What would you pay?

Question

Units: 5 
Gross Income: $2750
Taxes: $300 per month
Water: $75 per month
Insurance: $150 per month (??)
Misc: snow/lawn $100 per month

Location: Lower incomes, typically high turnover, though relatively decent part of town.

Condition: plenty of defered maintenence, older baths ad kitchens, roof needs in near future; condition reflected in rents.

Misc.: potential for office use of 1 or 2 of 1st floor units, parking 10 cars, no garages
What would you pay?

Jeff Fry · Answer

If you bought it for 225K (not saying I would), that would be a little over an 11% cap.  In Lincoln, NE that a steal, we average about a 9% cap rate.  The $137K number thrown out is above 18% and an extremly insulting offer.   I don't think you want your rep as a broker to be ruined by going around making crazy offers.  That being said, Mike is right that you need to find someone that has to sell.  Check the legal notices in the paper for divorces, notices of forclosure, anything that makes someone desperate.  I bought a house to flip where the husband went to Arizona for a golf tourney and called the wife up and said it's great out here, I'm staying, and your not invited.  She let the house go for 2 years with no maintenance and I got a great deal.  I worked had on that house and I loved it so much I moved into it and sold my other house.  One thing my numbers above did not account for was debt service.  That makes a huge difference.  There are deals out there and you have the resources to find them.  Don't buy because you have "the itch."  Buy from someone that had "the itch," screwed up, and is selling cheap  :lol: .

Michael Rossi · Answer

Jeff,

That 9% cap rate that you're talking about is nothing more than another way of describing a retail deal.  The vast majority of rentals are bought by mom and pop "investors" who pay retail; lose money; and rapidly go out of business.  So, when you pay the average cap rate for your area, you are just paying what the failures are paying.  Almost without exception, you will not have a positive cash flow when you buy a rental at retail.  Instead of doing that, I buy my properties at about half of the market price.  I'm looking at a property today that has a cap rate of 22% and I won't lose any sleep buying it at an insulting cap rate like that.

I agree 100% with you that it is silly to go around offering people half of what they are asking for a property and I certainly don't do that.  Making a bunch of low ball offers is just a sign that it is amateur hour in investor land.  Therefore, as we both said, the key is to find sellers who are already desperate and buy their property at YOUR price.

Mike

Michael Rossi · Answer

You are exactly right, it is NOT EASY  -  nothing like you see on the infomercials.

I get almost all of my deals from knowing people.  As a broker, you should have a lot of contacts.  Do all of them know what you're looking for?  You are looking for desperate sellers and you are ready to buy NOW.  Desperate landlords, people getting a divorce, death of the owner, auctions, foreclosure sales, distressed properties, etc, all are examples of possilbe sources of deals.  Obviously, you should belong to your local REIA and become friends with the SUCCESSFUL investors.  Have you told the other real estate brokers and agents that you're buying?  Have you told your banking contacts?  Have you told the title companies you work with?  You should be WAY AHEAD OF THE GAME!  You've got the contacts  - USE THEM!

Mike

Jimmy NA · Answer

You're right.... Have to wait for the right deal.  But, I got the itch to buy. I hate sitting by and watching others make the real money and grow equity. By the way, I am a RE broker  (7yrs).  Watched people make alot of $$$.  Maybe that is over? The subject property is not on the market. I am dealing direct with the owner. I would say there is no desperatin here.

Where do I find these "DESPERATE" sellers?  HUD props get bid up to market price....no deals there. Same with tax lien props.  What are some other sources of leads?

Sellers don't like to give props away. People do not like to part with these assets easily.

I know the price paid when a person does not buy in a prudent manner. Just don't want to wait......do you know where I am coming from?

Michael Rossi · Answer

I will not buy a property unless the gross rents are at least 2% of my cost (purchase price + rehab).   The 2% is just a screening tool and I always also consider the cash flow and equity.  Buying with rents at 2% of cost will generally allow you to have a positive cash flow of $100 per unit per month.

If this guy won't sell the property to you for the right price, I wouldn't buy it  -  it's just that simple.  If you're running a business, you either make money or join the vast majority of newbies who fail.

FYI,  I buy properties at HUGE discounts all the time.  I have nearly 50% equity in my rentals, all because of buying at a huge discount.  The problem here is that you're trying to turn a retail deal into a real deal.  Instead of doing that, you should look for DESPERATE sellers.

Good Luck,

Mike

Michael Rossi · Answer

Certainly not more than $137,500.

Mike

Jimmy NA · Answer

I would love to hear how you came up with that. Maybe just a quick summary? It would help me. In this town, in this condition it would sell for $225K.  The problem is a seller, even the a naive seller, would know that 137, 500 would be robbery. I don't think I couls convince the seller to do that price, though I would love to get it at $137k.