DEAL WORTH DOING? Lufos ? John Locke?
I just ran across a deal that i wanted to get the opinion of smart people on this site. This is a multiple family that is in decent condition even though the neighborhood is not beverly hills.
The numbers are as follows:
annual figures
Asking Price 449000
yearly income- 59351
expenses
oil and heating- 5318
water-2273
con ed- 964
taxes- 2850
Monthly Unit rents- 350 for 2br--superintendent lives there so rent is reduced
550- 1br in basement
923 - ibr first floor
981- 2br- first floor
954-2br in 2nd floor
1069-2br in 2nd flr
Owner says annual income is 59351 but math does not come out to that. In any case what is a good offer price for this property. Thanks for anticipated responses--- John locke and lufos weigh in too
From a quick glance and not knowing the property in detail the numbers are pretty good. Using the rents you listed (including the reduced superintendents) I came up with a cap rate of 12.9% (NOI/Purchase Price). Anytime you can get a cap rate of over 10% it is something to look into. Variables that might be a negative: What type of loan can you secure? A high interest rate can kill your cash flow? How much capital do you have to tie up in form of a downpayment? You managing it yourself or outsourcing? Any major expenses in the foreseeable future--roof, parking lot, etc...?
If that property were in my area I definitely would be spending some time doing my DD...
Good luck and let us know what you end up doing...
Q
Ooopsss...I just read your post again and you wanted replies from "smart people" Disregard my previous post
Q
I know nothing about your market or the area that this property is in. That's your job, all I can see is the numbers, but here are a few thoughts.
I don't think you're getting the whole story. Most sellers, when selling a property, will inflate the income and minimize the expenses. Interestingly, they'll do the Opposite come tax season. Get the Schedule E from the last 3 years of his income taxes.
Often times sellers will spend lots of money getting it ready to sell a year before they list it on the market, which makes their income for the following year look much bigger as well.
Are there other expenses? I noticed that you didn't allocate for a vacancy expense (at least 5%). What about when stoves, refrigerators, roofs, dishwashers, pipes, etc go out. They will. You need to work that into your budget. As is your calculated expenses are only 20%. That is LOW LOW LOW!. I don't know NYC, but I don't think that's possible there. Add a 5% vacancy and you're up to 24.6%. Still low.
I don't know your market, but I'd say 30% is low, but realistic if you run your property smoothly. 35% is probably closer to reality. Your numbers may be dead on, especially if rents have shot up recently. To me it's a big red flag though. I smell a fish.
As has been said, let us know how you're going to finance it and at what rate. Bad financing can make a stellar deal a Negative cashflow deal really quickly. Anyways....
With your numbers (and 5% vacancy) and 100% financed at 6.5% I come up with:
Cap: 9.7%
DSCR 2.02
Cash Flow: $9500 per year
at 35% expenses and the same financing I come up with:
Cap: 8.38
DSCR: 1.59
Cash Flow (yearly) $3600.
Your insurance will most likely triple when you change owners.
Taxes may also increase.
This is a 5 unit complex. 5+ units means it's a commercial deal....a small commercial deal at that. They can be tough to get funded.
I might point out that Locke's specialty is Sub. to. From what I understand, he's the first to tell you that he knows a world about that, but hasn't delved into every other aspect of RE.
IF I'm right with the 35% expenses, I'd try to get it for around $375,000. He may laugh at you. If he does, he's not a "motivated seller".
What is the assessed value of the property? talk to your county assessor about it and get their opinion. Talk to a realtor and get SOLD comps. There are much better ways to find out what it's worth than asking here.
Hope this helps.
Hibby has covered everything that I could possibly think about. He is a breath of cold water on a hot deal and rightly so.
Remove the passion and get to the ration.
check the prior years tax return now thats a goody, I must remember that.
Of course the key to any small number of units is that when you get a vacancy it really hurts. 20% vac on one unit empty.
That hurts. By the way how can you afford a resident Super or manager on this small a unit count? Also on the small units like this the swak(tenant complaints) is slightly higher.
The answer is after checking suitable comps,non older then six months, to roar in and start the offers. Start in the 3,s and work up. So he says mean things, just watch his responses and adjust. This is where it pays off Negotiat.
Hibby has got it right.
Lucius.
I think Hibby is on the right track. I would definately do some more research and get opinions and info from someone other than the current owner. Good luck. P.S. Hibby, how did you get 830 posts in 4 days???? You obviously know what the hell your talking about, just curious.
Sounds like an excellent deal, what part of the city, rentals sound low, can do a quick search for you for value, pm contact information, I am a lender in NYC area.
good responses guys, I have a feeling the owner is not saying everything, but I wiil go and see him on sat, I am trying to get good comps but no house has sold there recently. I am going to check with realtors and see if I can get a good value. This is a three family, but what they did is that they developed the basement and rented it out.
dajackhammer, That's only 9 posts per hour for 4 days straight! Try 1 year and 4 Days! Thanks for the laugh.
Walk through the units. It is a TOTALLY different deal if you can get an appraiser to look at it as a 4 plex rather than a 5 plex. Check out how it is listed at the recorders office.
Will the seller let you take over his payments or do a wrap? Look into doing some owner financing and your life will be a lot easier. [ Edited by hibby76 on Date 02/04/2004 ]
The changing in years, always messes me up. My bad.
hibby76,
You are correct if it has anything to do with me having a toilet plunger in my hand, I will pass.
I will say your explanation was well done, still not good enough for me to buy a plunger though.
John $Cash$ Locke
As i promised, I met with the seller today, I am expecting to get the schedule E from him . It was a three family-- but it had illegal apartments(the super and the one bdroom) in the basement. Im concerned that they could decide not to pay rent and i have no recourse if i bought the place. The were a lot of other interested buyers, As lufos advised I will probably offer 385,000 to get the dicussions going. It is fairly maintained with the super living for 350.
What do u guys think?
Hello - I am new to REI and to this site but already think it's a great resource for learning and listening in. I've just read your discussion and applied some of your assumptions to a new multi-fam. that just came on the market yesterday. I live in upper westchester/lower dutchess county area of new york and properties fly, often within days at most/weeks. If I apply the assumption that the value is 5-7 times the goi which in this case is 40,800 the value is 285,600 the asking price is 289k by the way, the numbers worked until I applied your 35% rule of vacancies and maintainance. Before I had a +900 cash flow monthly now I have a -1000! Scary! Other expense estimates provided initially are 4953 for taxes and 3560 for utilities, insurance etc.. My question is, is your 30% maint. estimate inclusive of expenses such as utilities etc.. or strictly repairs and a reserve fund? If so, that would bring cash flow to -500 something. I'm also assuming 10% down, which still doesn't make this work. Thanks in advance for any thoughts...
This "Operating Statement" has so many holes it's not worth my time to analyze. Vacancy of 5%-HA!. Utilities expenses need to be scrutinized. Where's the maintenance and repair expenses? Where's the reserves for replacements? Where's the bad debt and collection loss,? Where's advertising, management, accounting, legal expense. Oh, Hell. Forget I said anything.
I' apologize for not providing a detailed run down of my math for you, but I have taken a much more detailed look at it than I provided in my previous post. Here is the run down, and after looking through this site I think I've found the answer to my own question - which was - what does the 30-35% expense figure include, in another discussion thread it included utilities, taxes, insurance etc... when I apply that to my number I come up with a positive cash flow using the following numbers... and please remember I'm just starting and trying to ensure that I have all of my formulas correcly calculated.
Taxes -4,953
Insurance -2,000
Heat/Hot Water 0
Utilities -360
Water -1,200
Maintenance/Vacancies -3,727
Mortgage Rate 5.75%
Mortgage Term (months) 360
Price 285,600
Down Payment % 5%
Down Payment $ 14,280
Mortgage 271,320
Monthly Mort ($1,575.80)
Monthly Taxes (413)
Monthly Expenses (690)
Bad Debts (170)
Total Monthly Expense (2,849)
Monthly Income 3,400
Net Monthly Cashflow $551
Rent 1 10,200
Rent 2 10,200
Rent 3 10,200
Rent 4 10,200
Rent 5 0
Total 40,800
Down Payment Financing
Rate 4.50%
Down 14,280
Mo. Cost ($82.94)
Thank you again for your thoughts, even your disgruntled thoughts...