Atlanta, GA · Member since 2014 · 8 posts · 0 votes
Looking at a condo in a high-income historic neighborhood, near a major university. Neighborhood has appreciated at a 5% rate in the past 10 years and has tapered off to 3.5%. Unit is in need of some work and I have the opportunity to get it at a discount.
Zillow estimate rent: $1,100, recent nearly identical comp sold at $135,000. Known expenses (hoa, tax, ins) are $400/month. Newer construction apartments down the street rent for more like $1,400.
Repairs needed: Repair plaster walls, paint, repairs to casement windows, HVAC is 15 years old, possibly bathroom updates required.
I have a couple of questions to help me pin down a good price:
1.) Need to narrow down cost of repairs, I've estimated $5,000 - $15,000.
2.) What's an appropriate cap rate for this area? Recent sale indicates 5% cap rate (using 50% rule)
Investor · Denver, CO · Member since 2010 · 99 posts · 20 votes
11y
Whatever you think you will need for repairs, add 50%! Ask me how I know that. It is pretty tough to "rehab" anything to be rent ready for less than 10k. Condo may be different though.
Investor · Denver, CO · Member since 2010 · 99 posts · 20 votes
11y
Whatever you think you will need for repairs, add 50%! Ask me how I know that. It is pretty tough to "rehab" anything to be rent ready for less than 10k. Condo may be different though.
Salem, OR · Member since 2013 · 701 posts · 159 votes
11y
When I first look at a property I use the 50% rule. As I acquire more data I go to detailed information such as taxes, Insurance, Management, utilities if relevant, and on-going maintenance and I also include capital reserves. I also use vacancies as an expense from the gross rents. It is pretty all inclusive.
Investor · Denver, CO · Member since 2010 · 99 posts · 20 votes
11y
It'll obviously depend how much it takes to get a place rent ready, but in your situation I would guess that the place doesn't have to be perfect since its in a college town. You will still need new HVAC, drywall/paint, window repairs, and whatever you need to get the bathrooms functional again. College rentals probably won't need the latest and greatest bathroom. You might be able to get away with 10k.
Oh, and I like to use rentometer in addition to zillow to determine rental comps (if you don't have MLS access of course).
Atlanta, GA · Member since 2014 · 8 posts · 0 votes
11y
Great so here's what I'm thinking based on the above input (annual figures). Sebastian says $10k plus 50% fudge factor, so $15k rehab, which is within my original estimate. Here's what a fair price would be based on detailed analysis:
$13,200 gross rent
-$1,100 vacancy expense
-$4,800 tax, ins, hoa
-$1,000 reserve for rehab ($15k every 15 years)
=$6,300 net rent
@ 7% cap rate
= $90,000 FMV
Less $15,000 needed rehab = $75,000.
Note that similar rehabbed units sold for around $130k, so I would need to get about about a 45% discount. I'm not thinking that's going to happen.
Real Estate Investor · Kirkland, WA · Member since 2014 · 33 posts · 5 votes
11y
In a similar vane, how would you estimate rehab/repair costs and calculate a fair price if the property is rented and you're unable to view it before making an offer?
Would you simply factor in a repair buffer? If so, then would it be a fixed amount ($10-15K) or a sliding percentage based on the property's age (A% @ B yrs, C% @ D yrs, etc)? If the latter, what would be best practices for age-based percentages?
Then once your offer is accepted, and your inspection finds issues higher than estimated, how would you typically handle getting favorable consideration; price adjustment or seller credit at closing?
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Account Closed - do very careful research on rents. One sentence in your posts worries me - "Newer construction apartments down the street rent for more like $1,400." You know why new stuff rents for more? Because it's new. There's no functional obsolescence and there are no plumbing leaks. While Zillow numbers are not to be trusted under any circumstances, in this case you really have to be careful...
If the rental market cools down, the A Class will lower rents, which will compress the B Class and kill the C Class. Be careful indeed!
Don't look at Cap Rates. In an SFR situation they are meaningless. We don't even make a buy decision on CAP rates when considering 150 units cause it's such a bad indicator, let alone a condo...
Atlanta, GA · Member since 2014 · 8 posts · 0 votes
11y
@ Juan
That's not a bad situation to be in, If you know that the renter has been in the for a while and has paid rents on time. If you don't have both of those then this doesn't apply, but if they both apply then you know:
1.) that if anything, current rent is at least at market (above, tenant would have moved)
2.) that the current condition of apartment is at least decent (because it wouldn't be occupied by a good-paying tenant if it were rundown.
Of course, it's possible that the place is run down AND the rent is below market, but that's not a terrible problem because you could fix up the place and raise the rents. Often this will happen if you get a cheap tenant in a good neighborhood who doesn't care about updated kitchens/bathrooms (i.e. a male).
Once you find out gross rents, you can figure out FMV of property based on your required returns.
@Account Closed - do very careful research on rents.
Don't look at Cap Rates.
I know that a 1br unit in the complex currently rents for $900, so I thought that $1,100 for a 2BR didn't seem too far off. I can't be positive but there's only so much research that can be done, any suggestions?
If not cap rates, what should I look at instead? I tried to calculate the value just to flip the property and I got a similar number.