Here you go- I must be STUPID or something 2%-50% rule...

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Here you go- I must be STUPID or something 2%-50% rule...

Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

I've been negotiating for 6 months on an extremely nice "class c" property in Dallas area. We're finally going to close on the 14th of Aug. According to those that believe the 2%-50%, I must be stupid, but I'm surviving!!
Actual #'s . 154 units with good mix and # of buildings. No chiller system. Tenants pay all utilities. Over 91% occ for last 3 years. Same owner and mgmt for 7 years.
Price is $4.1 million with 1.3 down and 2.8 loan at 6.5% 25 yr(I have no verifiable income so rate and term not great!! I show no taxable income). Will refi inside a year.
2007-$919K inc. 501K exp.418K noi
2008-$921K inc 503K exp and same 418K noi.
2009-465K for 6 mos and 92% occ.projected noi of 429K.

According to the 2%, I'm low. According to the 50%, I'm high. It must be a bad deal! I believe it is almost a 10 cap, with NO deferred maint( new roofs, a/cs and other goodies.
With my loan, I'll show a little over a 15% cash on cash! This is with the same mgmt onsite, and the same prof mgmt company. I'm pretty happy with this turnkey investment and like the return- even though it is a "failure" on the 2-50 stuff. Maybe , if I try really, really hard, I'll be able to get the occ up to 95% and then it may be a "good deal " as per the 2-50 crap.
I thought I should share an actual deal with the board and let you shoot me down. I'm still pretty happy with it. Rich.

p.s. I'll furnish more info on a self- storage facility I'm buying in FL. Current appraisal of 4.2 and purchase price of 2.710. I don't know if it will make the 2-50 crap- and I DON'T CARE.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    17y

    $26.6K per door on a fully stabilized class C in TX sounds pretty good Rich, congrats.
    As you know, I go for the non stabilzied as I like the upsides so I can force appreciate but anything under $30k per door in a decent TX neighborhood with above 90% occupancy for last 3 years is a good deal in my book.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Rich,

    The 2% Rule is just a screening tool - nothing else. This deal is 1.9% which is certainly pretty close and therefore worth looking at.

    Contrast that to the old 1% Rule which would have you paying $7,675,000 for this property. Would you pay $7,675,000 for this property Rich? So, the 2% Rule was certainly in the ball park on this deal!

    The 50% Rule only states that throughout the United States, operating expenses run 45% to 50% of the gross rents. That's all it says! So, for the full year 2009, using the numbers you listed, the operating expenses are 54%. Hopefully, with a little work and a little more efficiency, you'll get the expenses down to where they should be.

    Finally, as for a cash flow analysis, here's how I would evaluate this deal with your numbers for 2008, since these are actual numbers (however considering the opportunity cost of your downpayment).

    Gross rents: $76,750 per month
    Operating Expenses: $38,375
    NOI: $38,375
    Debt ($4,100,000, 25 yr, 6.5%): $27,683

    Cash flow: $10,692 per month or $69.43 per unit per month. That's a little low for me, but not terrible.

    This is a good example of the 2% Rule/50% Rule in every way!

    Out of curiousity, do you know what the management/maintenance structure is for this property?



    The 50% Rule and 2% Rule have absolutely nothing to do with self-storage.

    Mike

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  • James Hiddle
    Altus, OK · Member since 2008 · 2k+ posts · 690 votes
    17y

    If you can increase occupancy you might have a shot at $100 a door providing you or your management can come up with effective ways to get people coming in.

    $69 a door is slightly little for me as well but I would probably still take this deal if it were offered to me just to decrease the vacancy rate and increase cash flow.

    You also said that the tenants pay the utilities I take it that this is under a Triple N lease? if so that is also a sweet deal.

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  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    Thanks Mike oh. I thought it would be good to use actual #'s for a change. The prof mgmt is 4% of collections. The onsite mgmt and maint are on salary. Onsite mgmt was 4.05% and the maint/repairs was 8.07%. They live on site.

    There is also a possible bonus on this deal. We've filed an application for part of the "green stimulous" package. I feel there is a good chance of receiving up to 900K in grants. I'm paying 10% to the grant writer person if I obtain the funds. These are for high seer A/C, windows, different toilets etc. Basically, free upgrades less the 10% fee, received over time. Just a bonus opp. If obtained, I'll only have 500K net in the property....

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Owning a piece of a self storage, I have to say our total "expenses" (which includes vacancy, both economic and actual, and capital improvements) are surprising close to the 50% mark. I'd reasonably expect them to be lower. But we've had to give away a lot of free months to deal with vacancies, but in the last 2.5 years, yep, pretty close to 50%.

    I assume that $920K in income is the actual number. Combine that with a occupancy of 91% and I get $1.01 million in gross scheduled income. Vs. the $4.1 million price, you're right at 2%. I'm getting average rents of $550/unit. Looks like a good deal to me.

    If you applied my simple analysis (Mike's, really), I'd get:

    Rent: $1.01M
    Expenses: $505K
    NOI: $505K
    PMT: $327 (7%, 30 years, $4.1M)
    Cash flow: $178K
    Cash flow/unit/month: $96

    Very close to Mike's $100/unit/month goal.

    With your actual loan and actual expenses, looks like you're about $103/unit/month. 14.7% cash on cash.

    I'd say your example is a good one to support those simple evaluation calculations. This shows that even if things don't work out quite as well as you might expect ("expenses" closer to 60% than 50%), you can still do well with a deal that passes these simple screens.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Rich,

    I was really more interested in the employee structure of the complex. How many managers? How many maintenance personnel?

    I have a friend that manages a complex about the same size as yours. He works for a large management company and the inefficiency is staggering. I'll bet you could make up that 4% in expenses (maybe a little more) by just tightening up the management!!!

    Mike

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  • Rich Weese
    OP
    Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    17y

    Mike-oh
    I plan on checking that and everything else out. My experience is when ownership goes on for 7 yrs plus, they get lazy on income and expenses. I expect better #'s, the ones I quoted are current and accyrate. Rich

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