First Deal: What to offer on 8-unit?

Question

Searching for my first rental property and don't want to offer too much.
Any suggestions/advice is much appreciated. Thanks!

There is an 8-unit brick building built in 1967 in a decent location near the high school in my town. Contacted the seller's agent and actual expenses for 2015 are:

Income: 69,345

RE Tax: 4225

Ins: 2181

R&M: 3957

Cleaning/Maint: 1272

Utilities: 13660

- Elec: 4749

- Water/Sewer: 3815

- Gas: 3799

- Trash: 1297

Advertising/Misc: 700

The property is currently fully rented at 6542/mo (including 127 laundry)

The rents are close to, but slightly under market rate.  The 2015 assessment value is 528,100 and the current sales price is 675,000.  The building looks to be in decent shape, so I estimated roughly 1000/unit (8000) in initial repairs.

I want to manage the property, but budget 10% in case I ever want to hire a property manager.  Not sure what to use for vacancy rate, 5-10%?

J Scott · Answer

Bob, this is reminding me of the conversation we had last year where you argued with about 10 of the most successful, intelligent and experienced people on BiggerPockets what the definition of "Cash Flow" was.  You claimed that you knew more than any of us, and that the textbooks were all wrong.

I'm not wasting my time having that type of conversation with you again.  And I've noticed that all those other BP people refuse to discuss anything with you again either.

Have a great day.

J Scott · Answer

Any two rational numbers can be expressed as a ratio/percentage -- in fact, that's the definition of a rational number.  In this case, if:

x = NOI + Capex + Vacancy

y = Gross Rents

Then x/y defines NOI + Capex + Vacancy as a percentage of Gross Rents.

In my example, above, Gross Rents was estimated at about $78K (65K/month) and NOI + Capex + vacancy was estimated at about $36-40K (based on the numbers that the OP presented and some assumptions.  So, the NOI + Capex + Vacancy as a percentage of Gross Rents would equal about:

$38K / $78K,

Which is around 49%.  I rounded to 50% for simplicity.  Sorry if that confused you.

For more information, I would recommend any 5th grade math textbook.

Correct.  And neither is vacancy, by the way.  That's why I always include them separately, as I did above.  That said, grouping NOI, capex and vacancy is an easy way to determine the total cost of ownership (not including taxes and depreciation) as a percentage of Gross Rents.  In my experience, this is a valuable measure for doing analysis.

Correct.  That's why I didn't try to place a value on the property.  I did say what the property might be worth to the OP, based on his desired return.  But, I didn't have enough information to provide an objective value, which is why I didn't provide one.

David D'Errico · Answer

contact a commercial broker and ask what other buildings that size and type sold for. Also what the current local cap rate is. Also yea 5-10% on vacancy is ok. Definitely  add in a management fee. Are the units not submetered, check into that, that could be a value add. Have you been in any of the units, you may need quite a bit more than $1000 per unit. Check Age of the roof and HVAC? Sorry I may not have answered your question directly, but these are the things that first came to mind to lead me to evaluate the deal. Once you gather that info you'll be better suited to make an offer

Wes Kirtz · Answer

First, thank you all for your advice!  I am so grateful for BP and the hundreds of podcasts/articles/forums that have provided a continual stream of advanced education.

@David D'Errico, the units are submetered, so there is an opportunity to add value by offloading some of the utilities to the tenants.  It is a mixed bag in my area: about 25% the owner pays all utilities, 25% tenant pays all, and 50% they split.  Apparently there is a newer roof/HVAC, etc. that I will make sure to account for in the due diligence process if I get that far.

@J Scott , for the return I want, my original calculations were right around the 400K mark - great to know I wasn't too far off!  That is significantly lower than the asking price, but I guess if your offer doesn't make you blush, you offered too much.

@Brent Coombs,trying to be as sophisticated as possible, thanks!

Brent Coombs · Answer

@Wes Kirtz, by all means, become a "sophisticated investor".

ie. (From my perspective), that means: offer LESS than market value! Cheers...

J Scott · Answer

Looks like total income when fully occupied is about $78K.  Based on the expenses you've listed, and adding in reasonable vacancy and capex costs, you're looking at about 50% expense ratio (including vacancy and capex), putting your NOI at about $36-40K.

If there were no deferred maintenance and if you wanted about 10% return, then the property should be worth about $360-400K to you.  Of course, you may want a higher or lower return and there might be deferred maintenance (which should be reduced from your purchase offer) -- based on that math, you can come up with your own number to meet your goals.

Wes Kirtz · Answer

Thanks @Jason Jastillana! Best of luck to you as well.

Jason Jastillana · Answer

@Wes Kirtz As a newb on the site, thanks for sharing!  I'm in the analyze as much properties stage and this thread is very helpful.  Good luck with the deal!

Account Closed · Answer

How is double counting vacancy going to help someone?

J Scott · Answer

It's not that I can't address it...it's that it's not worth discussing with you.  As I've stated on many of my posts, there are the accounting definition of terms and the way to use concepts in order to make analysis easier and more efficient.  Unless otherwise specified, people here are looking to learn how to be real estate investors, not accountants.  So, I provide the information they need to become better real estate investors.

There's a reason why my Post:Vote ratio is about double yours -- I care about helping people and you care about arguing.  You prefer to be pedantic and difficult -- as opposed to trying to help people be successful -- and that's why the well-respected people on this site dislike discussing things with you.  You need to learn to play better with others.

Sorry to be so blunt, but you just don't seem to want to take the hint.

Now I assume you'll respond to this post with something pedantic and difficult...and just prove my point...

First Deal: What to offer on 8-unit?

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