Looks like a great deal to me, but...

[Mark Myers]

I am completely new to this, so forgive my abundant ignorance.   I've found and MF 8 unit building in a pretty good location.  All units are 3/2 1080sqft. Actual 2014 numbers are as follows: potential yearly gross income $50,000      actual yearly gross income $43,175.    Building operating expenses $10,872.  Asking $330,000.  Mortgage would be (ballpark) $2200/monthly. Seems like a great deal.  Why has it been for sale for almost a year? Am I being overly cautious? Thanks for input.

[Dash Siva]

Hi Mark - 

Great to see you're doing your due diligence and asking the right questions. A few observations - keep in mind this isn't an all inclusive list of considerations. 

Could you provide additional information how you got the numbers? Were they provided by the seller? As I progress the DD process, I like to see the leases, property tax bill, check actual utilities with the provider, appropriate parts of the tax return. 

Have you had a chance to walk the property? How about each of the 8 units?

Take a look at market related data such as comparable sales. What's the comparable cap rate for the area? Are vacancy rates in line with the area?

In terms of expenses, has everything been taken into consideration - such as accounting, advertising, insurance, janitorial service, lawn, snow, licenses, legal, misc, management, repairs and maintenance, supplies, taxes, trash removal, utilities (gas, sewer, water, electricity, fuel oil, telephone), etc.?

What is the seller's motivation for selling? 

Keep us posted on your progress

[Mark Myers]

Thanks for responding. Info came from posted seller information. .. Ok, I can get utility info from provider- got it. What about things that sound like I would get them from seller, IE. the leases, accounting, insurance, "appropriate tax return sections"?? Wouldn't this info come from seller (who the agent doesn't want the buyer to meet)? Also, if you can rely on accurate info on income from seller would you be able to rely on above mentioned items? Also, how do I find out what the comparable cap rate is?  And, i have not been to site, im in CA on business and found this on website. Sorry for all the questions.

[Dash Siva]

Hi Mark - thank you for following up. Taking a step back - I always like to cross check information provided by the seller. Reason being - it is not uncommon that numbers posted by a seller contradict their own numbers that may be in a lease, tax return, etc. 

As for comparable cap rates, look for recent comparable sales. A way to help the analysis is to also look at the gross rent multiplier for these sales and compare it to your property.  You'll also want to do a similar type analysis for lease Rates and operating expenses to see how they match up with your property. 

If you're dealing with a broker, he or she would be a good starting point for this information.

Happy to discuss further or offline. 

[Mark Myers]

Thanks so much for info. I'll dig deeper for more details.  Also will update on what I find. Thanks again.

[Account Closed]

Originally posted by @Mark Myers:

I am completely new to this, so forgive my abundant ignorance.   I've found and MF 8 unit building in a pretty good location.  All units are 3/2 1080sqft. Actual 2014 numbers are as follows: potential yearly gross income $50,000      actual yearly gross income $43,175.    Building operating expenses $10,872.  Asking $330,000.  Mortgage would be (ballpark) $2200/monthly. Seems like a great deal.  Why has it been for sale for almost a year? Am I being overly cautious? Thanks for input.

 $50,000 gross income / 8 units / 13 months equals $520 rent equals $.48 gross rent per sf.  YUCK!  Where is the profit?

[Mark Myers]

??? Debt service of $2200/month +operating expenses 916/month = $3116 /8units= $389.5. Divided by1080sqft = .36/sqft  .48-.36= .12x1080=$129+ per door.  Thought anything over a hundred to start was good.???

[Steve Babiak]

Operating expenses sound WAY too low to be realistic. Are those pro forms or actual expenses? There are a number of studies that have been published to show what typical average expenses could be expected to be at. Those have come close to 50% of scheduled gross rent - so when expenses fall too far below that you have to be suspicious. 

[Mark Myers]

Thanks so much for the info.  I'm still very uneducated in the matter. I've listened to podcasts but not had time to read up on the subject. I promise I will smarten up on it and not waste everybodies time or spin my wheels.  Thanks again for your time and your experience.

[Cailyn Aune]

Mark- if people are on here and taking the time to answer your questions... You're not wasting anyone's time. :) That's their choice if they want to take the time to do that to respond or not. Don't apologize. :)

The more you learn, read, ask for help- the closer you will get to being able to identify good numbers that meet your criteria. Keep going.... You can do it!

[Mark Myers]

Of couse your right. Thanks so much again.

[Wade Sikkink]

I agree with @Steve Babiak, the expenses are too low.  We have a 14 unit building and it's surprising how close the expenses run to 50% over the last 3 years.  There is a high probability that the seller has been neglecting maintenance and that's why the expenses are low.  This is a common tactic for sellers to neglect maintenance the year or two before they try to sell so they can make the expenses look better than they really are.

When you run your numbers assume expenses will be 50% of gross rent. The other 50% has to cover debt service and provide any profit. So, $45k revenue (assume 10% vacancy) less $22.5k expenses leaves NOI of $22.5k. Your debt service is $26.4k annually, so this looks like a loser to me.

Have you looked at the property to see if it has a lot of deferred maintenance?  If it does, that's a negotiating point to reduce the price.  Also, if there is an opportunity to increase rents then that could improve your numbers and make this a better deal.  We did both those things when we bought our building (negotiated a lower selling price and raised rents after taking possession), so they are realistic to put in your plan.

Good luck!

[Mark Myers]

Thanks for info.  That does shine new light on it.  Thanks to all who responded, for helping keep this in perspective.