Property Analysis Feedback

20 Replies

Below is detail on a property in Niagara County , NY. I analyzed this property earlier this year and just closed on the deal last month. I have some lessons learned including the expectation that I was not as conservative with the maint/CapEx/Vac as I should have been for a multi-building lower income property. I'm curious to hear what the community has to say. Thanks!

The property consists of two detached buildings. The front building was built in 1900 and has a 2 BR unit lower (current rent 675) and a 1 BR upper (current rent 500). The back building was built in 1920 and consists of 4 1 BR units. The property has mostly new furnaces and water tanks. Some new windows, and a moderate amount of smaller differed maintenance (broken door handles etc). These are lower income apartments with 3 units receiving Sec 8 assistance.

Purchase Price: 157,000
Units: 6
Annual gross: 38,340
Taxes: 4,547
Gas (Landlord): 2,380
Water: 2,280
Insurance: 1,708
Maintenance(5%): 1,917
Snow Removal: 650
Cap Ex: 1,200
5% Vacancy: 1,917
Debt Service: 860

If I'm ready your numbers correctly, you are positive on the year at $20,686....or about $1700/month.

Don't figure Vacancy based on a 5%.  I've never seen any rental unit, where only 5% of it is vacant.  It's either vacant, or it isn't.  Calculate vacancy this way...based on what actually happens:

1 - Find out what the vacancy rate is for your units (this isn't a "%", it's a number of months per year.
2 - Calculate what you would need to cover per month when a unit is vacant....i.e..Taxes, Gas, water, Ins, Snow (if Winter...figure it would be), utilities, D.S
3 - Multiply your answer in #1 x your answer in #2.
4 - Take all of the positive cash flow in the first months, and put it into a reserve, until the reserve totals your answer in #3.

Now your are actually got your vacancy covered.

CAPEX is another matter. REI love to take out a "%" and think they are doing something right...and they'd be wrong. Doing that will make you feel good, right up to the time you get a CAPEX expense...like a new roof. How much would a new roof cost you on your 4 unit building? How many years, at $1200/year, would it take you before you can afford to replace it? This doesn't work.

Go out and get an LOC, that you can use for all of your rentals. ONLY use it as your CAPEX fund, when needed. Replace/payoff the use of it from the cash flow as you see fit.

What about trash service and lawncare?  Like @Joe Villeneuve said... know what it really cost to replace something and verify you are putting enough away for them. 

A preexisting tenant takes care of the very small lawn. Garbage is part of the taxes.

Howdy @Justin K.

I totally agree with @Joe Villeneuve .  I start with a minimum of one month Vacancy or 8.34% for reserves.  I want to build that amount to cover 6 months of mortgage payments.  Joe is right you also must be ready to cover the operating expenses while not receiving any income.

I use a HELOC and a LOC in my business. The HELOC is used for Rehabs and the the LOC is used for unexpected expenses until I have appropriate reserves for that property.

@Joe Villeneuve

What are the terms on the LOCs for unexpected expenses. I'm intrigued by this. Always good to have access to more funds if needed.

Are you saying that once you've scaled a significant amount of rentals and let's say 1 roof needs replaced, you take LOC money/income from let's say 19 other rentals to cover things?

William S.

    Originally posted by @William S. :

    @Joe Villeneuve @John Leavelle

    Are the LOCs personal or business? Can you provide more details?

    The idea is to get an LOC of some kind, any kind, and let that be your source for your Cash Reserve to pay for CAPEX.

    just taking out a little at a time (5-15%/month), and thinking you are doing something positive for this, is (I'm trying to not use the word stupid here...so I won't) an illusion at best.  Here's why:

    Rent = $1000
    5-15% = $50-150/month (I'm laughing hysterically right now)
    Cost of roof = $4 - 5K per property
    # months to fund roof this way = 27 - 100 (this is why I'm laughing)

    I guess you better hope you don't need a new roof within the first 2 to 9 years.

    @Joe Villeneuve

    I agree. I don't use percentages. I built a spread sheet of all the items and cost of each.

    Currently I set aside $182/m for CapEx and have $10k in reserves per house for the unexpected. The $182 is actually 10% extra in buffer than the original figure.

    However, it is hard to see that $10k sitting there not doing anything. Especially when you are trying to grow.

    William S.

      Originally posted by @William S. :

      @Joe Villeneuve

      I agree. I don't use percentages. I built a spread sheet of all the items and cost of each.

      Currently I set aside $182/m for CapEx and have $10k in reserves per house for the unexpected. The $182 is actually 10% extra in buffer than the original figure.

      However, it is hard to see that $10k sitting there not doing anything. Especially when you are trying to grow.

       That $10k isn't "not doing anything". That's your "risk control".  It's your silent partner, that will allow you to grow by covering that unexpected for you.  Nothing stops you sooner from growth than the unexpected.  

      Originally posted by @William S. :

      @Joe Villeneuve

      I agree. I don't use percentages. I built a spread sheet of all the items and cost of each.

      Currently I set aside $182/m for CapEx and have $10k in reserves per house for the unexpected. The $182 is actually 10% extra in buffer than the original figure.

      However, it is hard to see that $10k sitting there not doing anything. Especially when you are trying to grow.

      Why are you adding $182 a month to CAPEX if you have $10k already there. Besides, you'd want to max out your access to an LOC for this. That $182/month is your money. Keep it. Let the LOC do its job, just like the tenant does theirs.

      @William S.

      My LOC is personal. I can transfer any amount I want (up to my limit) to any account that I need to. Since I have multiple properties with individual accounts this makes it covenant to cover any unplanned expenses as they occur. The properties pay me back when appropriate (Usually from the reserves account). It has a secondary benefit of improving my credit rating (not that it's needed right now).

      @Joe Villeneuve

      $10k in reserves won't cover my replacement costs for the next 25-30 years. That's where the $182/m comes from.

      William S.

        Originally posted by @William S. :

        @Joe Villeneuve

        $10k in reserves won't cover my replacement costs for the next 25-30 years. That's where the $182/m comes from.

        Never said $10k. This is an LOC. You should be building that up. Use your cash flow to replace (payoff) your LOC after you use it.

        ...or, you do it like we do it now (we used to do it the way I described above).  Our PM pays for it, and we reimburse them from our cash flow on that property until we are whole. 

        @Joe Villeneuve @John Leavelle

        Has there been a time where you've used your LOC? What's the interest rate? Seems like you need a sizable portfolio to pay it off due to interest.

        William S.

          Originally posted by @William S. :

          @Joe Villeneuve @John Leavelle

          Has there been a time where you've used your LOC? What's the interest rate? Seems like you need a sizable portfolio to pay it off due to interest.

           Yes.  8%.  Payoff in 8 years.

          Roof cost = $4800.

          Interest/year = $384

          Payoff/year = $984

          Payoff/month = $82

          You can also use your 401B.
          50% of face value up to $50k.
          Interest charge to the LLC owning the property is a deductible expense. Interest paid to 401B is income...so you're paying yourself.

          @Joe Villeneuve

          8% fixed rate?

          Was your answer yes to having sizeable portolio to make these major costs easier to ride out?

          William S.

            Originally posted by @William S. :

            @Joe Villeneuve

            8% fixed rate?

            Was your answer yes to having sizeable portolio to make these major costs easier to ride out?

            No...the "yes" was to the question if I had used my LOC.

            The cost isn't that much.

            A lot of great points on a LOC and reserves. Any opinions on this particular deal?

            What does the snow removal consist of? Why does the landlord pay gas? What about the turn over costs/make ready/lease fees, etc.

            William S.

              @William S. Snow removal is a landscaping company I'm paying to snowblow the driveway, 6 car parking lot, and sidewalk. The gas is paid by the landlord because the property only has one meter per building. I plan on having it checked out to see if I can have it split out per unit. I also plan on renovating the units some between tenants to increase rents and reduce minor maintenence issues.

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