I need another pair of eyes, please, help analyze this deal

[Jerry Evans]

(11 unit complex)

Asking Price: $80k

25% down: 20k

Monthly rent(s):5k

Property tax: $282($3,380, 2015 tax year)

Estimated mortgage: $250 (20 year loan)

Utilities: $425

Vacancy: 10%=  $500

Repairs: 20%= $1000

PM: 10% = $500

Total: ($2957 monthly expenses) $2043 cashflow?

Am I missing anything above?

Please note, this property is located in a C-D neighborhood. As you can tell each unit is going for about $450 a month. There are one bedrooms that are going for as much $650 near this neighborhood, so I feel there is potential for rent increases. Residents pay for their own; Gas water and electric. Also, I fill I have a bit of negotiating power. This property has been on the market since last August.

I requested maintenance expenses, and I am also waiting on an insurance quote. This would be my second investment property and it would also be out of state, Iowa. How can I properly do a better due diligence. In the listing it also stated the monthly expenses are $2,500, I notice my number is a bit higher. Did miss something, or am I over evaluating?

What am I not asking myself?

All feedback and dissecting would be truly appreciated.

Jerry,

[Etay Orlander]

@Jerry Evans I follow the advice of real estate investor John T. Reed (www.johntreed.com) as closely as I can whenever thinking about acquisition options (or for that matter, pretty much anything real estate related). For my own personal experience, I am a relatively novice investor with one 3 unit rental property in southeastern Connecticut that I acquired through an FHA loan in May of 2016.

If you read his real estate article about positive cash flow (http://www.johntreed.net/positive.html), he mentions that according to several real estate professional organizations the average operating costs (costs before taking mortgage into account) of rentals is about 45% of gross rent.  Using that figure, you would expect to clear 55% (100% - 45%) of the gross rent as profit or $5000 * 55% = $2750 every month.

Looking at it from a cap rate perspective, you could say the cap is 5000 * 12 / 80000 = 75%, which is certainly higher than any cap rate I've ever seen.  However, given the 45% rule, I would look at it as 5000 * 12 * 55% / 80000 for a 41.25% true cap rate, still an unbelievable cap rate, higher than any I've ever seen by a wide margin.  So this must be an amazing deal that needs to be snapped up immediately, right?

Personally, I would be very hesitant and agree with previous commenters that a good amount of due diligence is required.  As others have said, a very thorough inspection must be performed with this.  What is wrong with the building?  Is the roof in working order?  How about the plumbing?  These can very easily turn into big ticket repairs.  What is the condition of the units?

When I bought my building it was in excellent condition (new roof, new plumbing, etc.), only thing that was needed was cosmetic repairs as the previous tenants took awful care of the units they were living in.  Want to know what it cost me with labor and supplies?  About $30k.  For THREE units.  I will add in as a note that the average contractor wanted $30k just for the labor, it was by a miracle that I found a guy who did a great job fixing everything up and did it for a much, much lower cost.  What I'm saying is when taking possible required repairs into consideration, the cost to acquire this building could skyrocket past $80k.  So make sure you get everything thoroughly checked to get as accurate an idea of the cost to repair as you can.  I also recommend adding 30% to 50% of whatever estimate you get regarding the cost to repair because from my experience and what I heard from others, it ALWAYS costs more than the estimate.  If you take a 203k loan, just remember that the extra interest you'll have to pay on that loan will also eat into your cash flow.

I imagine that on top of that, there will be a lot of non monetary "costs" with owning this property.  You mention this is a C-D neighborhood, which from my understanding means basically the worst possible neighborhood.  This brings in to question the validity of the 45% rule stated above.  Will it really hold for this property or is that number too low?  Keep in mind, in this kind of neighborhood you are likely to get a lot of people that will not be diligently ensuring you get the rent check on the first of every month, to put it lightly.  Your manager is very likely to spend a good deal of hours chasing and hounding tenants for the rent all throughout the month, for month after month.  Also, a lot of evictions sounds likely.  Evictions, from what I hear, are very costly and time consuming.  Remember that the bank is not going to excuse you from any mortgage payments because tenants are not paying their rent.  Are you certain you will have a great property manager?  For what it's worth, a big theme in John Reed's articles (I know I'm really harping on John Reed here, but he seems like a guy who thoroughly understands real estate) is NEVER hire a 10% of gross rent property manager.  There are no good property managers like that.  You should manage the property yourself whenever possible or if there is absolutely no way to do that, hire someone with a salary (or use a tenant manager).  I cannot speak to this because I have never used a 10% of gross property management company but it makes sense to me given their incentives.  They make a lot more money managing 1000 units horribly than managing 50 units superbly.

The property I have acquired in Connecticut is in a good area, I have been blessed with great tenants, I live 2-3 hours away, have a guy that helps me manage the property for $50/month (he mostly shovels snow, mows the lawn, collects rents, goes over lease with tenants), and haven't had to deal with any serious maintenance issues because of the recent renovations I did when I bought the place.  Even with all these things going right, I STILL get headaches from this building.  Being a landlord and ensuring everything runs smoothly is not an easy task, even under the best of circumstances.  So what happens when you have to handle 11 tenants, many of whom will likely fall short of being the ideal tenant?

Now, I'd like to mention that I am not telling you to skip on this deal.  I have no idea what this property is like, I can only go from your description.  I'm merely hoping that my comment will help give you ideas to consider when analyzing this building and determining if it's a worthwhile acquisition.  After all, the last thing you want in real estate is to deal with "surprises", right?