Positive Cash Flow won't Sell?

Question

Hi guys, I'm new to this site, but here's a question.  I have 3 properties, a total of 17 units that have positive cash flow, but I can't get any interest from buyers because the forclosure market is killing values. These homes are about 50% of ARV, and the cash flow is about +$6000 per month, but no one will touch them. Can anyone tell me how I can market these properties to get a buyer?           Thanks.         DAVE

Jon Holdman · Answer

Looks like $11,400 in gross scheduled rent, if I understand your numbers correctly.  So, that's $5,700 in cash flow if you paid cash.

Payment on $525K at 7% for 30 years would be $3493.  That leaves true cash flow of $2207, or $130/unit/month lumping the storefront into the unit count.  With a 25% down loan, you're looking at payments of $2620 and cash flow of $2207 a month.  Or, $36,964/year, which gives a cash on cash ROI. That's a 28% cash on cash return on the $131K down payment.

So, those number's look good.  Not $6000 a month in real cash flow, but good all the same.

You've still not said where.  Reading between the lines I'm guessing its a undesirable location.  Detroit, perhaps?

Rental demand looks low.  Only 11 residential units out of 16 rented.  That's a 27% vacancy in financial terms.  Does that reflect lack of demand or lack of attention on the owner's part?  Plugging in the actuals, which is how a potential buyer will value the property, the rents are only $4150.  So, that's going to knock down the value.

How does this compare to other properties?  Giving some extra credit to the storefront and parking lot, I get about $27,500 per unit.  If numerous other buildings are available for the same price, this isn't much of a deal.  Plenty of areas where that's not a particularly good deal.  If a potential buyer has plenty of choices at similar price, yours isn't going to stand out.

You say cash only, which implies there will be an issue with getting financed.  That makes you job extra tough.  The basic rental numbers look pretty good.  But your vacancies are very high.  So, its a turn around play.  You require a cash buyer and say its a bad area.  Cash buyer's are in a strong position these days, with lots of choices of where to put their money.  For a cash buyer with $525K in hand, the $36,964 in NOI means this has a cap rate of only 7%.  Lots of areas where a 7% cap rate can easily be had without having to deal with turning the properties around and "having a thick skin".

Would the owner consider financing the deal?  That might be enough to make it more attractive.

Dave Pricken · Answer

You guys are awsome, this is great, I don't know that much about calculating all the figures, but the help is great. That web site to show you everything about the area is priceless. Thanks for all the advise. I got these properties from a gentleman that is in dire straights and just has to unload. I'm hoping to get at least something out of it for myself and help the guy out. Thanks again for all the info and I'll post again for the great discussion.         DAVE

Scott R. · Answer

Those web sites, as well as zillow and a ton other are really hit or miss, not always very accurate. As far as the properties, just seems to me like might be in them alittle too deep right now to unload them.. as said above, the deal isnt an awful deal, there are just better, and in todays world, alot better deals to be found. 
  -Scott

Scott R. · Answer

A quick look at citydata, http://www.city-data.com/zips/07501.html shows this areas median home sales price is down a ton in this area, although these are multi units were discussing, if the areas not doing good, your commercial will also be affected.
You yourself said its a rough area, add a hurting local economy, doesnt matter if it cash flows or not it could still be overpriced.
Taxes arent as high as detroit maybe, but New Jersey isnt know for cheap taxes and im willing to be there pretty hefty.

Scott R. · Answer

Jon, 
correct me if im wrong, but the taxes should be on the same 50% side as the payment, which would probablly eat up a good portion of that $2207 left. esp if they are in detroit!
 -Scott

Jon Holdman · Answer

Taxes (and Insurance) are in the 50%.   Only the P&I part of the payment comes out of the NOI.

50% is too low, though, with the 27% vacancy.  If it is Detroit, then you're right that the especially high taxes may also act to raise expenses above 50%.

So, we're clear, Dave, the 50% is just a rule of thumb that says expenses (including taxes, insurance, maintenance, tenant caused expenses above security deposits, common area maintenance, utilities for common areas and vacant units, bookkeeping, legal expenses, grounds maintenance, etc.), capital items, and vacancy will average 50% of gross scheduled rents.  The remaining 50% is the NOI.  The debt service, which is P&I only, comes out of the NOI.  What's left is the true cash flow.

Dave Pricken · Answer

Here are the details:

Here we go,
1st property
6  units - 2 rented / 4 vacant No Repairs needed.  Rent potential $3600 per month
2nd property
6 units - 6 rented   Rents bring $4200 per month
3rd property 
4 Residential units - 3 rented / 1 vacant +Store Front (Rented $1000) + Parking Lot (Rented $500) Rents bring $3600 total with Apt's, Store Front & Parking Lot
All buildings are certified through the city and are in rentable condition.

Owner needs thick skin in these areas / Good Rental History
Package Deal - $525,000     Cash Only / Quick Close

What do you think?      This is crazy positive cash flow. The problem I'm having is with the area.    Thanks for the advise.        DAVE

Jon Holdman · Answer

If you're like to offer up these properties, please post details about them in the Make Deals forum.  You need to provide real details - price, rehab cost, location (not address, but at least the city), rents, current status (vacant, I'd guess from your "all in rentable condition" statement), etc.  You've been asked a bunch of questions here.  If the deal is all you say, you should get a buyer with a post in the Make Deals forum.

Jason Gray · Answer

I agree, if it was currently cashflowing $6000 a month and they were at or very close to 50% of FMV, I'd be on the phone with you and my lenders tomorrow AM. STAT.

PM me as I'd like to see more info. Depending on where the props are located there maybe something I can do.

I make it work in Detroit really well, so I can't imagine these "war zones" are all that bad...

JG

Chris L. · Answer

Dave,
Chances are that it does not really cash flow 6K per month.
Why don't you post purchase price and rents and more detail on the property.
Are the utilities split?  How many units are rented? etc.
There are plenty of buyers here on the site but you will need more detail to generate interest here.
Good luck.
Chris

Positive Cash Flow won't Sell?

Most Popular Reply