All Forum Posts by: Bradley Benski

I'd like to consider but I'll be out of the country for the next few months.

@Shawn Thom 

Good looking house!  Will be ineterested to see how the progress goes.

@Vasant A. 

If I go by the following assumption in addition to 50% rent is expenses such as 1 month of vacancy (8%) and say $6000 as closing costs then my spreadsheet shows negative cash flow.

I would work all numbers based on the current income the property is producing, no sense to pay a premium in price for "work" and "value" that you produce:

A common gouge is $100 per door, or positive Cash flow of $400 a month = Offer price of $172K

How about purchasing at a specific cap rate say 8% = offer price of $153K

Or Cash on Cash, Say 12% = offer price of $158K (Which is your opportunity cost)

IF you can get rents up to $3000 per month then the property isn't a money loser at it's asking price, but on its own it's not a great find.

You have some other goals you want to achieve rather than just "income" form this property in terms of gaining a tax advantage.  I'd really study the cost/risk/benefit of that.  My dad used to say don't buy something that loses money just for the tax loss, that's a losers proposition.  Back in the late 80s the IRS changed the rules about passive losses from real estate and many properties lost value, one of the early dominos in the Savings and Loan Scandal from back then.  If the Tax rules change you don't want to be left holding a dying money sucking dog of a property.

@Kevin Stein 

Welcome.  Ha, I know where Oshkosh is located and if it wasn't for working out of the country this month I'd of been there this week :-)

Welcome to the boards.

Brad.

@Jonathan Gregori 

Multi-family's (typically 5+ units) are valued based on their income.  The method you bring up seems to be working around this formula:

Cap Rate = NOI/Purchase price

For first run analysis you can assume that NOI is roughly 50% of rental income (50% rule).

The rules you present have us multiply the gross rents by 12 to get yearly gross income.  The yearly gross income is then multiplied by 7 to get a target price (+/- adjustment)

So:

Purchase Price = Monthly Rent * 12 * 7 = Monthly Rent * 84

NOI = Monthly Rent * 12 / 2 = Montly Rent * 6 (Standard assumption based on 50% rule)

Cap Rate = (Monlthy Rent * 6) / (Monthly Rent * 84) = 6/84 = .07142 = 7.14%

Is that the Cap Rate you desire?  Is it the current Cap Rate for the market the property is located in and the class of the property? 

There are two assumptions built into the calculation as I've broken it out.  The first is that expenses are 50% of Gross rents.  The second is that the Cap Rate you are targeting is 7.14%  When using guidelines it's sometimes good to know the assumptions built in.

Bottom Line, these are all tools for analysis, but do no good if you don't know what you are looking for. You may be better served by developing criteria of what you want and then you can create your own guidelines to evaluate properties and determine what is a good buy or not.

Below is a table. Multiply Monthly rents by the number next to the cap rate to determine an approximate purchase price based on a NOI of 50% expenses:

For a Cap Rate of 7% take Monthly Rent and multiply X 86

For a Cap Rate of 5% take Monthly Rent and multiply X 120

@Marques Barton 

You didn't fail, you followed your guidelines and choose not to purchase.  Think of it as part of your analysis of the deal, you analyze many deals on paper without buying.  This one looked good so you continued your analysis by inspecting the property.  After the inspection, you found an issue that caused your paper analysis to change making the property attractive.

But you learned about negotiation, what's required to get a property under contract, the value of doing an inspection and if I remember correctly getting a proper inspection done.  That's progress!  Hey, it's a short time while you save to make your next purchase.  In the mean time don't stop looking, never know what will drop in your lap, plus if you find a deal you might be able to find the money too.

@Michael Quarles 

Is that the actual file you put on your voicemail greeting or just the script read by a computer voice?

So it's close to Gulfway drive (87 as it goes through town) going towards Groves and the Bridge over the Neches River.  That was a dumpy area when I was in High School (79-83) and I don't think it's gotten better.  Population wise the area has been stagnant since the 50s.  I remember my Father had an interest in an apartment in that area in the early 70s and they ended up being a tax scam and we got audited over it. 

You mentioned that the units are 65% occupied and they claim because of the reno.  Do you happen to know what the occupancy was before the reno?  The Address of these apartments wouldn't happen to be on Poole ave?

@Thomas Fosnaugh 

Gross Rent (Rent you'd get with every unit occupied) - Vacancy + Other (Laundry) = Gross Income

Gross Income * Factor (50% for example) = Expenses (or use Actual Expenses)

Gross Income - Expenses = Net Operating Income

Net Operating Income - Debt Service = Monthly Cashflow