All Forum Posts by: Oren K.

Sam,

This is not that unusual a situation where an employer pays for accommodation. If you break it down there are two basic things you are interested in:

- Will the rent be paid - In this situation, your lease should be with the church or at least have the church be a guarantor.

- How will the people living in the unit treat the place - Checking with past landlords and making an assessment of the people should answer that question.

If their previous place was taken well taken care of and you feel comfortable with the church as the guarantor, I would have no problems.

My two cents.

Oren

So I've spoken to a couple more PM's and in the process discussed 'standard' business practices in Michigan with a couple of people, some of which seem unusual to me.

There have been many discussions here that in different areas, practices can vary widely with respect to rates, terms, charges etc. A couple of things from one contract I have seen struck me;

There is a minimum fee for leasing up a unit regardless of the rental rate. Owner is responsible for making up any difference. So it is quite possible to end up paying much more then 1 month rent to the PM

Something that I still can not believe is true and I am trying to wrap my head around is that the PM 'owns' the tenant for as long as they stay in the unit and gets their % fee. This is on a unit by unit basis so you could end up with multiple PM's in the same property as if it were a condo. Is this really normal practice for Michigan?

Need recommendation for a PM covering Flint Michigan. Property is less then 25 units so a couple of the lager PM's I've called were not interested.

Anyone using a PM in that area that they care to recommend?

Thanks,

Oren

@Joel Owens - Mid 50's seems about right. Yes, Maintenance will creep up over time but we'll see what happens. With respect to refi; yes, as we have discussed in the past, being a 'foreign national' is an issue. I have spoken to a couple of brokers who 'say' they can get it done and their lenders don't care but the proof will be in a year from now. If it's a 65-70% refi, I can live with that.

@Kevin Tran - You may be right on the insurance. I need to get a firm quote but remember it is just for structure / liability and not contents. The reserve I included is incremental contribution from this property. I already have some funds set aside as a general emergency fund.

@David Beard - Hopeful of the upside but not counting on it and yes full property inspection (unit by unit) will absolutely be done. On the refi front, see my answer to Joel. As to the furnaces; only time will tell but as part of the inspection each will be turned on to confirm they are working properly as of the purchase.

Context

The story is that an elderly couple purchased and owned a number of multi-unit properties which they unfortunately purchased 4-5 years ago. They kept the properties going until 2012 when the husband passed away. The wife tried but can not take on the owner / landlord responsibilities and the units have been getting run down without the proper supervision.

I am looking a purchasing one of the assets as a short sale. It is a 14 unit Townhouse property in Ohio taking up an entire block on a side street.

Units:

8 - 2Bed / 1Bath

6 - 3Bed / 1Bath

- All with unfinished basement

- Washer / Dryer hook-ups in basement

- 60 AMP service on breakers

- ~1000 sq ft. per unit

- All have old convection air, natural gas furnaces with no central air

Originally listed at $299,000 and recently dropped down to $265,000.

11 of the units are currently vacant and all units do need some rehab. Units can be turned inexpensively (e.g. just paint and cleaning) for ~$1,100 per unit but can also be brought to a higher standard for ~$3,500-$3,800 per unit including updated appliances and refinished hardwood through out based on discussions with a couple of contractors and the prospective property manager who knows the area well. Rehab should take 45-60 days but I’ve budgeted 90 days and then a lease out period of another 90 days since I will be renting at slightly below market (see below).

The units all have garages (not attached) and the landscaping is currently minimal (just some lawn). Most rental / condo townhouses in the area have off street parking but no garages.

As a comparable, a 4 unit townhouse, all 2 Bed / 1 Bath, property virtually next door sold two months ago for $120,000 but it is finished to a very high standard. This 4-unit property has no garages and rents for $500 -550 / M. It is fully occupied as are most others multi-unit properties nearby. This is a solid working class neighbourhood with no boarded up or dilapidated houses in sight. Neighbourhood clearly shows pride of ownership with flowerbeds, painted porches and no litter. Tenants in the area pay their own utilities so the landlord responsibilities are taxes, trash (part of property taxes), structure (e.g. roof, foundation, etc.), insurance and maintenance.

Intent is to rehab to a higher standard and rent out at slightly below market rents ($475 – 2Bed, $525 – 3 Bed) to lease up and then increase to $500 & $550 as individual vacancies occur due to the inclusion of the garages.

Performa Financials:

Income $82,000 (@$475 & $525)

Taxes 11,000

PM 8,000

Vacancy 8,000

Maint 8,000

Insurance 2,000

Reserves 1,000

Net $44,000

I am actually hoping that the maintenance will be somewhat less due to the newer appliances and other repairs but we’ll see.

Using the comparable (they have a higher finish level but no garage), the ARV is ~420. I am hoping to get the property for under $220K and will invest an additional $50-$75K (including closing costs). I would be all-in forabout $300K which is ~70% of ARV.

This will be a buy and hold investment. A year after stabilization, I will look to refinance the equity out.

Thoughts / comments / have I missed any major considerations?

@Tony - I think you are mixing up rent and profit.

The 2% rule is a rent per month threshold at which a property 'should' (mileage will vary by individual situations) generate positive cash flow before debt service and so weather you are paying cash or not does not affect the result. It is not the monthly profit. Whatever the rent is, expenses have to be deducted to determine the cash flow and if they exceed the rent, it is cash flow negative.

Assuming you are paying cash for a property that is properly analyzed / underwritten as a 12 CAP. You will then make your 1% per month - cash on cash (COC).

Need some help determining the value of a two of cell leases on a building I am looking at.

One lease is with Sprint and the other is with MetroPCS. Both leases have termination clauses; The Sprint lease is a one year notice and Metro PCS one 30 days notice. Both have multiple 5 year options with 10% bumps per option. One has 3 years on the current term and the other has 2 years on the current term.

The property is definitely the tallest structure for miles around and it is unlikely that given current construction costs and rents, that another tall building would be built.

I read @Joel Owens comments from last year which if I understood correctly says that the most the income stream is bought out for is 15 - 20 cents on the dollar for a guaranteed 10 year stream. That translates into a 1.5 - 2 times current income (I am not taking the bumps or inflation into account since they more or less cancel each other). In this case, there is no longer term guarantee but the likelihood of termination is, I think, not high for quite a few years to come.

Anyone have any advice, thoughts or experience valuing cell leases.

Kevin,

One item that many spreadsheets don't get quite right is the Taxes.

Using the current taxes as a starting point, you need to determine what the likely new taxes will be. You will need the current assessed value (typically from the county or city web site) and an understanding of how the assessed value will change (e.g. just based on sale price, comparables, etc.).

If the new assessed value increases, cash flow decreases and obviously the reverse is also true.

Since property taxes are a major portion of the expenses, making sure you know not just what they ARE but what they WILL BE is important.

Oren

Carolina E Ned Carey

The property is a 20 unit multi-family + Retail on the street level.

LOI - Letter of Intent: The LOI would not lock up the property but is the basis for the purchase agreement. It is something I am comfortable enough doing that I don't need a lawyer involved. If we reach agreement, then a purchase agreement is drafted by a lawyer.

Sign Back - Counter Offer (can bounce back and froth until main points are agreed to).

Wayne Brooks - So your expectation is that any out of state purchaser visit the property before they put in an offer. I can understand it but doesn't it make more sense to make sure there is 'likely' meeting of the minds first as long as the property is not 'tied up'? Otherwise you fly out to visit and then there might be no agreement on basics like price.

Thanks for the input. It sounds like I am tripping over my Canadian 'politeness'. Well enough of that!

Need to get some input on a situation;

For a property, that is not local to me and I am interested in, I called and got a bunch of information from the agent. He also answered a number of follow-up questions. I have made an LOI offer on the property and they just sent the sign-back (we are not that far apart). As part of the sign-back an issue came up and I asked the agent to get some comparison information.

His response was that he was not willing to invest the time / effort to get the information until I made the trip to see the property. I am not willing to do this until it is at least under LOI (preferably purchase agreement).

I have not signed anything nor was there any discussion that he was representing me. In fact, he has been careful to not tell me to much about the sellers. Currently, if this transaction happened, he would double end it (more power to him!). But with his response, I am thinking of bring another agent I know in the market into the picture to get the information I am asking for and he would get the commission split.

Is it inappropriate to bring anther agent into the picture at this point?