Hello,
I am a new investor and would love to get feedback from this forum regarding this deal I came across. Below are the details.
According to the spreadsheet I am using this seems like a good deal. My taxes estimates are bit higher than current taxes. According to the broker all units are currently rented on one year lease, only one unit lease is coming up this month. No obvious issues to fix. The rent multiplier figure provided by broker is 7.18 and Cap rate is 10.35.
Am I missing anything in this analysis?
@Imran Raz Let me begin by stating Real Estate Investing is a business and should be treated as such were decisions are void of emotions. Just because someone has a name and a professional title does. It guarantee that he/ she is proficient, in their field. In essence, you are a "babysitter" and a "policeman" making sure everyone is doing their job, fulfilling their contractual duties, operating with an acceptable level of ethics and integrity, etc. Regarding your Escrow Deposit of 10% is ridiculous as is not wanting you to have a "Subject to Financing Clause." The typical amount placed in Escrow is 2-2.5% of the Contract Price. I owned 500+ units housed in multi million dollar Apartment Buildings. I never placed more than 3% of the Contract Price in Escrow. You need Contingency Clauses, in your Sales Contract. These are your outs. I typically use the following four.
1. Subject to Financing.
2. Subject to acceptance of Inspection Reports.
3. Subject to acceptable review of last two years of Federal Tax Returns.
4. Subject to Clean Title.
I will explain the Contingency Clauses above.
2. Subject to acceptance of Inspection Reports. (You want to have the major systems inspected such as electrical and plumbing to ensure there are no major issues and the aforementioned systems are fully Code Compliant with the County and if applicable Municipality Building Department. In addition, you want to have the roof and foundation inspected. You also want to inspect random units, of YOUR CHOOSING)
3. Subject to acceptable review of last two years of Federal Tax Returns. (You should assume that 90%+ of the numerical data you receive will be false to have the property appear it is performing better then it actually is. You asked me if the Seller's Accountant prepare the Income and Expense Reports. The answer is NO unless the Seller's Accountant is managing the property. If the property is professionally managed, the Income and Expense Reports should be prepared by the Management Company. ACCEPT NO LEDGER REPORTS. If the property is self managed, the owner generates the Income and Expense Reports. If the owner provides you hand written reports, this would raise a Red Flag. You asked me how do you verify the numbers, on the Income and Expense Reports. This is where this clause comes in to play. A Seller can fudge numbers to initially hook you, but should not be fudging these numbers, on his/ her Federal Income Tax Return.
4. Subject to Clean Title. (Every jurisdiction is different, but in general O&E (Ownership & Encumbrance) REPORTS only cover the last recorded deed, and any encumbrances and judgments publicly recorded against the property (in rem matters). MUNICIPAL LIEN SEARCHES cover anything that is NOT recorded (not in public record) for any and all city, county, and state entities/ agencies' outstanding balances (i.e., code enforcement liens and violations, unpaid utility bills, real estate taxes, etc.). TITLE SEARCHES are searches that examine the chain of title prior to and through the current owner, but includes searches against the current owner (in personam matters) where IRS LIENS may be missed when only relying on O&E Searches. I have years of experience in the title/ settlement agent business and I see this mistake happen more often than not. HENCE, if you are to engage in any due diligence prior to making an offer, spend money on an O&E Search (but make sure your title company includes a search against the person if they don't do so), and a municipal lien search.
If an issue comes up during an executed contract (i.e., code violation, judgment, etc.), renegotiate the purchase price, assess how to clean up the issues that are clouding title, and try to turn it into a Win-Win Situation. Of course, I only negotiate liens/ judgments where the entity will play ball. See the green in liens! If the seller and/ or entity is unwilling to negotiate, I walk and move on to the next deal.)
In conclusion, many of these Sellers need to be educated. I have seen Sellers offering Owner Financing with a 50% down payment which is also ridiculous. One thing that is imperative that you do is have the following three questions honestly answered. Why is the Seller selling? What does the Seller need? What is the Seller's level of motivation to sell? This information will help you, in negotiations.
Imran,
I would recommend that you account for property management fees even if you plan to manage the property yourself. Doing so will give you a better picture of the real performance of the property. Remember that when it's time to sell, your buyer might decide to hire a PM company.
Good luck!
be sure to check on The insurance, you are going to need Hurricane here in Miami with a bank loan. The $250 may not be enough.
The bank will also calculate numbers with management in place they don't care that you will be managing it so I would keep it there.
The $2K for loan acquisition seems low and you need to account for legal fees and other closing costs. Double check with your bank that they are going to amortize the loan at 30 years and not 25.
The question of the return is all relative, what part of town is this in, some areas in Miami sell for 4 Cap and other for 12 Cap.
"according to the broker"....? Being in this industry in Miami, I hope you have seen / will soon see the actual leases, rent roll or some other affidavits signed by tenants that confirm that income (rents) & vacancy rate.
On the surface it looks promising. Your due diligence will give you exact numbers based on owners past tax returns and actual cost/income. Make sure you have a conditional offer that includes esstopal letters and a escape/option to reduce offer once real numbers are known. If you purchase switch all tenants to M2M leases as soon as their present leases end and raise their rents to market. If this is a hobby or one property landlord the rents will surely be below market. If it is a professional landlord this will likely not be the case.
The advantage of seeing tax returns is that most investors will fudge the numbers by increasing expenses on their taxes to reduce their income. This will give you the opportunity to reduce your offer based on their own numbers even if they are false.
Imran,
I would recommend that you account for property management fees even if you plan to manage the property yourself. Doing so will give you a better picture of the real performance of the property. Remember that when it's time to sell, your buyer might decide to hire a PM company.
Good luck!
Hello Lennon, what % you would recommended to account for Property management fees?
be sure to check on The insurance, you are going to need Hurricane here in Miami with a bank loan. The $250 may not be enough.
The bank will also calculate numbers with management in place they don't care that you will be managing it so I would keep it there.
The $2K for loan acquisition seems low and you need to account for legal fees and other closing costs. Double check with your bank that they are going to amortize the loan at 30 years and not 25.
The question of the return is all relative, what part of town is this in, some areas in Miami sell for 4 Cap and other for 12 Cap.
Thanks for pointing this out, I'll confirm with the broker regarding hurricane / flood insurance.
"according to the broker"....? Being in this industry in Miami, I hope you have seen / will soon see the actual leases, rent roll or some other affidavits signed by tenants that confirm that income (rents) & vacancy rate.
Sure I'll do that, I just spoke to the broker and according to him this seller is very strict, he does not want financing contingency in the contract and would like to have 10% escrow upfront. Is this common request in multifamily/investment properties?
On the surface it looks promising. Your due diligence will give you exact numbers based on owners past tax returns and actual cost/income. Make sure you have a conditional offer that includes esstopal letters and a escape/option to reduce offer once real numbers are known. If you purchase switch all tenants to M2M leases as soon as their present leases end and raise their rents to market. If this is a hobby or one property landlord the rents will surely be below market. If it is a professional landlord this will likely not be the case.
The advantage of seeing tax returns is that most investors will fudge the numbers by increasing expenses on their taxes to reduce their income. This will give you the opportunity to reduce your offer based on their own numbers even if they are false.
Thanks for good tips, the seller wants to have no financing contingency in the contract and wants 10% escrow upfront.
On the surface it looks promising. Your due diligence will give you exact numbers based on owners past tax returns and actual cost/income. Make sure you have a conditional offer that includes esstopal letters and a escape/option to reduce offer once real numbers are known. If you purchase switch all tenants to M2M leases as soon as their present leases end and raise their rents to market. If this is a hobby or one property landlord the rents will surely be below market. If it is a professional landlord this will likely not be the case.
The advantage of seeing tax returns is that most investors will fudge the numbers by increasing expenses on their taxes to reduce their income. This will give you the opportunity to reduce your offer based on their own numbers even if they are false.
Thanks for good tips, the seller wants to have no financing contingency in the contract and wants 10% escrow upfront.
everything is negotiable.... why 10% in escrow (and why all up front)? If no financing contingency, what are your other ways to "get out of the contract" if discover something that would make this purchase no longer attractive? Are you paying cash?
Imran Raz In my opinion and experience you need the following, for your analysis: the last two years of Income and Expenses and the last two years of Rent Rolls. DO NOT ACCEPT PRO FORMA DATA! Such information is how a property is expected to perform over time, if you do x,y,z. You should also factor 10%, of the Gross Monthly Income for Property Management Fees. In addition, it would be wise to include, in your expenses, Capital Reserves (10% of the Monthly Gross Income). You build Capital Reserves that are equal to 10% of the Property's FMV. This will allow you to build a fund that will cover major repairs instead of you having to scramble, to acquire a loan or other funding sources. You want to also call a minimum of three Insurance Companies and get a quote. Use the highest quote, in your analysis. Finally, talk with the existing Management Company. This will provide you invaluable insight regarding if there is any Deferred Maintenance, how the owner has dictated Management Policy, existing circumstances, etc. I have walked away, from many potential acquisitions just because the Management Company provided me unique, real time insight that I factored into my numerical analysis.
Thanks for the great information. I added 10% management fee on the total rent and also increased the cap ex. Regarding asking for last two year or income and expenses, does the seller accountant prepare this report? How do I verify if numbers on the report are correct?
Here are the numbers after those additions, granted all reported taxes and expenses are correct, does it still looks like a decent deal?
On the surface it looks promising. Your due diligence will give you exact numbers based on owners past tax returns and actual cost/income. Make sure you have a conditional offer that includes esstopal letters and a escape/option to reduce offer once real numbers are known. If you purchase switch all tenants to M2M leases as soon as their present leases end and raise their rents to market. If this is a hobby or one property landlord the rents will surely be below market. If it is a professional landlord this will likely not be the case.
The advantage of seeing tax returns is that most investors will fudge the numbers by increasing expenses on their taxes to reduce their income. This will give you the opportunity to reduce your offer based on their own numbers even if they are false.
Thanks for good tips, the seller wants to have no financing contingency in the contract and wants 10% escrow upfront.
everything is negotiable.... why 10% in escrow (and why all up front)? If no financing contingency, what are your other ways to "get out of the contract" if discover something that would make this purchase no longer attractive? Are you paying cash?
I'll verify with the broker again. No I am not paying cash.
@Imran Raz Let me begin by stating Real Estate Investing is a business and should be treated as such were decisions are void of emotions. Just because someone has a name and a professional title does. It guarantee that he/ she is proficient, in their field. In essence, you are a "babysitter" and a "policeman" making sure everyone is doing their job, fulfilling their contractual duties, operating with an acceptable level of ethics and integrity, etc. Regarding your Escrow Deposit of 10% is ridiculous as is not wanting you to have a "Subject to Financing Clause." The typical amount placed in Escrow is 2-2.5% of the Contract Price. I owned 500+ units housed in multi million dollar Apartment Buildings. I never placed more than 3% of the Contract Price in Escrow. You need Contingency Clauses, in your Sales Contract. These are your outs. I typically use the following four.
1. Subject to Financing.
2. Subject to acceptance of Inspection Reports.
3. Subject to acceptable review of last two years of Federal Tax Returns.
4. Subject to Clean Title.
I will explain the Contingency Clauses above.
2. Subject to acceptance of Inspection Reports. (You want to have the major systems inspected such as electrical and plumbing to ensure there are no major issues and the aforementioned systems are fully Code Compliant with the County and if applicable Municipality Building Department. In addition, you want to have the roof and foundation inspected. You also want to inspect random units, of YOUR CHOOSING)
3. Subject to acceptable review of last two years of Federal Tax Returns. (You should assume that 90%+ of the numerical data you receive will be false to have the property appear it is performing better then it actually is. You asked me if the Seller's Accountant prepare the Income and Expense Reports. The answer is NO unless the Seller's Accountant is managing the property. If the property is professionally managed, the Income and Expense Reports should be prepared by the Management Company. ACCEPT NO LEDGER REPORTS. If the property is self managed, the owner generates the Income and Expense Reports. If the owner provides you hand written reports, this would raise a Red Flag. You asked me how do you verify the numbers, on the Income and Expense Reports. This is where this clause comes in to play. A Seller can fudge numbers to initially hook you, but should not be fudging these numbers, on his/ her Federal Income Tax Return.
4. Subject to Clean Title. (Every jurisdiction is different, but in general O&E (Ownership & Encumbrance) REPORTS only cover the last recorded deed, and any encumbrances and judgments publicly recorded against the property (in rem matters). MUNICIPAL LIEN SEARCHES cover anything that is NOT recorded (not in public record) for any and all city, county, and state entities/ agencies' outstanding balances (i.e., code enforcement liens and violations, unpaid utility bills, real estate taxes, etc.). TITLE SEARCHES are searches that examine the chain of title prior to and through the current owner, but includes searches against the current owner (in personam matters) where IRS LIENS may be missed when only relying on O&E Searches. I have years of experience in the title/ settlement agent business and I see this mistake happen more often than not. HENCE, if you are to engage in any due diligence prior to making an offer, spend money on an O&E Search (but make sure your title company includes a search against the person if they don't do so), and a municipal lien search.
If an issue comes up during an executed contract (i.e., code violation, judgment, etc.), renegotiate the purchase price, assess how to clean up the issues that are clouding title, and try to turn it into a Win-Win Situation. Of course, I only negotiate liens/ judgments where the entity will play ball. See the green in liens! If the seller and/ or entity is unwilling to negotiate, I walk and move on to the next deal.)
In conclusion, many of these Sellers need to be educated. I have seen Sellers offering Owner Financing with a 50% down payment which is also ridiculous. One thing that is imperative that you do is have the following three questions honestly answered. Why is the Seller selling? What does the Seller need? What is the Seller's level of motivation to sell? This information will help you, in negotiations.
@Thomas Franklin awesome advice!
Thank you @Adam Schooley
@Imran Raz Let me begin by stating Real Estate Investing is a business and should be treated as such were decisions are void of emotions. Just because someone has a name and a professional title does. It guarantee that he/ she is proficient, in their field. In essence, you are a "babysitter" and a "policeman" making sure everyone is doing their job, fulfilling their contractual duties, operating with an acceptable level of ethics and integrity, etc. Regarding your Escrow Deposit of 10% is ridiculous as is not wanting you to have a "Subject to Financing Clause." The typical amount placed in Escrow is 2-2.5% of the Contract Price. I owned 500+ units housed in multi million dollar Apartment Buildings. I never placed more than 3% of the Contract Price in Escrow. You need Contingency Clauses, in your Sales Contract. These are your outs. I typically use the following four.
1. Subject to Financing.
2. Subject to acceptance of Inspection Reports.
3. Subject to acceptable review of last two years of Federal Tax Returns.
4. Subject to Clean Title.
I will explain the Contingency Clauses above.
1. Subject to Financing. (Self explanatory)
2. Subject to acceptance of Inspection Reports. (You want to have the major systems inspected such as electrical and plumbing to ensure there are no major issues and the aforementioned systems are fully Code Compliant with the County and if applicable Municipality Building Department. In addition, you want to have the roof and foundation inspected. You also want to inspect random units, of YOUR CHOOSING)
3. Subject to acceptable review of last two years of Federal Tax Returns. (You should assume that 90%+ of the numerical data you receive will be false to have the property appear it is performing better then it actually is. You asked me if the Seller's Accountant prepare the Income and Expense Reports. The answer is NO unless the Seller's Accountant is managing the property. If the property is professionally managed, the Income and Expense Reports should be prepared by the Management Company. ACCEPT NO LEDGER REPORTS. If the property is self managed, the owner generates the Income and Expense Reports. If the owner provides you hand written reports, this would raise a Red Flag. You asked me how do you verify the numbers, on the Income and Expense Reports. This is where this clause comes in to play. A Seller can fudge numbers to initially hook you, but should not be fudging these numbers, on his/ her Federal Income Tax Return.
4. Subject to Clean Title. (Every jurisdiction is different, but in general O&E (Ownership & Encumbrance) REPORTS only cover the last recorded deed, and any encumbrances and judgments publicly recorded against the property (in rem matters). MUNICIPAL LIEN SEARCHES cover anything that is NOT recorded (not in public record) for any and all city, county, and state entities/ agencies' outstanding balances (i.e., code enforcement liens and violations, unpaid utility bills, real estate taxes, etc.). TITLE SEARCHES are searches that examine the chain of title prior to and through the current owner, but includes searches against the current owner (in personam matters) where IRS LIENS may be missed when only relying on O&E Searches. I have years of experience in the title/ settlement agent business and I see this mistake happen more often than not. HENCE, if you are to engage in any due diligence prior to making an offer, spend money on an O&E Search (but make sure your title company includes a search against the person if they don't do so), and a municipal lien search.
If an issue comes up during an executed contract (i.e., code violation, judgment, etc.), renegotiate the purchase price, assess how to clean up the issues that are clouding title, and try to turn it into a Win-Win Situation. Of course, I only negotiate liens/ judgments where the entity will play ball. See the green in liens! If the seller and/ or entity is unwilling to negotiate, I walk and move on to the next deal.)
In conclusion, many of these Sellers need to be educated. I have seen Sellers offering Owner Financing with a 50% down payment which is also ridiculous. One thing that is imperative that you do is have the following three questions honestly answered. Why is the Seller selling? What does the Seller need? What is the Seller's level of motivation to sell? This information will help you, in negotiations.
Wow what a great piece of advise, I'll go over this information few times times to fully consume it.
Is this property in Miami? If so, given the rent amounts and purchase price, I'm going to assume its a somewhat rougher area. For a quad in a low income area, you definitely need to bump up your repairs budget.
Also, the management fee is a percentage of the total rental income, not the net after accounting for vacancies.
Other then that, I think a key factor that hasnt been brought up is the $230 a month in Utilities. If that includes electrical, its too low. If its only water, its too high. Either way, you need to research whether or not you can pass that expense on to the tenants. If you can separate the meters and have the tenants paying their own utilities, removing that expense from your books makes this property much more attractive (and valuable).
@Imran Raz Utilities appears to be too high. How many meters? I will personally walk away from the deal because I'm in it for the CF. Your deal is a low PCF. Your money could work stronger in some other deal. What are your exit strategies for this deal? Be careful playing the appreciation game.
Is this property in Miami? If so, given the rent amounts and purchase price, I'm going to assume its a somewhat rougher area. For a quad in a low income area, you definitely need to bump up your repairs budget.
Also, the management fee is a percentage of the total rental income, not the net after accounting for vacancies.
Other then that, I think a key factor that hasnt been brought up is the $230 a month in Utilities. If that includes electrical, its too low. If its only water, its too high. Either way, you need to research whether or not you can pass that expense on to the tenants. If you can separate the meters and have the tenants paying their own utilities, removing that expense from your books makes this property much more attractive (and valuable).
Hello Robert, $230 / month does not include Electric, Tenant pays for electric. However, upon further discussion with broken, there is a $208/month for Trash, not sure why trash fee is so high. If I include that, I don't think it'll make this a good deal anymore. What do you think?
@Imran Raz Utilities appears to be too high. How many meters? I will personally walk away from the deal because I'm in it for the CF. Your deal is a low PCF. Your money could work stronger in some other deal. What are your exit strategies for this deal? Be careful playing the appreciation game.
I feel the same especially after learning that there is a 208/month for trash, which would eat into the cash flow. On the other hand, I am not able to find any other attractive deals in or surrounding Miami/ Fort Lauderdale areas. What would you recommended?
First, allow me to complement Real Estate Investor from Miami, Florida for his many '2-cents' he has given you and all that do read these posts! He has given you and all readers better advise than most 'people' will give specially for FREE! If you and everyone else remember anything Thomas has posted it is this: “.... Real Estate Investing is a business and should be treated as such were decisions are void of emotions.” CYA!
I for one also add a positive thought at first-glace of the number you have provided, but … as we say in Spanish, numbers can be made-up and paper, paper will hold anything (crap) that is written on it!
Contingency Clauses ARE a must for all real estate purchases! If a seller is against any Contingency Clauses, I would walk-away … you have to CYA and pockets!
A must have Contingency Clauses: “The SELLER declares, No BUILDING CODE violations, that there no hidden repair issues with the property” and or “your approval IS NEEDED of the property inspection report”! There are MANY hidden problems that are not seen by the average person and many do not come to light till after you take possession! CYA! Keep looking! Keep asking questions!
Imran, an idea for you … you stated that you are a new investor, perhaps you should consider teaming (partnering) with other in our area (Southeast Florida) for a few initial investments then when you fell you can do-it alone, do so! Let us know!
Imran, I think the final nail in the coffin, if I'm reading this correctly, is that there's an additional $208/mo in trash collection. That would slash your $403 monthly cashflow in HALF and also greatly impact all other numbers including CAP rate! This in conjunction with the 10% EM and the no financing contingency is the straw the broke the camel's back and I'd move on. "Strict seller"?! I think that's code for "not motivated" and that alone would've made me bail. Being that it's your very first deal, I would absolutely walk. I know it's hard to find decent deals, but trust me it's never an excuse to get yourself in a bad situation. And in this particular case, run, don't walk. Good luck!
First, allow me to complement Real Estate Investor from Miami, Florida for his many '2-cents' he has given you and all that do read these posts! He has given you and all readers better advise than most 'people' will give specially for FREE! If you and everyone else remember anything Thomas has posted it is this: “.... Real Estate Investing is a business and should be treated as such were decisions are void of emotions.” CYA!
I for one also add a positive thought at first-glace of the number you have provided, but … as we say in Spanish, numbers can be made-up and paper, paper will hold anything (crap) that is written on it!
Contingency Clauses ARE a must for all real estate purchases! If a seller is against any Contingency Clauses, I would walk-away … you have to CYA and pockets!
A must have Contingency Clauses: “The SELLER declares, No BUILDING CODE violations, that there no hidden repair issues with the property” and or “your approval IS NEEDED of the property inspection report”! There are MANY hidden problems that are not seen by the average person and many do not come to light till after you take possession! CYA! Keep looking! Keep asking questions!
Imran, an idea for you … you stated that you are a new investor, perhaps you should consider teaming (partnering) with other in our area (Southeast Florida) for a few initial investments then when you fell you can do-it alone, do so! Let us know!
Indeed Thomas Advise was gold. I read it few times already. I agree with you, the more I read and discuss it seems that this seller is trying to hide something by not allowing financing contingency and even to see the property, I have to sign the contract first. I would love to connect with investors nearby, do you recommend any meetups in Miami/Pembroke Pines or Fort lauderdale area?