All Forum Posts by: Oren K.

Ross - I think you have to first define what you mean by profitable (not rhetorical). Profits can be had in two basic forms; appreciation and cash flow. 

A property can be cash flow negative (you have to support it with additional funds each year) but is appreciating so quickly that when you exit / sell , you have an overall 'profit'.

A property can be very high cash flow positive (you take fund each year) but has virtually no (or even negative!) appreciation. Each year you are taking the 'profit' but when you sell you basically get your purchase funds back (ignoring inflation).

As well, both examples are affected by any leverage you may take out on the property; All-Cash ties up the capital but insulates you from interest changes while highly leveraged may allow you to purchase more but has interest rate risk (it also eventually ties up capital as the loan is being paid).

These two 'extremes' are why many investors look at the Internal Rate of Return (IRR) and other financial metrics and not just CAP Rate or Cash-On-Cash. Also any metric that require forecasts into the future (e.g. Rent increases, Exit Price) are an additional 'risk'.

There are markets like SoCal and NY where appreciation is going strong. Prices are high and you need either deep pockets or syndication / partners. Alternatively there are markets like the Midwest where you can find and buy low price value-add properties that once stabilized (which has its own risk profile) generate cash flow in the teens if not higher on an all-in basis.

Defining what kind of profits you want  (or the balance between them) will help you figure out what markets / properties are right for you.

Oren

Joe,

First I would check if the property is what is called 'legal non-conforming'. This is a form of grandfathering that occurs when the a property is already being used for a purpose and the city changes the zoning making the existing use illegal. For example, a parcel that was zoned light industrial under the original city plan but then as the city expands, is rezoned commercial-retail. Another example is an existing shed built to the lot line but the city then changes zoning to require setbacks. IF this is the case, you should be OK but be very certain and still check with a lawyer who knows what they are talking about.

Anytime you are dealing with a property whose current use does not comply with its current zoning, you are taking about significant risk. It can be anything from banks simply refusing to finance to the city coming and issuing violations which would tie up the property until cleared. The lawyer who is handles RE should be able to give you a much better idea of possible consequences.

IF it is NOT the case or 'legal non-conforming', run-don't walk to a lawyer who is familiar with municipal law and city politics. You need 'expert' advice on something like this. For the few hundred $ of advice, you could be saving yourself a world of hurt.

Good luck,

Oren

Hi Lou,

Yes there are a number of things that stand out as ? in my mind.

Firstly, I don't see anything that indicates that these represent quarterly figures. But lets assume that they do. The inconsistencies as I see them are;

- The income seems off at ~62K. At 14K per month, it should be as you point out ~43K. This seems to be ~4.3 months worth of income; a very odd number. Even if you assume full occupancy at $800 per unit for the vacant units, you do not get to 62K

- The expenses include debt service. NOI is calculated before debt service. In this case, it would mean that expenses were only slightly more then 12K over the time period (whatever it is). An expense ration of under 20% (12/62) is virtually unheard of even for new construction.

- I do not see any expenses for property taxes listed.

- Again, because the time period of the expenses is unclear the insurance is suspect. $4,760 / 24 is a bit less then $200 per unit. If the statement is annual, this is a very low number. If it is quarterly, it means ~$800 per unit which is off-the-charts high

- I also see depreciation listed - this is a non-cash expense that only applies to filing of income taxes and as with debt service is not be part of the NOI calculation

- Next up is Repairs and Maintenance; at ~$900 for 24 units is $37.5 per unit. Even if quarterly and the annual is only $150 per unit which likely to low. If this is supposed to be an annual cost, it is simply unbelievable.

I suggest you clarify what time period these expenses cover. You should also have list of expenses you expect to see and if you don't see them, confirm if they are included in the general R&M or are simply left off (e.g. Landscaping, Snow Removal, Trash, Pest Control, Common Area Cleaning, Annual Fire Alarm Inspection, Annual Boiler startup / Inspection, etc.). You also should be familiar with what the average expenses are in each category for properties of this size. If the claimed expenses are too high, then it may be an opportunity (you may be able to bring it down) or if they are too low, it is a warning flag regarding the actual expense and needs proof.

Good luck

Oren

James - Just to be clear, the $36,413 is the NOI in 2029 (12 years out) and assumes no increase in insurance or property tax rates during that time. The current NOI is as below.. Right?

$37,800 - 2017 Income

$(1,475) - Insurance

$(10,712) - Property Taxes

$25,613 - NOI (before reserves for any CAPEX repairs)

Currently a 7.9 CAP by these numbers.

Alex - As you are not local to the Cleveland market, you may not know that in the City of East Cleveland, prior to a sale, the property has to undergo what is called a Point of Sale (POS) inspection. Only the seller can order the POS. Basically the city comes through and tells you what needs to be done to bring the property up to code. The deed can not be transferred without the POS.

It then usually falls to the buyer and seller to determine who will do what. As you are selling 'As Is', I presume you will want the buyer to take on all the violations but buyers should be aware of the process.

Good luck.

Trevor,

There are a lot of overpriced listings out there claiming 11 13 and even 15 CAP rates in the Mid-West but when you look at the underwriting (expense assumptions), it is either totally missing key categories or they are way understated to industry norms. The one I love is with respect to property taxes. They assume that taxes will remain the same despite the price being 2x or even 3x the current county valuation. If you ask, you get some BS.

Stick to your own underwriting assumptions and good luck.

Oren

JC,

I have been happy with the company (Midwest Realty) I am working with for the past 2+ years. Not a huge company and good service (tenants and me).

If you would like an e-Intro to owner, PM me with your direct email.

Oren

I would think that the sooner you can make an offer the better; preferably before they appoint an agent. 

The fewer hands reaching into the pot, the better.

Oren

Hi Ayodeji,

I have been happy with MIdwest Realty based out of Willoughby. If you want an e-Intro to the owner, PM me you direct email address and a bit more background in terms of current holdings / planned holdings.

Good luck

Oren

Mark,

My family also immigrated; we had little and lost that.

A couple of other points to consider. From what you have posted, this 'seed' money represents all of your families wealth and so you need to be very careful with it. You did not answer the question of how your family will support itself after the move so I will assume it will be from cash on hand until investments start to cash flow.

With that in mind, not all of the funds you bring with you will be available for investment and very likely not all at once. Also, if your parents want to buy a home that will also significantly cut into what you have available to invest. I also do not think you will be able to leverage to the degree you expect. With no network, no history, no credit rating, lenders are going to be very conservative.

Even if you could leverage to the degree you stated, you need to ask yourself if that is the right thing to do. The more you leverage, the less buffer there is between survival and losing it all if things do NOT go as hoped. It is generally not a good idea to 'go all in' / 'roll the dice' with funds that you can not afford to lose in a business that you are not familiar with. Is your family prepared to take that kind of risk and have to 'bootstrap' themselves.

Finally, you need to get together with a US Real Estate Tax Accountant and figure out the 'after taxes' income your family will need to support itself. Is there a gap between the income you can generate 'conservatively' from investments and what the family needs? If there is one, make sure you have a plan on how to fill this gap. Do not depend on being lucky.

What your family is planning is a big move and needs to be considered from all angles before committing. The family is fortunate that there are funds to start your new life but it is not with out risk; wish you every success.

Oren