8 Unit Building, how much would you offer?

Question

Turn key building from long time owner of 26 years, here are the numbers I have verified. Class B+ neighborhood. How much would you offer?

#

Description(All Figures are Annual)

Monthly

Annual     Amount

1

POTENTIAL RENTAL INCOME

$  5,560

$    66,720

2

Less: Vacancy -10%

$    (6,672)

3

EFFECTIVE RENTAL INCOME

$  5,004

$    60,048

4

Plus: Other Income

5

GROSS OPERATING INCOME

$    60,048

OPERATING EXPENSES

6

Real Estate Taxes

$  723.00

$8,676.00

7

Personal Property Taxes

$  -

$    -

8

Property Insurance

$  189.17

$  2,270

9

Off Site Management

$  483.61

$  5,803

10

Payroll

$  -

11

Expenses/Benefits

$  -

12

Taxes/Worker's Compensation

$  -

13

Repairs and Maintenance

$  750.00

$  9,000

14

Utilities

$  -

15

Accounting and Legal

$  -

16

Licenses/Permits

$  -

17

Advertising

$  -

18

Supplies

$  -

19

Lawn and Grounds Keeping

$  140.00

$  1,680

20

Miscellaneous

$  150.00

$  1,800

21

Electric

$  50.00

$  600

22

Gas

$  250.00

$  3,000

23

Water

$  165.00

$  1,980

24

TOTAL OPERATING EXPENSES

$2,900.78

$  34,809

25

NET OPERATING INCOME

$2,103.22

$  25,239

Nazz Wang · Answer

@Bob Bowling @Brie Schmidt @Samson Kay Account ClosedThanks for the insight. I usually used a 9% cap rate rule, but I am doing more research now about past sales of similar properties and see what the trading cap rate is. Is the trend towards 8% for a B neighborhood nowadays? What cap rate do you guys use for C and A neighborhoods?

This is also a 60 year old building with a lot of recent upgrades (or should we say, deferred maintenance caught up) in 2012. I don't have any experience with buildings more that 35 years old. Any insights?

Account Closed · Answer

@Gavin Delmas , You don't mix 2% rule with 50% rule.

If you use 50% rule then you use half gross rent minus the PI to get your cash flow.

If you use 2% rule then you get your Purchase price and can't use that to calculate cash flow.

I don't know how you come up with Neg $133

Account Closed · Answer

I would pay around $315k.

Nazz Wang · Answer

@Victor Eng

I keep a minimum of $1000 a unit plus $1000 for common area maintenance every year. The $9000 I budgeted was the highest amount in the past four years. The rent is about 700 a unit. The vacancy and eviction costs I am accounting in the 10% vacancy rate from gross potential rent, which is the running average for the last 4 years. It is an easy rent in a solid B at those low rents, so I am not expecting a lot of vacancies. You are right perhaps I need to increase my repair budget.

Nazz Wang · Answer

@Gavin Delmas

Thanks for thinking about the deal. If you are new, I would really recommend you use the 2% rule and 50% rule very very sparingly. Those two rules are very rough estimates, and I only use them to filter out listings. Once one looks at a potential purchase like the I listed here, one needs to look at the real numbers or best estimates to determine the cash flow. For instance, single family and multifamily properties are drastically different. In SFR's, the tenant usually pays for all expenses not covered in property taxes and homeowners insurance, while the landlord usually pays for water, landscaping, trash, and sometimes gas and electric, which increases the overhead by a large sum. Do you see how you can't just apply the "50% of rent collected are expenses" rule on all properties? Also property taxes are very specific based on location. Notice the property tax here is about 8700, for a property that is about ~300k, while many of my other properties in California about the same in value only pay about $2500 to $3000 in taxes every year.

The 2% rule, ha, let me just say, I have properties where monthly rent is about 0.75% of the purchase price and will cashflow $300 dollars a month. You have to do your numbers based on real numbers of your target location.

Also the property is 8 units so I will not be able to use conventional loans for financing. Commercial loans are usually higher interest with a shorter loan term.

Samson Kay · Answer

@Nazz Wang Any idea what the area cap rates are? 8% Might be a fair return for a larger building. If all the other 8-10 unit buildings are getting closer to 10-12% you might be overpaying at 310K.

I personally like 10Cap minimum. Or value add so that proforma cap rates end up around 15%

Gavin Delmas · Answer

Tommy thank you for making me think here.  I'm very new and trying to process it all.  Since she didn't provide a potential offer number I just figured for starters I would see what the 2% rule was in reverse, so I divided $5004 by 2% and that arrives at $250,200.  I then plugged that info into the rental calculator on this site along with the other info she provided and it pops out negative cash flow.  Maybe I am inputting things wrong or going about it wrong.

Gavin Delmas · Answer

I might be completely off here but with the numbers given I don't think this property will cash flow even using the 2 percent rule if you are doing a conventional 25% down....? It appears you are using 15% for repairs and maintenance,10% for vacancy, and 10% for PM.  I calculated in 10% for CapEx.  When calculated using the 2% rule you get a purchase price of $250,000, plug that into the calculator with the above percentages and the rest of the expenses you stated and you are still -133.00.  Maybe I royally messed something up here and if I did please let me know so I can learn.  I am new to all this after all......

Account Closed · Answer

However buying at "fair" cap rates would cost you $18,000 MORE if the market cap rate is only .5% higher.  Fair doesn't seem so fair now does it?

#	Description(All Figures are Annual)	Monthly	Annual Amount
1	POTENTIAL RENTAL INCOME	$ 5,560	$ 66,720
2	Less: Vacancy -10%		$ (6,672)
3	EFFECTIVE RENTAL INCOME	$ 5,004	$ 60,048
4	Plus: Other Income
5	GROSS OPERATING INCOME		$ 60,048

OPERATING EXPENSES
6	Real Estate Taxes	$ 723.00	$8,676.00
7	Personal Property Taxes	$ -	$ -
8	Property Insurance	$ 189.17	$ 2,270
9	Off Site Management	$ 483.61	$ 5,803
10	Payroll	$ -	$ -
11	Expenses/Benefits	$ -	$ -
12	Taxes/Worker's Compensation	$ -	$ -
13	Repairs and Maintenance	$ 750.00	$ 9,000
14	Utilities	$ -
15	Accounting and Legal	$ -	$ -
16	Licenses/Permits	$ -	$ -
17	Advertising	$ -	$ -
18	Supplies	$ -	$ -
19	Lawn and Grounds Keeping	$ 140.00	$ 1,680
20	Miscellaneous	$ 150.00	$ 1,800
21	Electric	$ 50.00	$ 600
22	Gas	$ 250.00	$ 3,000
23	Water	$ 165.00	$ 1,980
24	TOTAL OPERATING EXPENSES	$2,900.78	$ 34,809
25	NET OPERATING INCOME	$2,103.22	$ 25,239