All Forum Posts by: Ross Kerne

Frank,
Thanks for bringing up seller financing and sharing your experience. I should explore this avenue more, as I think it could help me with this situation. 

Originally posted by @Brandon Johnson:

@Frank, thanks for your input. I appreciate it.

I walked through the 1 vacant 2 bedroom, and I think it would be ready to go. The owner seems like he has just checked out, is not even trying to place tenants, and just wants sell it (for too much IMO). I didn't think about allocating any money to get it ready to rent, but I will discuss that cost with the property manager. I'm sure there is something we could/should do, but I don't think it is much more than cleaning.

I thought an AC unit would cost more than that, so thanks for sharing those numbers.

I can pay for the repairs upfront, but I was trying to have less cash tied up in this property. The repairs are cosmetic at this point, but a roof with missing shingles will start to leak eventually, and the falling fascia will just get worse. The steel stairs are starting to looks like swiss cheese, and they are structurally sound for now, but they'll have to be replace sooner rather than later. When I mentioned paying for repairs with cash flow, I was eluding saving all revenue that wasn't directly paid out (CapEx, Vacancy, Maint, and Cash Flow) and after a few months at full occupancy I'd have a enough to tackle the major items without coming out of pocket. I would eventually have to pay for these repairs from the Maintenance or CapEx budget, it would just be accelerated and those items wouldn't be on the radar for a couple decades. Not the best way to go about it, but I think it is an option.

I agree, the difficulty of this area should bring higher returns, but after looking at comps, there are quite a few people who are making something work in their favor. 2bd 4 plexes in this area are consistently selling about $150K.

My comments and description of Building 2 must have made it sound much worse than it is. The building has only been completely vacant for about 2 months, and it sounds like each tenant had a special case, but that could all be BS from the seller. You do bring up an interesting point about permits, and thank you for that awareness. I walked through the four 1 bedrooms apartments, and they were all in the same condition as the vacant 2 bedroom. Building #2 is in better shape than Building #1. Not something I would want to live in, but decent for $500. The seller said that one of the carpets would need to be "re-stretched", but I didn't see it coming off the tack strips anywhere. Refer to my previous comments about the seller just not wanting to find tenants.

I would eventually like to do some updating in each of the units so that it is a little nicer, but I just don't think the value is there to increase rents. My property manager doesn't think we would have any problems getting these units rented out as in. 

Thanks  @Jack Pinney, do you think 15% and 10% are too generous? I am pulling these values from various area of the forum.

 Thanks for the suggestion @David Boroughes. Everything I have been looking at is in this price point so I'll find a multifamily at a higher income bracket and go through the same exercise.

The intent of going with a lower income property for my first MFR is so that the mistakes I make on the first deal ( I know there will be some) shouldn't cost me as much. I see it as a lower cost of admission to the School of Hard Knocks. I've read good and bad things about lower income rentals (there is a whole thread dedicated to that topic right now) and that barrier to entry fits my current risk tolerance. I could go spend my entire investing fund on an expensive multifamily rental, but I didn't think that'd be wise right out the gate.

I didn't simply ask if this was a deal. I laid out the analysis of comps, rents, financing, taxes, returns, etc for this market with research to back it up. Why wouldn't Brandon want to see someone implementing what he's teaching? 

I'm not asking for a fish. I'm showing that I'm learning to fish.

I've asked the forum to help validating the analysis, looking for holes in my approach, and whether or not they'd take this deal.

@Brandon Turner, what do you think?

I've listened to you and Josh so much I feel like I know you, but this is my first time posting on BP.

 No, I haven't been able to review the books on this property. I'm sure this Old Dog keeps track of everything on a napkin.  

I guess I could have phrased that questions better. I didn't mean for it to sound like I won't have to account for M, V, and C, and would pocket everything instead. The intent of my question is how to truly evaluate ROI.

I was thinking that the revenue coming in could pay for the planned repairs every 3-4 months, requiring less spend up front.

What's your opinion on the ROI when accounting for Maintenance, Vacancy, and Capital Expenditures savings? Is 12%-20% the target before or after account for these expenses?

Thanks for your input @Mike H. See my responses below.

Originally posted by @Mike H.:

I do think he was quite delusional with his initial evaluation. I think I will start with $190K and see where it goes from there.

I mentioned assessor value because that is all I have to reference without comps. I was trying to build a correlation between the comps for the 2 bd and the assessed value for the 1 bed. The tax assessed value seems to be on par with comps +/- a few $K.

I agree that seller financing has benefits, but since this rental space is new to me, I was trying to stick with at least one area that I know. I am researching more on owner financing, but I am still naive on the subject and how to structure the deal so that it works in my favor. I can get a 30 yr fixed @ 4.625% with conventional financing which is pretty tough to beat right now. The owner is old and won't structure a deal like that.

Thanks for confirming my thoughts that the entire building vacancy could be a red flag. My plan is to have him turn the utilities on for a full inspection.

Current rents are $625 Unit A, $600 Unit B, and $550 Unit C. Current tenant pays $625, but that is above market since the rates have dropped in that area over the past couple years. According to my property manager in this area, he thinks he can get $550 for the vacant 2 bd and $450-$500 for the 4 vacant 1 bds.

I think the current tenants are month-to-month after their one year lease was up. The units are not nice by my standard, but seem on par with that price point. It's a  "C" to "C minus" neighborhood.

I am defaulting to the property managers experience, and its confirmed by my market research for various apartments in this area on CL, etc.

I think the Bldg 2 was recently vacated. When I asked why he hadn't placed a tenant, he said "Its the holidays and I'm married, figure the rest out". I just don't think he has the drive/time/desire to place a tenant and just wants to sell the properties. 

I'm sure there is some issue hiding in the vacant building, but besides age, nothing jumped out during the whole walk through. I will leave myself an out or bargaining chip pending the inspection.

The seller did offer 10% down and 6% interest rate, but over a very short time frame of 5 years (He is 69 years old and just wants out). The property just would not cash flow under those terms.