All Forum Posts by: Oren K.

Mark,

Size is all relative. Some people start with 1 SFH and grow 'organically'. Others start with small MFH (e.g. 10 units), others jump right into 100+ unit complexes (not recommended for the faint of heart). Yet others just stay passive going with syndicated deals. It depends on many factors;

- Available capital

- Access to financing

- Prior non-real estate experience (e.g. project manager)

- Team (e.g. PM) network

- Risk tolerance

and so on.

And there are those that avoid residential like a bad cold and stay strictly office / retail.

It can all work and it can all go horribly wrong. I believe that some overriding indicators for success is attention to detail, ability / willingness to learn and listening to the experience of others. But then these are success factors for any venture.

Oren

The address is  4004 W Erie Av, Lorain OH according to Loopnet

  http://www.loopnet.com/Listing/4004-W-Erie-Ave-Lor...

I don't have exact information but some additional information on the listing is that property is only 60% occupied so the gross income is currently closer to 60K making the NOI around 20K since other then landlord paid utilities, expenses are not significently affected by occupancy.

That puts the CAP rate in the 5% range (20/395). And this is without looking at any deferred maintenance that may need to be done.

Gotta watch those proforma(s).

Hi Rafi,

There are a number of agents in the Cleveland area that can help you;

@Matthew King - Deals almost exclusively with multifamily; low rise to high rise. Worked with him at times. He is knowledgeable and tells it straight.

@James Wise - Owner of Holton-Wise a PM company. Focused only on certain areas and mostly smaller properties; less then 10 unit and single family (I think).

Ben Baker (can't get @ to work) also is focused on multifamily across greater Cleveland.

There are others but they don't come to mind at the moment. Doing a member search should pop up some names.

Oren

Heather,

Regarding CAPEX, I much more agree with @Aaron Nelson and not @Patrick Britton and will go even one step further and say it is independent of rents, or property value. Replacing a 2000 sq ft roof costs the same independent of how much rent you are getting or if the property is worth $100,000 or $1,000,000. Assuming a property is intended as a long term hold you need to distinguish between two categorizes;

Immediate Repairs - Broken and needs to be fixed as part of purchase, setting its age to 0y

Full & Lapsed life time - Will need to be replaced at some point

Assuming you do not want to have a 'cash call' (as this will reduce your overall long term returns), for each item on a CAPEX list you need to go through the exercise of figuring out where it is in its life cycle and how much it will cost to replace / do. If its minimum end-of-life is inside your hold period, then you should put funds aside to cover the used up life and an annual reserve for its remaining life.

A couple of simple examples;

                 Min   Max              Current    On Purchase

Item         Life    Life    Age    Cost         Banked Funds   Annual Reserve

Roof         15y     30y    10y    $7000     $2340 - $4670   $234 - $467

Heating    10y    20y      7y     $2000     $  700 - $1400   $100 - $200

Carpet        3y      6y      2y     $1000     $  333 - $   666   $166 - $333

etc.

Total                                                         $3373 - $6736    $500 - $1010

Could the roof last 40y or even 50y? absolutely but it is not something that you count on.

So if as part of a rehab, a HW tank is replaced, you do not need any banked funds and only need to put a reserve away based on its expected usable life time.

In the above example, for these items, I would put ~$4500 in the reserve account and ~$750 away annually. Its not perfect (lemons happen) but should avoid $ surprises.

On the other and, if you are doing a flip, none of this matters since you don't intend to hold the property long enough for any end-of-life issues to be your problem.

Also, bonus points if you take inflation into account.

Kendra,

This does not sound promising in that you are responsible for part of the property. There are too many possibilities when your duties may / will overlap with who ever is managing the other part (e.g. plumbing, electrical, heat, water, sewer, garbage, landscaping, tenant complaints, security) regardless of who is technically in charge of these items; let the finger pointing begin.

I don't have any specifics but generally speaking these kind of properties have extensive reporting requirements regarding the tenants  (e.g. certifying that tenant meets income requirements), units (e.g. inspections), financials (e.g. audits) and regulatory compliance (e.g. anti-discrimination rules). Make sure you fully understand what the expectations are and that you allocate / budget time accordingly.

I would recommend that you include in the RFP your requirements to accept the assignment. Ideally you can insist on managing the entire property vs. just a section of it.

Good luck,

Oren

As @Federico Gutierrez pointed out this is an investment marketed on BP by Holton-Wise. It has already been pointed out that property taxes will significantly increase some time after the sale. Buying the LLC is not necessary protection against this happening as the county is aware of the practice and can / does dig a bit deeper to figure out if there was a sale event.

I also noted that in the marketing, it stated that of the 100K spent on the property, 50K was the roof. A couple of points;

- For such a such a small roof (3,000 sq ft??), this sounds very high even if they did a full tear off down to the joists. Perhaps there were some rotten joists; who knows.

- Even taken at face value, that means that 50K was spent on the rehab of the 5 apartment units (~10K per unit). While the pictures look pretty, I would be concerned regarding what is behind the walls. In my opinion, a 'complete renovation' would normally cost more then 10K per unit but then it depends on what they mean by 'complete'.

There are lots of questions to ask and have answered before you can determine to move forward of not;

- Statement of work (SOW) regarding work done

- What is warrantied and for how long

etc.

Also while this is not a 'turnkey' as it seems that HW does not own the property, they are certainly intimately involved.

Neil,

My family owns some commercial in a prime location and we have been approached many many times in the past 2+ years regarding a dispensary. Leaving the current vs future legalities aside, the point that @Claude Boiron  made regarding 'unsavory' use is near / at the top of our list for not considering allowing one at the property.

As a landlord you should consider the tenant mix. For example, and being extreme, imagine if you had a day care center or after school tutoring school in a unit. Gaining a dispensary tenant may mean loosing another tenant. Also if you have class 'A' tenant (e.g. Starbucks), they may not want the association and take the first opportunity to move.

Oren

Ugh is right... What I have not seen anyone mention is that you will be reducing the value of your property if you grant any rights to anyone else. No idea how much, but exclusive use is more valuable then shared / restricted use any day of the week.

I agree with @Tom Gimer that removing the deck is the best option but then that affects the value of his house.

Anthony - buying 'just' the business is very different from buying the land & business. If nothing else, you need to lock-in a very long term lease to fix those costs and base your valuation on the term of the lease since once it expires, the landlord can increase rates to the point that the business is no longer viable.

@Spencer Gray - Yes everything can be repaired but does it make sense. And if repairs are not done, is the property safe and habitable.

So it's not so much functional obsolescence (every one needs a place to live) but lets call it financial obsolescence. A property that has not been maintained through out its history, at a certain point, it is not worth bringing back as market rents (hence NOI) makes the return unattractive (or even negative).

You hear rehabbers / inspectors talk about good bones; that the foundation / structure / shell are in reasonable condition because these can be very expensive things to repair correctly.

Recently saw a property where the interior has to be totally gutted down not just to the studs but to the cinder block and who knows what the condition of the structure is. In addition, the exterior brick has any number of cracks. The tuck pointing work that needs to be done is massive (basically taking apart exterior walls brick by brick and then putting them back). You would need to deconstruct then rebuild the building with out the efficiency of ground up construction.

The market rents at that location simply would not support the investment needed if I was given the property. Government / charity can step in but then it's a different kind of investment.