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Updated almost 8 years ago on . Most recent reply

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Adam Dow
  • Rental Property Investor
  • Charlottetown, Prince Edward Island
8
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25
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Financial Analysis on a 12 unit building-- need help

Adam Dow
  • Rental Property Investor
  • Charlottetown, Prince Edward Island
Posted

Hi everyone, 

I am running some numbers on a nice 12 unit building in my area. The current owner hires a property manager and pays 5% of gross rents plus rent finder's fee and a few other variable fees. The seller keeps really good records of expenses and has provided me with detailed income statements outlining property management expenses, finder's fee, etc. If I buy this property, I plan on taking care of all property management needs myself (except for repairs and maintenance), so I will be saving the 5%+ fee the owner is currently paying. My question is: when I am analyzing the financials on this building, should I adjust the expenses to reflect the fact that I will not be paying the property management fees? The numbers do not work with the property management fee (yielding less than 6% cap rate, cost of financing is 3.5%) if I run the numbers exactly as provided from the seller. If I take the property management fee out, the property is above a 6% cap rate, which is my minimum and seems like an OK investment. However, I am concerned that if I leave out the property management fees of my pro forma, I may be making the property look like a better investment than what it really is. 

The property is already priced at a premium due to the high demand, almost no supply, and near-zero vacancy rates in my area. Very little room for price negotiation here. This would also be my fifth property in 5 years, but this would be my first building bigger than a duplex. So this is a bit more of a complicated property to analyze compared to my previous ones which were pretty straightforward. 

Any suggestions would be greatly appreciated!

Adam 

Most Popular Reply

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1,147
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James Syed
  • Real Estate Broker
  • Mount Olive, IL
309
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1,147
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James Syed
  • Real Estate Broker
  • Mount Olive, IL
Replied

@adam 

@Adam Dow

Welcome to BP. 

In my opinion, you should still consider property management expense as when you go to sell it, that buyer will take that into effect

What is the current expense ratio on this property? 

Hope it helps.

James 

  • James Syed
  • 618-406-9775
  • Loading replies...