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10 unit in Ohio
8 posts by 4 users
Travis B.Property Manager
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Hello Every One. I am in ohio and i working on a deal now witha 10 Unit building. If i get the deal talked down to where i want it i think it might peak the right investors attention!! Here is some details What ever cost i think there is in repair i double it to be on the safe side. So the repairs could be allot less. Property Cost $200,000.00
Property Cost With Repairs $250,000.00
Gross Operating Income $4,275.00
My formula always shoots higher on the cost to protect me. It is usally 100 to 200 more profit than it shows. Thoughts? |
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J S.Real Estate InvestorAtlanta, Georgia 
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Well, if those are the real numbers, I'd say you're getting a hell of a deal... Looks like you'd be buying with a near 17% cap rate, 30% COC return, and 31% total return...in fact, if you could turn around and sell it as a 9-cap, you could immediately turn a $250K profit (even after selling fees!)... Now, that said, the only way that would be the case is if: 1) the seller didn't know how to determine the value of his property, and was ripping himself off; 2) you had the ability to reduce expenses to a point where very few owners can; or 3) the seller is extremely motivated for some reason and is willing to practically give away his property. I'm guessing it's none of these, and that you are actually being too conservative in your pro-forma estimates. First, if expenses are coming in at much less than 40% of gross income, that should be a red flag. And it looks like yours are coming in at less than 25%. Some questions: - Is the 10% vacancy the total income loss? For example, if you have 10% vacancy, and 10% of your tenants don't pay (and have to be evicted), that's actually 20% loss. Too many buyers don't figure total loss when considering vacancy; - $1000 per year in total maintenance seems *very* low. Does this include deferred maintenance and reserves for capital improvements (new roof in 10 years, HVAC replacements, etc)? - Do you plan to spend any money on unit turn-over? What happens when someone moves out? Don't you need to get the carpets cleaned, the walls repainted, the bathroom scrubbed? - Is the water sub-metered for this property? If not, you'll be paying for that. - What about trash/sewage? Are your tenants paying that? Probably not, so you need to factor that in. - Who is going to do the general upkeep of the property? Will you be picking up trash, mowing the lawn, landscaping, etc? It's not factored in, so either you're doing it or it needs to be free. - Are you going to advertise the property to find tenants? Or will they magically find you and come beating down your door? If you plan to advertise, there will be a cost associated. - $25/month in accounting fees seems low, but let's assume it's correct. I imagine this doesn't include tax consulting and tax preparation fees. Are you a tax professional or do you plan to hire one to help you keep some of this money? - Will you be consulting an attorney to handle any contractual or legal issues (evictions, leases, purchase agreement, etc)? If so, factor that in. - The insurance estimate seems low to me...have you verified this yourself, or are you trusting the current owner's pro-forma? - Will you be doing the property management yourself, or hiring that out? If you're doing it yourself, do you have the time/energy/skills to do it successfully? What if you decide at some point in the future that you want to hire out the PM role...you should factor in those costs now, just in case. I could be wrong, but it looks to me like you're ignoring a lot of costs associated with this property, and will be in for a big surprise when you start actually writing checks. My first question to you would be whether you put together this pro-forma yourself (based on actual numbers and experience) or if you just listened to the current owners description of the expenses. All that said, it may still be a great deal, just make sure you do your due diligence before pushing ahead... |
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Travis B.Property Manager
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These are all good questions. I be glad to answer them all. 1. You Asked: the seller didn't know how to determine the value of his property, and was ripping himself off; 1A He knows the value and is selling all his properties and rolling it into a 1031. But when you deal with these kind of properties not ever one can say I have the money to buy it and the bank is not willing to just hand over money they look at it if it making 0$ if you can afford to pay the bills due to the market now. Not to mention he is motivated and wants to retire out of state to somewhere down south. also keep in mind he still making a profit because when he bought them many years ago he still making money off them even if they are not to market price 2) You Asked: you had the ability to reduce expenses to a point where very few owners can; or 2A Right now it is in talk. Once he agrees to go down on the price then yes I will get the exp report. All units have their own meter but there is still the house meter and waste costs. that is unknown. 3) You Asked: the seller is extremely motivated for some reason and is willing to practically give away his property. 3A See answer 1A. It is in talks he has not agreed to the price yet however I been buys his other property so with that and the limited market odds are in favor of the seller. Also keep in mind he still making a profit because when he bought them many years ago he still making money off them even if they are not to market price 4.You Asked: I'm guessing it's none of these, and that you are actually being too conservative in your pro-forma estimates. First, if expenses are coming in at much less than 40% of gross income, that should be a red flag. And it looks like yours are coming in at less than 25%. 4A I don’t buy property that has expensive higher than 40%, I also go for property that where the renter pay their own water and power, if they don’t have the meter then it worth to have the meter put in because your play with a risky unknown if you don’t. Now the waste cost in water I don’t have yet that is why it was left at 0. 5 You Asked:- Is the 10% vacancy the total income loss? For example, if you have 10% vacancy, and 10% of your tenants don't pay (and have to be evicted), that's actually 20% loss. Too many buyers don't figure total loss when considering vacancy; 5A At this time it is fully rented, however I allow myself to set money aside for a 10% vacancy so when one does come open I am prepared for it. It has a great location and will be easy to fill. 6.You Asked:- $1000 per year in total maintenance seems *very* low. Does this include deferred maintenance and reserves for capital improvements (new roof in 10 years, HVAC replacements, etc)? 6A When I take over a property I bring everything up to good shape. If I think it cost me 25 k in repairs I double it. Since I doing all the work it become allot less. With that being said that is why I guessing low on Maint cost. If it wasn’t for that a Landlord should always figure repairs in as 6-7% of their income to keep the place in good shape. 7 You Asked:- Do you plan to spend any money on unit turn-over? What happens when someone moves out? Don't you need to get the carpets cleaned, the walls repainted, the bathroom scrubbed? 7A That is all me! Just my time to get that done. Why outsource when you can do it yourself. You can buy a professional carpet cleaner for around 5k. In the long run you will save money. I am also debating about putting purgo wood floors in some units. Yes the cost upfront is a bit more but it easy to clean and gives the apt more appeal to the renter. If a section goes bad 1.75 a sq ft. I still thinking this one over. 8 You Asked:- - Is the water sub-metered for this property? If not, you'll be paying for that. 8A Yes 9 You Asked:- - What about trash/sewage? Are your tenants paying that? Probably not, so you need to factor that in. 9A Yes you are correct I just don’t have that number yet. 10 You Asked:- Who is going to do the general upkeep of the property? Will you be picking up trash, mowing the lawn, landscaping, etc? It's not factored in, so either you're doing it or it needs to be free. 10A Once again that is all me. The investor I work with I do a 50/50 and part of that is me keeping the place up and maintaining it. 11 You Asked:- Are you going to advertise the property to find tenants? Or will they magically find you and come beating down your door? If you plan to advertise, there will be a cost associated. 11A HA your funny. Well once again that be me and since I already have all the EQP no need to buy new signs. I also set up a referral program for if a renter has a friend move in and is accepted they get 25$ worth of quarters for the Laundry room :) I know this may not work in all building but that how I do it on my other property and seems to work out well. 12 You Asked:- - $25/month in accounting fees seems low, but let's assume it's correct. I imagine this doesn't include tax consulting and tax preparation fees. Are you a tax professional or do you plan to hire one to help you keep some of this money? 12A It’s all about networking!!! I know a CPA that will do each of my properties for 300$ for 10 or less units. 13 You Asked:- Will you be consulting an attorney to handle any contractual or legal issues (evictions, leases, purchase agreement, etc)? If so, factor that in. 13A Once again it is about networking. You can do your own evictions thru the court house and depending where you are the cost may very ($50 or less) I never had to evict someone yet thank goodness but my lawyer told me how to file it. You can find Legal lease agreement's all over the web and customize it to what you want to say. My buddy that is a lawyer looks it over for 100$ makes whatever changes then I use the same lease over and over. The purchase agreements are usually straight forward. If there is allot legal talk in it that a red flag to me. Also your realtor sees more of these than a lawyer does. But my buddies will do it for 100$ He charges the avg Joe allot more and makes a mint! 14- You Asked:- The insurance estimate seems low to me...have you verified this yourself, or are you trusting the current owner's pro-forma? 14A this is still in talks so I took my other property figured out the % on that one and may a guess on this one. You are correct I am not 100% sure yet until I have a agreement with the seller to lower the price. Once that is done I have my INS guy go check it out. 15 You Asked:- Will you be doing the property management yourself, or hiring that out? If you're doing it yourself, do you have the time/energy/skills to do it successfully? What if you decide at some point in the future that you want to hire out the PM role...you should factor in those costs now, just in case. 15A It is all me, and for the things I not sure how to do I have good friends that been in the business for 40 years willing to teach me. Once again networking really does help!! I am a young buck and a hard worker. It my business and when you hire someone else to run it I am afraid they run it to the ground if you’re not careful. Plus I know all my renters and keep a good relation with all of them. This also helps build long term renters. This way they know you’re a working Joe and not some rich guy that they try to take advantage of. |
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Vernon B.Real Estate Investor
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Interesting deal. Let us know when you get the rest of the information needed to accurately access the operating expenses. I noticed that you mentioned you have signs for advertising vacancies. Is that all you use? No ads in the paper/journals? It also appears you will be spending quite a bit of your own time in this property. Have you factored in your time? Will it be taking time away from your job, other properties, etc. |
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J S.Real Estate InvestorAtlanta, Georgia
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Have you successfully run any other mutli-unit properties with OE of 25% or less? If so, you're likely one of the best landlords in the country, and I would recommend buying much larger apartment buildings/complexes where you can make a LOT more money... My biggest concern based on your answers is that if you're doing all the work yourself (leasing, maintenance, turn-over, landscaping, evictions, etc), you're probably spending at least a third of time time (if not a lot more) on this one property, and this one property is only earning you $20K per year. So, you basically have created a job for yourself, that's earning you less than $60K/year. Wouldn't you rather be creating a business where you can be using your abilities to acquire and operate property to build a much bigger portfolio? You can't do that if you're busy mowing the lawn and spending time in court evicting tenants. You should take your talents and go make millions...not thousands...of dollars... |
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Travis B.Property Manager
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I just have one property at this moment. It will take me about 6 months to get it the way I want it then I can put all my attention to another one. Mow grass and stuff just a few hours of work if that. As far as evictions go I have not had to do any thank god. 5/6 are MTM and are paying on time. I share this property with a silent partner from the UK. He fronted all the money and I doing all the leg work and made a 50/50 partnership. Even though I doing well I am always willing to learn that is why I am here. I am new to being a land lord but not to making deals and make money. The only diffrence the money going into my pocket and not some one elses. My goal is to make millions but I have to take it one step at a time to get there. If you run you could tumble all the way down and have nothing. It very important to take it one step at a time. Another thing I learned working for other companies is once they start to get bigger they focus more on the number than their customers. I try to stay grounded get to know all the renters and relate to them one way or another. This way I can relate to the renter and they know I not a greedy person I do anything I can to give them a better living at the same time they know I have to cover costs. I am more the people person and math guy and my wife is the grammar and English person. We make a good team :) |
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MikeOHReal Estate InvestorOhio, Ohio 
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Thoughts? Jason is being quite polite and diplomatic. What he's trying to tell you is that your expenses are way too low - to the point of being in fantasyland. Here is a more realistic look at this deal: Gross rents: $4,750
Mortgage ($250K, 30 yr, 7%): $1,663 Cash flow: $712 per month or $71 per unit per month Not bad, but certainly not the numbers you quoted. Good Luck, Mike |
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J S.Real Estate InvestorAtlanta, Georgia
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Just to clarify what Mike is trying to point out... A good rule of thumb for many residential properties is that expenses (including vacancy, maintenance, taxes, insurance, upkeep, administrative, etc) will generally run between 45-50% of gross income. This is more a rule for single family houses than apartments, but still a good rule of thumb for apartments as well. You can argue whether an experienced landlord in specific locations can ever get expenses lower than 45% on-average, but I think 99.9% of experienced landlords would never honestly believe you could get expenses anywhere near where you have them (25%). You can take Mike's advice and plan for 45-50% expenses (he has dozens of data points to support it), or you can stick with your own estimates, and consider it a learning opportunity a couple months down the road... Good luck! |
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Posted: 07/03/2008 at 09:55PM