How can this work for rental?

Question

I'm looking at a rental. Here's my analysis:

https://www.dropbox.com/s/a53xqujtbgv7o4u/Rental%20Property%20Analysis%20-%20ghosted.pdf

Anybody see problems in the figures?

Details:
+ Very desirable part of Northgate (Seattle) = https://www.dropbox.com/s/cjrjvq1so4zosk7/Google%20Maps.png
+ Seems to be below market value (or roughly at)
+ Covered parking (under the condo)
+ bus access very close
+ I-5 access very close
+ same renter for past 5 years
+ May appreciate about 9% next year.

I think this is set to go for purposes of appreciation.
I need input for the cashflow part.

Jon Holdman · Answer

I was using your NOI number of $699.33 from your spreadsheet.  Divided by your rent of $1300 is 53.8%.  What's left is 46.2%.  Rounded to 46%.

Looking again I see you have not included taxes in that number.  So, that's not what I would consider NOI.  Subtracting off the property taxes I get $592.23 for what I would consider NOI.  That means $707.77 is going to the expenses, vacancy and HOA.  That's a more reasonable percentage.  That HOA is a killer, so I hope that it include significant amounts and they have good reserves for major capital items.

I don't like HOAs for rentals for two reasons.  One they can limit your ability to rent.  If not restricting it altogether (which some do, even if they don't right now) they want to screen your tenants or other BS.  Second is if they do allow rentals you can get a lot of NOO units and the project becomes nonwarrantable and hard to resell.

Timothy Javins · Answer

Jon Holdman Thanks for your critique. Where did that 46% figure come from? I can't seem to match it by running any relevant numbers.

Jon and Zach Schwarzmiller, my calculator is interesting in that it only takes the 10% vacancy allowance for six months and then quits. So the monthly figure has a cashflow of $19.61, but it puts out $1015.33 annually since the second half of the year does not take vacancy allowance. It basically only covers one month of PITI per year. Is that a bad idea?

To both of you, thank you so much for your input. It's members like you that make this forum function. :)

Zach Schwarzmiller · Answer

@Jon Holdman; my situation is a bit different. I am planning to purchase, invest $1,000 in each unit and sell it immediately after. I will manage this building the entire time during that. I didn't mention any of that as I was more just showing what I had taken into account in my figures. DCSR is on the 2nd sheet and does not factor in disposition. I really just put in there numbers which correlated with inflation in the case that something happen with economy and I had to hold it instead of sell it like I plan. I should factor in repairs over the long run for that analysis as well, but hoping just to sell within 6-9 months! Thanks for the notes though.

I would agree on the speculation of condo market improving 9%, I wouldn't gamble on that either, especially not in this area. It's a good area for a rental however.

Jon Holdman · Answer

Timothy Javins I think your cashflow projections are optimistic.  $699 NOI out of $1300 rent is only 46% for vacancy, capital and expense, and you have a $288 HOA fee in there.  Even with your projections you only have $19 a month cash flow.  I think thats more likely to average a $30 per month loss over time.  Even with your numbers, why would you invest $34,000 to earn $240 a year?  That's a 0.7% return.  You can do better with a bank CD and not have to worry about a large special assessment or a tenant wrecking the place.

So, this is a pure speculative play.  This: "May appreciate about 9% next year." is nothing but a guess.  That's your only source of return on this deal.  IMHO, I wouldn't do it.  If I'm going to gamble, I go to Vegas.

Zach Schwarzmiller on gross income of $76,896 on your 12 unit building, you're projection NOI of $51,983 or 67%.  You've allocated nothing for management expenses, so this number may not be too far off the mark.  But are you really in a position to buy yourself a job?  That's what your doing.  My personal estimate is it takes 20 hours per year per unit.  That's from very little data, though.  With 12 units, that's 240 hours per year or about a 1/8th time job.  For that labor, you're earning the PM's cut of about $13,535.

I don't see debt service on the deal.  I see something about it on the second sheet, but that's a multi year projection, so I didn't look closely.  Multi year projections move your analysis from a useful look into crazy guessing.  Better to just see if it works now and assume nothing much changes in the future.

I don't see any allowance for capital in your numbers.  If you're in this for the long haul you will have to eventually buy expensive roofs and boilers.

Zach Schwarzmiller · Answer

I personally think this is a good area to build. There are going to be some new developments coming (confidential at this point) in the next 3 years which will make living in this area a lot of attractive. I am looking into building some multifamily in this area. Your expenses seem a little light, but I've never dealt with a condo investment. Does the HOA take care of any capital improvements needed within the individual condo? You may want to set a little aside in your budget for capital reserves. Personally I think cap rate is not worth considering in properties under 5 units, I would base it off a gross rent multiplier, but then again I've never done anything with condo's and am unfamiliar with that investment structure.

Here is a sample of how I underwrite to see the perspective I am coming from. I am sure others would find flaws in mine as well.

https://www.dropbox.com/sh/apqcnjv3ugq24xu/SGBlSs158x