22 Properties, Am I Paying Too Much? Details.
I am close to buying 22 properties which
consist of 14 sfh's, 5 double wides and 3 regular mobile homes with lots. Properties are in fair to excellent condition and all are rented. Owner is retiring and offering owner financing @ 7% on $977,196.00 with a 50,000.00 down payment. Current annual gross rent is $149,220.00. Annual payments to owner would be approxiamitely 86,000.00.
Yearly taxes- $8,000.00
Insurance $2,000.00
The vacancy factor is very low. One just opened up and was re-rented in two days.
Based on my inspection and knowledge of these propertiy values, the property is priced at about 85% of FMV if property was sold individually.
I am standing back trying to determine if I am overlooking anything. Sure appreciate your opinions.
Jodyb
Use the new Proforma tool, and it will give you a good idea.
It will work on one unit or 22.
http://www.thecreativeinvestor.com/modules.php?name=Tools&op=ProForma
Based on these numbers, you stand to net $53k per year but I would include a few other key costs.
1 - Maintenance - Using a low number of $100 to set aside for upkeep and repairs on each property, that would be $26400 per year.
2 - Vacancy - I typically consider vacancy to cost 5-8% of the rent roll per year. That would be about $7500 per year at 5%.
This leaves you with a net income of $19100 per year.
The taxes and insurance costs look suspiciously low. I would take another look at those. I would bet they would be higher than stated.
Ditto on the Insurance & Taxes. or maybe some re-zoning going on. Tom
Yes, taxes are low, since some of the properties are in the county, their is no city tax. In addition the owners have owned some of these properties for years and the assesors office hasn't been as aggressive in its valuation of them it seems. They have an extremely low cost for insurance, and they have provided us with company name etc.
The best part of this deal to me is the owner financing, otherwise we would never be able to purchase these properties.
So if everything is as it seems should I consider this an OK deal?
Jodyb
Getting a close to million-dollar property for only 50k down sounds good to me. Owner-financing at 7% is fantastic.
Great numbers don't mean anything if you are buying a pig in a poke.
Have you done all your due dilligence?
Are you making sure you aren't going to be the new owner of his EPA super fund site? I know that is extreme, but you get the idea, right?
Have you inspected each of these properties, put your hands on them personally.
Have you inspected all of the leases?
Have you seen all his books? How about tax returns? Check the county records, the assessors office, the taxes are current?
Lots and lots of due dilligence and a competent attorney are in order in my opinion.
$2000 a year in insurance for all those properties? I pay more than that for my car.
If Kentucky figures their taxes like Oklahoma does, you will need to find the assesment ratio and the millage in your area and find how much tax will be charge on $1M of property. You rates will probably go up after the purchase because the property is automatically reassessed at the purchase price when it changes hands. You insurance would be about 2.5 times your figure here in OK, but rates may be a lot lower there for some reason. I have an excellent spreadsheet I got from a professor that analyzes your cash flow, NI, Internal rate of return, net present value of cash flows and several other figures. I got some rough numbers from the info you provided. You should be cash flow positive from the beginning, your before tax IRR could be 30% or better, you have a gross rent multiplier of about 7.18 - anything under 8 is usually good. You can plug in whatever numbers you want and see how it will affect your return. I'm sure you can get more accurate results if you plug in all your own numbers. Send me your email if possible and I can send you the spreadsheet - or someone please tell me how I can post an attachment here.
Joel,
This Proforma tool is a beta version. I found it to be very handy, how accurate do you think it is? Is this your tool? What percentage of error should I add to it, up or down.
Quote:
On 2003-12-22 09:42, joel wrote:
Use the new Proforma tool, and it will give you a good idea.
It will work on one unit or 22.
http://www.thecreativeinvestor.com/modules.php?name=Tools&op=ProForma
I don't want to rain on your party but I think Cygnus made a very good analysis above. When you combine his information with the expected higher taxes, likely insurance increases, depreciation of mobile homes, and probably much higher than $100/unit maintenance, I think you will break even if you are lucky. If you aren't fortunate and expenses are higher, or real estate prices start to falter as many economists are predicting, you could end up in the red. Just my opinion, but I wouldn't even think of taking on close to a million in debt for something that seems rather borderline.
you sound as if you do not have a lot of experience in this area. be very careful you could be heading for trouble. a million dallor deal is a lot of money to invest a once if you are inexperienced or simply not sure. ggod luck. kenmax
If the seller is wanting to retire look for deferred maint. could add up to lots of dollars on a deal this big.
Id really look extra close at the mobiles are they newer or older models. Doublewides are they built cheesy will they stand up to rental abuse some of that vinyl coverd drywall is a pain to match and imposible to paint over.
Just somthing to think about
ED
if unsure spread out the risk to see if you know what you are doing and get your feet wet.
Buy 1/2 the proerties with a option to buy the rest after 6 months or a year. Tell him you want to fix them up a little (which will improve his collateral) and would like to spread out your cost so you dont have to pay the 50K and fix up cost all at once.
Hard part will be which 1/2 of the properties try to get the better ones. If the better ones you may have to pay more than 1/2 of the 50K down.
Instead of looking at this from a rental standpoint why not approach each renter and turn them into T/B's. Put the maintainance in their court and raise rent rates giving them a $100 rent credit towards the purchase. Just thinking outloud. Mike
Another question to ask is if you buy the whole bunch and sell off a few individual properties, will the seller go for the partial release? I am guessing that you will have a blanket mortgage over all the properties.
Thanks davmille. That was my point. It sounds like a great opportunity, especially with the owner financing...but I don't think the profit is rich enough. The leverage of your down payment is great but do you really want to manage 22 properties for less than 20k per year?
I like the suggestion of purchasing/cherry-picking 1/2 the props. or doing a lease option to generate some additional cash flow. Or maybe include a clause in your purchase agreement that the seller has to pay a certain amount of any upcoming reapirs. Try to beef up this deal by being creative.
A million at 7% seems extremely reasonable. If the owner wants to retire wouldn't it be easier to sell each property individually or hire a manager? Why would this person be offering you such a modest rate? Answer that question and you will know if you should do this deal.
I think this has been covered very well. As a contractor investor I would say that you should look for deffered maintenance. Can you imagine the cost of 18 roofs?
As for managing 22 properties for a 20k gain a year. No problem! that is what property management companies are for, and with 22 you should be able to negotiate a lower rate.
As investors we make our money at the purchase either in great financing or low price or both.
If the seller is really that flexible, take the property in trust, or a series of trusts with an LLC as the beneficial interest etc.
THis might do several things, such as avoid a major increase in property taxes as it looks like the owner is merely doing some estate planning.
If you have misguessed this one then you would avoid losing more than your 50K and repair costs if things go south.
Being able to keep your own home if the market turns more than you can bear is a plus!
NOt enough information here to give a definative answer, If you are looking at it from a landlord standpoint who knows? 50K in and 20K a year out isn't a bad return on equity. IN fact 50K in and 15K a year out is great if you aren't involved in the day to day management.
If you are looking to rehab these this could be a windfall.
You say this appears to be 85% LTV
you know your market, is it appreciating? going down? or stagnant?
IF it is appreciating close to the national average of 6% the hold on for a year or two and sell.
I would LO or RTO as many properties as feasable.
You might get him to lower the price or interest rate.
YOu have a lot to think about here! I will say "Never take counsel of your fears" Norman Vincent Peale
Good Luck!