talking myself out of deals / 50% rule

[Kenneth LaVoie]

Hi.
I need some help in my clarity. I have been educating myself for about a year and investing for about 6 months. I have been analyzing some deals and have already walked away from ONE 11 unit apartment building that was selling for 205k. Where my confusion is coming from is that when I was looking at single family houses, it was hard to find one that met ANY of the rules (50% rule / 2% rule / $100 per door per month free cash flow, etc.) Now once I start looking at buildings OVER 4 units, these numbers seem to be met easily, but then the REAL numbers tell a different story. So NOW I'm finding tons of deals in multi unit (7-11 units) that are busting thru all the "quick" rules but don't seem to hold up to analysis--Here are some of the recent ones I've analyzed.

These numbers are from the APODS, schedule C or 1120s's EXCEPT heating oil -- I take their actual gallons and assume $3 per gallon for a "base case" (I don't want a building that won't cash flow if oil goes from 2-3 bucks gallon ... it's gone to $4 before so $3 is not a stretch in my humble opinion -- is this reasonable?)
Also, I use 8% for mgmt. (probably paid to self) and 10% for maintenance except the 11 unit and 8 unit I use 15% becuase they're lower income types. All others are real and true expenses. The 11 unit is uncertain because he's made some energy upgrades -- last year most rents included electricity and now most pay their own so I used 20% of last year's numbers.

This is an 11 unit -- not bad area, but definitely low income "as long as they pay the rent" type of people.

Purchase Price: 220,000 (205 pp plus 15 improvements)
Down Payment: 55,000
Interest Rate on Loan: 5.75
Term of Loan: 20

Scheduled Annual Gross Income: 66,000
Vacancy/Collection losses: 8.00
(Annual Operating Expenses) ---------
Property taxes : 4,400
Insurance: 3,000
Electricity: 1,080
Gas: 0
Oil: 17,000 (6,000 gallons @ just under $3 per gallon)
Water: 1,320
Trash: 780
Management: 4,858

Repairs/Maintenance: 9,108

Cap Impr. 15,000
monthly PI 1,158

using this model, expenses are 68% vs. 50% -- cash flow after everything is $5,273 or 39.95 per door per month -- worth doing??
*** this is two buildings, incidentally, right next to each other, hence the heinous amount of fuel.

Deal 2 -- 7 unit -- VERY nice area -- much nicer tenants, not doctors and lawyers, but you don't smell pot smoke in the lobby either! I'm listing this as one, but Im actually looking at two 7 units, both nice areas, owned by same person 15 years. Because of special financing, all rents are $100 per unit below market value

Purchase Price: 169,000
Down Payment: 42,250
Interest Rate on Loan: 6.00
Term of Loan: 20
Improvement Ratio: 75
Scheduled Annual Gross Income: 39,900
Vacancy/Collection losses: 8.00

Property Taxes 3,900
Insurance 2,800

Oil and all utilities 9,400 (actually all utilities, oil, elec, sewer water as we don't have breakdowns yet -- based on using $3 oil, this figure could be as high as 15,500 vs. 9,400 creating an on paper negative cash flow)
Water inc. in Oil
Trash inc. in Oil

Management 8.00% 2,937
Repairs/Maintenance 10.00% 3,671
Advertising 300

TOTAL OPERATING EXPENSES 23,007
Op. Expenses as %age of income 62.68%


Net Operating Income 13,701
-Yrly. P & I 10,897
CASH FLOW (BEFORE TAXES) 2,804 $33.38 per door per month

I'm just curious what you experienced people do -- I can see assuming the 50% rule when your "real" numbers say expenses are LESS because it gives you a margin of safety -- but how about when they 50% rule says expenses are LOWER than your own research tells you?? especially with the 11 unit, I'm doubting myself because it not only meets, but blasts thru all the standard rules based on price and gross rents

Thanks for your valuable and much needed ongoing education!!