.

Now reviewing the pro forma #s in a rental calculator, this deal does cash flow (assuming 20%down and financing).   The 10 units spin off $240/ month.  That is total.  Definitely not something to purchase if you are looking at long term cash flow.  

If we look at a purchase price of $400k,  we get a monthly cash flow of almost $1,400/month for the 10 units. So a bit better.  

Overall, I think it could be something to look deeper into based on the new #s.  The majority of the units are below market rents, some up to $300 below.    For this area, the 1% rule is the norm.  

At last look, this property was no longer listed.  

As always, comments and suggestions are welcome.