All Forum Posts by: Chris K.

Hi @Ayodeji Kuponiyi --- having an accurate cap rate matters, but my main concern is not that.

You have two options for calculating operating expenses: (1) include CapEx Reserves into it; or (2) don't. In my area, unless I'm dealing with very sophisticated sellers/buildings (e.g. industrial factories), most people mean option 2 when they say "operating expense."

The chart below hopefully shows how drastic of a change that can make. Option 1 says you should pay $252,164.68 for the property at 10.93% cap rate while Option 2 says you should pay $378,247.03 for the property at the same cap rate. 

Note that the cash flow is exactly the same in both options (although you would have to put in about $120,000 more to keep the debt service the same).  

So that would be my most important question I have: do you live in a market where it uses option 1 or option 2? My guess is option 2. 

@Ayodeji Kuponiyi So I think that might explain the gap between the two prices. Let's say the CapEx Reserves are 15% of your 55% expense. Let's also assume the local customs dictate that CapEx Reserves are not operating expenses. In PA, that's probably the case 99 percent of time. I have a several theories on why that's the case, but that's a story for another time.

So based on the above assumptions, I believe your NOI should be $41,342.40 (or 60 percent of your effective rental income).

At 8% cap rate (which I assume is the market cap rate), the market price is $516,780. That's right around what the seller is asking for. If that's the case, the purchase price $283,500 is around 14.6% cap rate. That's a big gap between the seller and the buyer. 

Hi @Ayodeji Kuponiyi

A few quick thoughts. Are you factoring in CapEx Reserves in the 55% expense line? If so, some sellers may object to that depending on local customs. In my area, for example, the realtors do not include CapEx reserve in the operating expense. This will of course make a huge difference in terms of your NOI, which in turn makes a difference on what your cap rate is.

Now if you are including CapEx Reserves into the 55% expense line, I think your reserves might be too low --- "might" being the important word since I don't know what the building is like. It depends on the market, but I'm typically happy if I can get my operating expenses under 40% and closer to 30%. But that's possible if: (1) all the utilities are split; (2) property is self-managed; and (3) I challenge the assessment on over-assessed properties. If I factor in my full capex reserve amount, I would typically get around 60% in operating expense + reserves. And that is with the benefit of having a partner who owns a building material company and work with contractors regularly.

How are you doing your IRR calculations? When and what is the exit?

Hi @Mike O. --- I am a lawyer that practices and invests in Pennsylvania. If you send me a private message with where you plan to invest, I would be happy to see if I can make any recommendations for you. 

@Carolyn Keller I don't know what your lease says so I cannot give you any specific legal advice. But as a general rule, the tenant and the landlord can agree to amend the lease at any time. So if they want to get a dog, you can most likely ask them to sign an amendment or addendum to the lease. But if the lease is entirely silent on pets, then you have a more difficult situation. 

Also if applicable, be careful about "service pet" laws and any local ordinances/laws that pertain to pets. 

@Robert Hastings To be exact, Dodd Frank can apply to individuals like you. But it sounds like your lawyer is experienced with seller financing, so he should know what those situations are. He may have looked into your files and determined that it wouldn't apply to your situation. 

The lease sounds like a standard lease with an option to buy. I don't see any obvious concerns although as a lawyer, I cannot say for sure without looking at all the facts. 

Remember to check with your insurance agent to see whether the above lease would change anything with your policy. Good luck! 

Hi @Robert Hastings. I would follow advice of @Jerry W. and check with your lawyer about Dodd/Frank issues. I would need all the facts to properly evaluate your case, but I think your transaction falls under Dodd/Frank. The question is then whether you qualify for the exception. My guess is that you probably do, but that's an issue to discuss with your lawyer. If he or she does this type of work, he should be able to give you a quick answer.

In terms of foreclosure versus lease, I would say that lease is the better option on average. Uncontested foreclosures take a long time to finish. Of course, a tenant can drag out an eviction dispute for a while as well. But a foreclosure will most likely take more time then a lease.

To your point about real estate taxes, utilities, and etc., you should know that the sheriff’s sale will not get rid of all those expenses. If the tenant does not pay certain expenses, the sheriff will take out those expenses from the sale price.

Hi @Tyler Von Harz! Welcome to BP and NEPA investing. 

@Jacob Sampson Ah my mistake --- the taxes are about $4,900 and was factored in the above analysis. 

@Robert G. Good point. I am actually planing to start a property management company so I will self manage. But the cost of property management is another way to negotiate down the purchase price. 

Hello everyone:

I would like to get your thoughts on a potential fourplex deal in the Wilkes-Barre area.

Property Info

• 4 units – all 2 bedrooms, 1 bath
• I would rate the area as a Class B. I wouldn’t live there, but the area is safe enough that college students and families live there.
• Current owner is an older lady whose husband passed away. Husband was basically the property manager
• Property is in decent condition. The units are not the most attractive, but inoffensive. Could be made better with cosmetic fixes.

Income/Tenants

• Current owner has rented two units for $600 and two units for $550. Seems to match the going rate in that area.
• Current owner was smart so the lease requires the tenants to pay all utilities.
• Current leases are year to year.
• I will rescreen the tenants when the lease expires.
• I will have to due diligence in terms of payment history, etc.
• Let’s be conservative and assume $550 per unit.
• That would be $2200 a month.

Financing

• The seller and I are still playing around with the numbers, but we are most likely looking at the following.
• Purchase Price is $105k
• Down payment is 10 percent via seller financing.
• Interest rate is 5 percent
• 30 year note

Expenses

• All utilities paid by tenant
• Sewage bills are $54 per month
• Insurance is around $90 per mouth
• Mortgage P&I is $507.30
• Assuming 12.5 percent vacancy --- $275
• I will be reserving $220 to cover CapEx per month for all 4 units
• 10 percent for routine repairs --- $220.

Summary

• Based on the above, I gest $427.95 per month in cash flow at $550 per unit.
• If I can rent units for $600, then $562.95 per month.
• Down payment is $10,500.

What do folks think? Any glaring flaws in the analysis? Would you take the deal (assuming due diligence works out)?